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

                                   FORM 10-KSB

   (MARK ONE)
      [X]       ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE
                SECURITIES EXCHANGE ACT OF 1934
                FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004

      [_]       TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
                SECURITIES EXCHANGE ACT OF 1934
                FOR THE TRANSITION PERIOD FROM ____________ TO ____________

                        COMMISSION FILE NUMBER: 000-29927


                                IMPROVENET, INC.
           -----------------------------------------------------------
           (NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)


                DELAWARE                                      77-0452868
    (STATE OR OTHER JURISDICTION OF                       (I.R.S. EMPLOYER
     INCORPORATION OR ORGANIZATION)                      IDENTIFICATION NO.)

            10799 NORTH 90TH STREET, SUITE 200, SCOTTSDALE, AZ 85260
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

                                 (480) 346-0000
                           (ISSUER'S TELEPHONE NUMBER)

           Securities registered pursuant to Section 12(g) of the Act:
                     COMMON STOCK, $.001 PAR VALUE PER SHARE
                                 (TILE OF CLASS)

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

Check if disclosure of delinquent filers in response 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. [_]

State issuer's revenues for its most recent fiscal year. $3,039,678

The aggregate market value of the voting and non-voting common equity held by
non-affiliates based on the closing sale price of the common stock on March 15,
2005 was approximately $1,824,623.

The number of shares outstanding of the registrant's common stock, $.001 par
value, was 54,441,932 as of March 15, 2005.

                    DOCUMENTS INCORPORATED BY REFERENCE: None

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                                TABLE OF CONTENTS

                                                                            PAGE
                                                                            ----
                                     PART I

Item 1.   Description of Business...........................................   3
Item 2.   Description of Property...........................................  12
Item 3.   Legal Proceedings.................................................  13
Item 4.   Submission of Matters to a Vote of Security Holders...............  13

                                     PART II

Item 5.   Market for Common Equity, Related Stockholder Matters and Small
             Business Issuer Purchases of Equity Securities.................  13
Item 6.   Management's Discussion and Analysis of Financial Condition
             and Results of Operations......................................  15
Item 7.   Financial Statements..............................................  29
Item 8.   Changes In and Disagreements With Accountants on Accounting and...
             Financial Disclosure...........................................  29
Item 8a.  Controls and Procedures...........................................  29

                                    PART III

Item 9.   Directors and Executive Officers of the Registrant................  30
Item 10.  Executive Compensation............................................  33
Item 11.  Security Ownership of Certain Beneficial Owners and Management
             and Related Stockholder Matters................................  34
Item 12.  Certain Relationships and Related Transactions....................  35
Item 13.  Exhibits and Reports on Form 8-K..................................  35
Item 14.  Principal Accountant Fees and Services............................  35
Signatures..................................................................  36








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FORWARD-LOOKING STATEMENT DISCLAIMER

Management's Discussion and Analysis of Financial Condition and the Results of
Operations and other sections of this report contain "Forward-Looking
Statements" about prospects for the future, such as our ability to generate
sufficient working capital, our ability to launch and implement new services and
offerings and our ability to generate sufficient funds to meet our cash
requirements. We wish to caution readers that the assumptions which form the
basis for forward-looking statements with respect to, or that may impact
earnings for years after December 31, 2004, include many factors that are beyond
our ability to control or estimate precisely. These risks and uncertainties
include, but are not limited to, availability of quality homeowner leads, our
ability to pass lead price increases onto home improvement service providers in
a timely fashion, our ability to expand the number of home improvement service
providers that do business with us, the potential of technological changes which
would adversely affect the need for our services, availability of customers that
wish to purchase our services, acceptance of new services by the marketplace and
changes in economic or political conditions, such as inflation or fluctuations
in interest rates. Parties are cautioned not to rely on any such forward-looking
statements or judgments in this report.

This Annual Report contains certain forward-looking statements that involve
risks and uncertainties. These statements relate to our future plans,
objectives, expectations and intentions. These statements may be identified by
the use of words such as "expects," "anticipates," "intends," "plans,"
"estimates," "should," "will," "could," "may" and similar expressions. Our
actual results could differ materially from those discussed in these statements.
Factors that could contribute to such differences, include, but are not limited
to, those discussed above and elsewhere in this Annual Report. These
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those reflected in these
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations, Risk
Factors that May Affect Our Results of Operations and Financial Condition" and
elsewhere in this report. We undertake no obligation to publicly update any
forward-looking statements for any reason, even if new information becomes
available or other events occur in the future.

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

                              BUSINESS DEVELOPMENT

ImproveNet, Inc ("ImproveNet", "we", "us" or "our") commenced operations in
January 1996 as a regional contractor matching service. ImproveNet was initially
incorporated in California and was reincorporated in Delaware in 1998. We spent
the majority of 1996 and 1997 building our database of home improvement service
providers, developing our services and technology, recruiting personnel and
raising capital. We launched our website and homeowner / home improvement
service provider matching service on a national scale in August 1997. During
1999 we completed the acquisition of two regional contractor referral companies:
Contractor Referral Services, LLC and the J.L. Price Corporation, both of which
were integrated into our operations during 2000.

On March 15, 2000, we completed our initial public offering and raised
approximately $44.16 million in gross proceeds through the sale of approximately
2.76 million Common Shares. Shares of our Common Stock were initially listed on
the NASDAQ National Market System. During the first half of 2000, we spent
substantial amounts on marketing and marketing related activities, as well as
the development and expansion of our service and operations infrastructure.

During July 2002, we entered into an agreement to merge with eTechLogix, Inc.
("eTechLogix"). The merger was completed during December 2002 and was accounted
for as a reverse merger as the previous owners of eTechLogix received a
controlling interest in ImproveNet subsequent to the merger. Under the terms of
the merger, pre-merger shareholders of ImproveNet were offered a share buyback.

During the fourth quarter of 2004, the Board of Directors determined that our
principal focus going forward would be on ImproveNet's core lead matching
service and the products and services that compliment it. This decision was
based on a number of factors, which include, but are not limited to, the
opportunities in the Internet home improvement industry discussed elsewhere in
this document. Based on this decision, we have actively pursued, during the
first quarter of 2005, disposition of substantially all of the operations of
eTechLogix. An agreement in principle has been reached with a third party for
the anticipated disposition and documents reflecting the definitive agreement
are currently being prepared and are expected to be executed in the near future.
Accordingly, the operations of eTechLogix, which had been classified as a
separate operating segment in previous filings, have been classified as
discontinued operations for all periods presented in the financial statements
included in this filing and in any

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financial data presented elsewhere herein.

                               BUSINESS OF ISSUER

BUSINESS OVERVIEW
-----------------
We are a leading Internet-based home improvement services company that, through
our TrueMatch(TM) platform, connects homeowners to local screened home
improvement service providers throughout the United States. We were recognized
by Money Magazine as "Best of the Web" in 2003 under the Home Improvement
Category and were recently featured nationally on the Today Show, MSNBC, CNNfn,
CBS Marketwatch and locally on many news networks and in newspapers. ImproveNet
has been connecting homeowners with local screened home improvement service
providers since 1996. Our website, www.improvenet.com, includes tens of
thousands of pages of content and serves both homeowner and home improvement
service providers including architects, designers, builders and contractors to
assist with the completion of home improvement projects from start to finish.
Our website also features management tools, product showcases, visualizers,
advice from experts and active message boards targeting home improvement
content.

During the third quarter of 2004, we implemented a new subscription-based
pricing model for new home improvement service providers joining our service
provider membership network. The model offers three different levels that home
improvement service providers can choose from to accommodate their financial and
professional needs. Benefits of some levels include email (for example,
name@improvenetpro.com), a website, online advertisements with ImproveNet
affiliates, a toll free number with immediate access to a dedicated customer
care representative, discounted prices on screened and verified home improvement
leads, an online console to manage the user's profile and home improvement
project lead management.

During September 2004 we entered into an exclusive licensing agreement for the
use of the phone number and website domain name related to "1-800-Contractor".
During December 2004, we launched a new division of ImproveNet through the
licensing of the 1-800-Contractor (1-800-266-8722) telephone number, the
1800Contractor.com web property (domain names) and associated service marks that
will compliment our existing home improvement information services by
supplementing the online home improvement lead generation and matching service
with an online and offline resource for homeowners to find and research local
contractors via the Internet or telephone. Our intent is to develop a leading
directory of homeowner rated, screened service providers and contractors that
can be accessed by homeowners by calling 1-800-Contractor or by visiting the
1800Contractor.com website. This will enable homeowners to obtain service
provider contact data and detailed company information via the telephone or
Internet. During the first quarter of 2005 we began generating revenue from
1-800-Contractor by selling directory listings to local and national service
providers in the home repair and installation industry.

During the first half of 2005, we intend to offer a highly targeted advertising
program known as "AdServePRO" to businesses searching to promote their products
and services to consumers and service providers in the home improvement
industry. Advertisers will have the ability to feature their products and
services as paid listings in their choice of ImproveNet's marketing channels,
such as emails, newsletters and the web pages of ImproveNet.com,
ImproveNetPro.com and 1800Contractor.com. Each month ImproveNet reaches hundreds
of thousands of homeowners and home improvement service providers. Through our
touch points, businesses can strategically position their products and services
in front of their target buying groups during the time the consumer or service
provider is searching for, or ready to purchase, home improvement products and
services. AdServePRO's technology is intended to be a user-friendly web-based
application that will allow advertisers to manage their accounts online, from
setting up their campaign, creating the message, choosing their target audience
and setting the amount they wish to invest in their advertising program.

INDUSTRY OVERVIEW
-----------------
According to the 2003 Annual Statistics of the United States Census Bureau,
Housing and Household Economic Statistics Division, there are an estimated 120.8
million housing units in the United States of America. Approximately 105.5
million housing units were occupied, 72.0 million by owners and 33.5 million by
renters. According to the Joint Center of Housing Studies at Harvard University,
45% of homeowner spending involves changes to interior space (such as kitchen
remodels, bathroom additions and remodels and room additions) and other
structural alterations. These project categories have been among the fastest
growing segments of the owner improvement market. Replacements to exteriors
(including roofing, siding, windows and doors) and interiors (such as flooring,
wall finishes and ceilings) represent approximately 28% of spending. Replacing
and upgrading systems and equipment accounts for approximately 11% of homeowner
spending and the remaining approximately 16% of homeowner spending is
attributable to general improvements to the property. According to the 2005
"Improving America's Housing" study from the Joint Center for Housing Studies at
Harvard University, remodeling expenditures by homeowners and rental property
owners totaled $233 billion in 2003, accounting for more than 2% of the United
States economy.

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The participants in the home improvement market include homeowners, service
providers and manufacturers, distributors and suppliers of home improvement
products. These participants face distinct challenges in meeting their
objectives. Details related to the challenges each of these market participants
face are as follows:

HOMEOWNERS - The appearance and general working condition of their residence is
highly important to a homeowner. Maintaining and improving a home involves an
ongoing and emotional investment to design, budget, hire qualified service
providers and successfully complete repair and remodeling projects.
Traditionally, homeowners relied on books, magazines, local newspaper articles
and advertisements, Yellow Pages and word-of-mouth recommendations to accomplish
these tasks. None of these resources provide immediate, objective, reliable and
personalized information. As a result, homeowners are often poorly informed and
uncertain about how best to identify and locate reputable, experienced and
competitively priced service providers for their projects.

SERVICE PROVIDERS - Based upon a compilation of industry sources, we believe
there are up to one million service providers including contractors, architects,
designers and handymen in the United States. These service providers have few
channels to communicate effectively with homeowners or with one another. Service
providers have historically relied on word-of-mouth recommendations, the Yellow
Pages and other traditional mass media advertising that may require them to pay
costly upfront fixed fees. Accordingly, service providers must often allocate
significant time, money and energy to qualify and verify leads that they
receive. Typically, small contractors experience difficulty in predicting lead
flow, managing staff levels and working capital requirements while
systematically building a stable business.

MANUFACTURERS, DISTRIBUTORS AND SUPPLIERS OF HOME IMPROVEMENT PRODUCTS - There
are many well-known companies supplying a wide array of home improvement
products to the home improvement industry. There are also a large number of
regional firms with limited means to distribute and market their products
effectively to homeowners and service providers. Although suppliers have often
used traditional media effectively to build brand recognition, they have
difficulty using traditional media to target homeowners who are in the process
of making time-critical purchasing decisions regarding products related to a
home improvement project. These traditional media lack a centralized database of
information that can be searched based on specified terms and the ability to
conduct two-way communication.

THE INTERNET HOME IMPROVEMENT OPPORTUNITY
-----------------------------------------
According to a recent Nielsen / NetRatings survey, 204.3 million Americans, or
approximately 75% of the population, were online in February 2004. According to
a study done in 2005 by the Pew Internet and American Life Project, 90% of
Americans are projected to be online by 2014, with high speed networks
dramatically faster than those used today. We believe an opportunity exists for
an online service that provides a central repository of information for the
benefit of homeowners, service providers and suppliers of the home improvement
industry. This service would enable homeowners to access design and planning
tools, locate service providers, find information on products that may be used
in their home improvement project and obtain other project management services.
This service would enable service providers to access job leads, increase their
visibility to the general public at large and differentiate themselves from
their competition. Finally, this service would enable suppliers to market their
products to a targeted audience of homeowners and service providers at the time
they are making time-critical purchasing decisions.

THE IMPROVENET STRATEGY
-----------------------
ImproveNet is a leading web-based home improvement services company. Our
strategy to maintain this status and increase our visibility to homeowners,
service providers and suppliers to the home improvement industry includes the
following:

DELIVERY OF A SATISFYING HOME IMPROVEMENT PROJECT EXPERIENCE TO HOMEOWNERS,
---------------------------------------------------------------------------
SERVICE PROVIDERS AND SUPPLIERS TO THE HOME IMPROVEMENT INDUSTRY:
-----------------------------------------------------------------
The Core of our strategy is to make it easy for homeowners, service providers
and suppliers to work together in an efficient manner throughout the life of a
home improvement project resulting in a positive outcome for all of the project
participants. Our focus on identifying homeowners that are highly interested in
undertaking and completing a home improvement project and screened service
providers interested in providing such services, in addition to providing
homeowners quick and easy access to information on service providers and
improved project support, allows us to change the current approach and execution
of a home improvement project. Access to this marketplace allows service
providers in our network to increase their own business and financial
efficiencies and differentiate themselves from their competitors. Similarly,
this access allows suppliers to market their own home improvement products and
services within a cost effective advertising medium. We believe that the
execution of our ongoing strategy requires us to: (i) Strengthen the pool of
high quality information and content on our websites, (ii) strengthen the size
and capabilities of our network of home improvement service providers and (iii)
strengthen our relationships with suppliers through enhanced co-branded
opportunities and highly targeted advertising products. We believe that
achieving these objectives will improve the level of professionalism and
reliability among service providers as well as the perception of the home
improvement industry in general.

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ATTRACTING MORE SCREENED SERVICE PROVIDERS TO OUR NETWORK:
----------------------------------------------------------
We continue our efforts to develop and implement initiatives that will result in
additional screened service providers participating in our network by: (i)
Upgrading and improving our web based content to create better home improvement
jobs, (ii) increasing participation by interested, responsive and screened home
improvement service providers, (iii) offering tools and incentives to help home
improvement service providers compete better and (iv) initiating home
improvement service provider recruitment programs to increase participation in
our network by utilizing call center operations. We have invested heavily in the
development of content design tools and services and have refined our submission
process to increase the quality of homeowner experience and the quality and
number of jobs submitted. We have also invested in our TrueMatch(TM) platform,
which increases the number of project types to accommodate more specific home
improvement project types. This action should permit us to more closely match
prospective service providers to each specific home improvement project lead we
receive. Although our contractors are subject to our screening criteria (set
forth below), we urge each homeowner to evaluate, on their own, the prospective
service providers that are identified before selecting one for their home
improvement project. We provide resources for the homeowners to do their own
independent research.

IMPROVENET'S SCREENING POLICY STATEMENT REGARDING SERVICE PROVIDERS
-------------------------------------------------------------------
ImproveNet, Inc. has taken reasonable steps to screen each service provider in
our network to evaluate whether each meets our screening criteria. The screening
process includes a written application completed and submitted by each service
provider on which such service provider makes representations regarding its
licensing status, general liability insurance coverage, workers' compensation
insurance coverage (where required by law), experience, and other matters. We
are not currently conducting background checks on any service providers. In the
screening process, we may rely on electronic data provided by third parties. We
expressly rely on statements and representations made by each service provider
in the ImproveNet application. Therefore, ImproveNet makes no assurance,
representation or guarantee that every service provider does, in fact, meet our
screening criteria. All service providers in our network operate independently
of ImproveNet, and we disclaim any duty, obligation or liability regarding any
action or inaction by these service providers. We make no warranties of any
kind, either expressed or implied, as to any matter involving these service
providers including but not limited to, a warranty of fitness for a particular
purpose or a warranty of merchantability nor does ImproveNet guarantee or
warrant the qualifications of any service provider or the quality of the work
performed by any service provider. The terms and conditions of any agreement you
make with a service provider are solely the result of the home owner's
negotiations with the service provider without any counsel, direction, or input
from ImproveNet.

IMPROVENET RECOMMENDATIONS TO HOMEOWNERS REGARDING SERVICE PROVIDERS
--------------------------------------------------------------------
ImproveNet strongly recommends that each home owner conduct its own independent
investigation and review of all service providers including a request for copies
of proof of licensing and insurance from any service provider a home owner is
considering to hire. Although we may re-check our member's credentials
periodically, we do encourage each home owner to conduct his own background
checks before entering into an agreement with any service provider. Resources
online that are available to conduct background checks include the Better
Business Bureau, local Registrar of Contractors, Dun & Bradstreet, Experian,
Equifax, and Trans Union.

COMMERCIAL RELATIONSHIPS WITH SUPPLIERS OF HOME IMPROVEMENT PRODUCTS, SERVICES
------------------------------------------------------------------------------
AND RELATED HOME SERVICES:
--------------------------
Our network has approximately 30,000 home improvement service providers with
active memberships although substantially less are actually receiving home
improvement project leads. The number of service providers that receive leads
each month is dependent on the number of home improvement project leads
submitted to us and the type of work required for each project submitted. On a
monthly basis, we receive thousands of home improvement project lead submissions
from homeowners, each of which requires ongoing email communication throughout
the life of the homeowner's home improvement project. Our websites
ImproveNet.com, ImproveNetPRO.com and 1800Contractor.com provided over 20
million page views of traffic during 2004. In addition to these communications,
we reach hundreds of thousands of homeowners and home improvement service
providers on a monthly basis through our homeowner and home improvement service
provider newsletters. Through these touch points with home improvement service
providers and homeowners, we can offer a highly targeted advertising program to
manufacturers, distributors and suppliers searching to promote their products
and services. Businesses can strategically position their products and services
in front of their target buying audience during the time the consumer or service
provider is searching for, or ready to purchase, home improvement products and
services.

THE IMPROVENET SOLUTION
-----------------------
                                 For Homeowners
                                 --------------

ONLINE PROJECT PLANNING ASSISTANCE: We believe our online services, including
our product showcase, design gallery and our planning

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and estimating tools provide a valuable resource to homeowners in need of
assistance with a home improvement project. Our websites allow each homeowner to
generate ideas from our product showcase and design gallery and access to a
personal project folder, which can be used to archive previous home improvement
project ideas. We also offer homeowners the ability to search for home
improvement services and to plan their current projects using our interactive
planning tools.

ACCESS TO SERVICE PROVIDERS: ImproveNet has built a network of home improvement
service providers covering most markets in the United States that service a wide
array of home improvement trade categories. By creating a national network of
screened service providers, we believe we improve the likelihood that homeowners
who contact us will be able to hire a screened service provider; however, we
urge homeowners to always perform their own independent research on any
contractor that they choose to provide services.

During December 2004 we launched a new division of ImproveNet through the
licensing of the 1-800-Contractor telephone number and the 1800Contractor.com
website. This division will compliment the existing ImproveNet home improvement
information services by supplementing the online home improvement service
provider lead generation service with an online and offline resource for
homeowners to find and research local repair and installation contractors via
the telephone or Internet. During the first quarter of 2005, we began generating
revenue by selling directory listings to local and national home improvement
service providers. We intend to use the 1-800-Contractor telephone number and
website to develop a leading directory of homeowner rated, screened service
providers and contractors that can be accessed by homeowners by calling
1-800-Contractor or by visiting the 1800Contractor.com website. This will enable
homeowners to obtain service provider contact data and detailed company
information via the telephone or Internet. We believe that the homeowner rating
system will further enable homeowners to quickly and easily locate home
improvement service providers.

CONVENIENT AND COST EFFECTIVE SERVICES: Through our proprietary TrueMatch(TM)
platform, we match home improvement service providers to homeowners using each
homeowner's job specifications, and consider the service providers geographic,
job type and job size preferences. We encourage the selected service providers
to contact the homeowner directly to discuss the project in detail within 48
hours. Our TrueMatch(TM) platform typically provides more than one service
provider, creating a competitive marketplace for the home improvement bid and
provides the homeowner with options when making the decision on the best way to
complete their home improvement project. Going forward into 2005 and beyond, we
intend 1-800-Contractor and 1800Contractor.com to be an additional resource for
homeowners to locate and research screened, homeowner rated service providers in
a quick, easy and cost effective manner.

                              For Service Providers
                              ---------------------

QUALITY JOB LEADS: Service providers who receive leads through our proprietary
TrueMatch(TM) matching service benefit from the likelihood that the homeowner's
interest is real and that the potential project is correctly characterized.
Service providers furnish us with their geographic, project type and project
size preferences, which enables us to match home improvement projects to the
proper service providers based on their preferences and expertise. Service
providers can change their preferences at any time to reflect their changing
needs and circumstances. Through the ImproveNetPRO.com website, we communicate
these job leads to service providers in our network in near real-time.

COMPETITIVE DIFFERENTIATION: We believe service providers can differentiate
themselves from their competitors by joining our network of screened home
improvement service providers. At the end of 2004, there were approximately
30,000 service providers in our network that were eligible to receive qualified
job leads from us. We believe service providers will be able to further
differentiate themselves by participating in our 1-800-Contractor directory.
This directory will be available to homeowners by calling the 1-800-Contractor
telephone number or by visiting the 1800Contractor.com website. By participating
in our 1-800-Contractor network, service providers will have the ability to
receive job submissions directly from homeowners who utilize 1-800-Contractor to
locate a home improvement service provider.

BUSINESS AND FINANCIAL EFFICIENCIES: During June of 2004, we introduced a
subscription based pricing model that offers service providers the ability to
pay a nominal monthly fee and reduce the amount charged for each job lead that
the service provider accepts. Service providers who participate in our matching
service pay only for job leads that they accept, allowing them to reduce their
upfront marketing costs. Under the subscription based pricing model, service
providers are not charged a fee for projects that they win, which was the case
prior to June of 2004. Job leads from our matching service supplement the flow
of work that contractors, architects and designers receive from their
traditional sources, which allows them to plan and operate their business more
efficiently.

   For Manufacturers, Distributors and Suppliers of Home Improvement Products
   --------------------------------------------------------------------------

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TARGETED ADVERTISING TO HOMEOWNERS AND SERVICE PROVIDERS: ImproveNet.com and
1800Contractor.com are designed to attract visitors who are focused on
remodeling, repairing and maintaining their homes. ImproveNetPRO.com is used by
service providers to access job leads and monitor their account status.
Additionally, service providers regularly receive correspondence from us via
email related to job leads that they may be interested in and newsletters to
keep them informed of current events in their industry. We believe that this
audience is a valuable target for suppliers of home improvement products and
services. Suppliers will have the opportunity to target their message more
efficiently and cost effectively to a highly responsive and focused audience.

                             Complementary Services
                             ----------------------

Through our regular contact with homeowners in the normal course of our business
we also generate leads for complimentary services such and home equity
financing, real estate services and home improvement design planning.

PRODUCTS AND SERVICES
---------------------
                                 For Homeowners
                                 --------------

IMPROVENET.COM: Our consumer website, ImproveNet.com, enables homeowners to
browse, free of charge, pages of ideas and information for use in their home
improvement projects and allows them use of our project tools to help them
better understand their home improvement project. Our design gallery features
color images of the work of leading architects, contractors and designers. For
most designs, we provide images, comments from both the designer and our editors
and a detailed list of products used in the design. Our product showcase
contains images of a full range of distinct home improvement products and
includes brands such as Armstrong, DuPont, General Electric, Owens Corning,
Price-Pfister, Masco's KraftMaid and Merrillat. Our eight interactive estimators
are designed to assist homeowners through the planning and budgeting stage of
the home improvement process, which allows homeowners to calculate prices for a
project based on parameters such as physical dimensions, styles and the
homeowner's location.

Homeowners can register as members, which entitle them to access to additional
services. As part of the on-site registration process, we create a customized
interface for each registered member, known as the personal project folder. The
personal project folder stores all information related to a homeowner's project
and allows us to present custom-tailored information to that homeowner.
Homeowners can store ideas they obtain from our design gallery, product showcase
and product estimator, in addition to their own thoughts, as they plan and
design their home improvement project.

Our website gives homeowners access to a community of fellow website visitors
and to service providers and industry professionals who can respond to home
improvement questions. Visitors may read discussions currently on our message
boards, and registered members may join in the discussions or post a new
question. This feature gives homeowners who are now in the home improvement
process a friendly environment in which to educate themselves further and to
reduce their anxiety related to home improvement.

IMPROVENET'S MATCHING SERVICES: Through our website ImproveNet.com, we offer
homeowners the opportunity to submit home improvement project information that,
through our proprietary TrueMatch(TM) platform, is matched with local home
improvement service providers, who will meet with the homeowner and bid on the
home improvement project. Homeowners who require a home improvement project may
begin the process by clicking on our homepage links to "Find a Contractor",
"Find an Architect or "Find a Designer". The homeowner is then asked to complete
a brief project request form that specifies the type of job the homeowner
desires.

Our proprietary matching service uses the homeowner's project description to
select the ImproveNet service providers in the homeowner's geographic area that
perform the type of work required by the project description. We deliver job
leads to selected service providers by email or by posting the leads on
ImproveNetPRO.com. At the end of 2004, there were approximately 30,000 service
providers in our network that were eligible to receive qualified job leads from
us. The interested service providers who first contact us get the opportunity to
bid on the project. We allow a limited number of service providers to be matched
to each project depending upon the project size and type.

Home improvement service providers are encouraged to contact the homeowner in a
timely manner to discuss the project in detail, ideally within 48 hours of
receipt of the project information. Once the homeowner and service provider have
been matched, the service provider is able to bid on the project at any time
after meeting with the homeowner. Following the completion of the project, we
send a quality-assurance survey form to the homeowner to determine the outcome
of the project and the level of homeowner satisfaction.

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<PAGE>

1-800-CONTRACTOR: During December 2004 we launched a new division of ImproveNet
through the licensing of the 1-800-Contractor telephone number and the
1800Contractor.com website. Through the 1-800-Contractor directory, homeowners
can obtain service provider contact data and detailed company information via
the telephone or Internet. Contractors in this directory will be rated by
homeowners who have previously contracted with the service provider. We believe
that this homeowner self rating system will further enable homeowners to quickly
and easily locate screened home improvement service providers. 1-800-Contractor
also provides license and insurance information, credit history, general
business disposition and much more to assist homeowners in choosing the right
service provider for the job.

                 For Service Providers, Contractors and Builders
                 -----------------------------------------------

SERVICE PROVIDER MATCHING SERVICES: With one of the most robust web-based
matching services for professional builders, remodeling contractors, general
contractors and other home improvement service providers, we are able to match
project leads to the approximately 30,000 active members of our network. The
number of service providers that receive leads each month is dependent on the
number of home improvement project leads submitted to us and the type of work
required for each project submitted. The members of the ImproveNet network
receive thousands of renovation and home improvement project leads each month
that have been qualified by our highly skilled, professionally staffed customer
service center. We qualify certain leads to ensure they are authentic and
reliable so that we are able to pass on accurate information to home improvement
service providers participating in our network.

IMPROVENETPRO.COM: Our commercial website, www.ImproveNetPRO.com, provides
enhanced services to our service providers. ImproveNetPRO.com allows us to
communicate in near real-time with participating service providers who are
online. ImproveNetPRO.com provides our home improvement service providers with
immediate access to new job postings. Once a service provider enters the
password protected section of ImproveNetPRO.com, they are immediately presented
with the status of new projects available to them, based on their location and
expertise. ImproveNetPRO.com also has information similar to our consumer design
gallery and product showcase to assist our service providers.

1-800-CONTRACTOR: During December 2004 we launched a new division of ImproveNet
through the licensing of the 1-800-Contractor telephone number and the
1800Contractor.com website. We intend to use the 1-800-Contractor telephone
number and website to develop a leading directory of homeowner rated, screened
service providers and contractors that can be accessed by homeowners by calling
1-800-Contractor or by visiting the 1800Contractor.com website. Home improvement
service providers who list their company in the 1-800-Contractor directory will
obtain increased visibility to homeowners seeking service providers, remodeling
contractors and builders at a reduced project acquisition cost compared to other
traditional marketing methods.

CUSTOMER SERVICE AND OPERATIONS
-------------------------------
During March 2004, we staffed our Scottsdale, Arizona office to operate all
customer care call center functions including lead qualification, service
provider support, new member services and collections. Prior to this, these
functions had been performed by a third party service provider. Although we
experienced some disruption in customer support as a result of this transition,
we believe this move enhances the effectiveness of the service provider matching
services.

   For Manufacturers, Distributors and Suppliers of Home Improvement Products
   --------------------------------------------------------------------------

During the first half of 2005, we intend to offer a highly targeted advertising
program known as "AdServePRO" to businesses searching to promote their products
and services to consumers and service providers in the home improvement
industry. Advertisers will have the ability to feature their products and
services as paid listings in their choice of ImproveNet's marketing channels,
such as emails, newsletters and the web pages of ImproveNet.com,
ImproveNetPro.com and 1800Contractor.com. Each month ImproveNet reaches hundreds
of thousands of homeowners and home improvement service providers. Through these
touch points, businesses can strategically position their products and services
in front of their target buying groups during the time the consumer or service
provider is searching for, or ready to purchase, home improvement products and
services. AdServePRO's technology is intended to be a user-friendly web-based
application that will allow advertisers to manage their accounts online, from
setting up their campaign, creating the message, choosing their target audience
and setting the amount they wish to invest in their advertising program.

COMPETITION
-----------
Our current competitors with regard to the home improvement information services
segment include the following:

LOCAL, PRIMARILY TELEPHONE-BASED, CONTRACTOR REFERRAL BUSINESSES
----------------------------------------------------------------
These are generally small operations that take phone requests from homeowners
that are attracted through Yellow Pages advertising or

                                       9
<PAGE>

direct marketing initiatives and that refer projects to contractors with whom
they often have a personal relationship.

ONLINE REFERRAL COMPANIES
-------------------------
Some of our competitors, such as ServiceMagic.com and Contractor.com, offer a
publicly accessible online database and perform similar matching services as
ImproveNet.

SUPPLIERS OF HOME IMPROVEMENT PRODUCTS
--------------------------------------
Retailers and manufacturers of home improvement products such as The Home Depot,
Lowe's, Masco, and Sears Roebuck & Co. offer installation services.

Additional information on some of the competitors identified above is as
follows:

SERVICEMAGIC.COM
----------------
Service Magic, Inc. a subsidiary of Lending Tree, Inc. provides an online
marketplace connecting homeowners to prescreened contractors and service
providers. ServiceMagic.com's service is also designed to provide consumers with
a limited number of interested home service professionals in their local areas
within one business day. All ServiceMagic.com contractors are prescreened for
licensing, bankruptcy and insurance. ServiceMagic.com addresses more than 500
different home service needs in more than 40 markets nationwide.
ServiceMagic.com also offers educational online tools to homeowners including
expert advice, design ideas, quick tips, over thousands of articles and a
homeowner toolbox containing estimating tools, example contracts and guides on
licensing and insurance.

CONTRACTOR.COM
--------------
Headquartered in Denver, Colorado, Contractor.com maintains a comprehensive
nationwide directory of service providers allowing homeowners the ability to
search for local home improvement service providers based on zip code and trade.
Service providers are rated by homeowners that have previously used the service
provider, which provides a quasi "word of mouth environment." Contractor.com
service providers are prescreened for liability insurance and must provide
business references in order to be listed in the Contractor.com directory.
Contractor.com also provides homeowners with tips on how to find and hire the
right contractor for their home improvement projects.

Contractor.com offers membership programs to contractors which provide access to
home improvement leads and unlimited use of business solutions including: Sales
and marketing tools, information on the construction industry, cost estimators
and business management and financing tools.

Parties with which we have commercial relationships and other suppliers of home
improvement products could choose to develop their own Internet strategies or
competing home improvement services. Many of our existing and potential
competitors have longer operating histories, greater name recognition, larger
homeowner bases and significantly greater financial, technical and marketing
resources than we do. We believe that we and any competitor seeking to establish
web enabled home improvement services confront significant challenges,
including:

     -    The ability to maximize the number of visitors to their websites, the
          number of home improvement jobs submitted by those visitors, the time
          spent by those visitors at those websites and the resultant loyalty
          created among those visitors, the degree to which website content and
          loyalty create allegiance to the service provider, and ultimately, the
          ability to generate repeat customers;

     -    The ability to cost effectively recruit and retain a network of
          service providers that have broad trade and geographical coverage so
          that a large number of jobs can be successfully completed;

     -    The ability to generate significant online traffic from homeowners and
          the ability to qualify the home improvement project submissions that
          the homeowners provide so that accurate project information can be
          efficiently passed onto a network of service providers;

     -    The ability to develop an effective process for managing a large
          volume of homeowner requests and delivering a high level of customer
          service to both homeowners and home improvement service providers;

     -    The ability to develop commercial relationships with suppliers of home
          improvement products and services that provide value to consumers and
          service providers, as well as revenue from advertising.

                                       10
<PAGE>

Nevertheless, many service provider matching services operate on a localized
basis and it is challenging for one company to dominate in all locations.
Various locations where we experience service provider matching opportunities
are greater in number than others. We believe that because of our website
presentation and our customer service and operation center, we compare favorably
with others offering service provider matching services in our industry.

FIND A CONTRACTOR

We also advertise on third party websites through our Find a Contractor service.
We place a "Find a Contractor" banner or button on third party websites that
links the user to ImproveNet.com. We pay these third parties either a flat fee
or on a per referral basis. Since many of the third-party websites that use Find
a Contractor are related to the home improvement industry, we believe these
programs will deliver more qualified traffic to our website. We also believe
that websites that are related to the home improvement industry and that
participate in these programs will benefit from the access to our service
provider matching services.

THIRD PARTY PROVIDERS

We believe that contracting with the best companies on the Internet and in the
home improvement industry is an important component in ImproveNet's effort to be
America's home improvement destination. Our primary means of creating demand for
ImproveNet services has been through interactive marketing. We have entered into
arrangements, which are generally performance based, long term in length but
cancellable with reasonable notice, that obligate us to pay based upon
performance including revenue sharing and cost per lead acquisition. These
relationships include:

o Frequently visited portals, such as Google, Yahoo, MSN and FindWhat;

o Websites related to home improvements, such as HomeTime and Mills Pride; and

o Lead generator service providers.

TECHNOLOGY INFRASTRUCTURE
-------------------------
Our websites are designed to provide fast, reliable, high quality access to our
online services. Our hardware and software systems must assimilate and process
large volumes of visitor traffic and store, process and disseminate large
amounts of user data and process interactive applications.

We have implemented a broad array of site management, customer interaction and
processing systems using our own proprietary technologies and, where
appropriate, commercially available licensed technologies. Our systems use
Windows NT, Linux and MS SQL and are designed for a high level of automation and
performance. We have redundant power supplies, secured databases and web servers
to optimize up-time and user experience. We monitor our network and machines 24
hours a day for reliability.

Our websites have been developed internally using a Microsoft platform. In
developing our websites we use a variety of tools to support rapid database and
web application development. Our ability to successfully receive and process
homeowner job submissions online, provide high-quality service to homeowners and
service providers largely depends on the efficient and uninterrupted operation
of our computer and communications hardware systems. Our websites and databases
are hosted by AT&T in Phoenix, Arizona. Visitor traffic to our websites varies
significantly. Spikes in visitor traffic and user demand can affect expected
performance of our websites and could cause outages. Having fatal system
failures or serious catastrophe to the systems could result in significant
downtime. We seek to maintain and advance our market position by continually
enhancing the performance of our websites and expanding the features that we
offer homeowners, service providers and suppliers. We expect that enhancements
to our websites and services will continue.

INTELLECTUAL PROPERTY RIGHTS
----------------------------
Our success is dependent upon our ability to develop and protect our proprietary
technology and intellectual proprietary rights, including our databases of
homeowners, service providers, distributors and manufacturers and our
proprietary TrueMatch(TM) platform. We rely primarily on a combination of
contractual provisions, confidentiality procedures, trade secrets, and copyright
and trademark laws to accomplish these goals. Our databases are trade secrets
and our TrueMatch(TM) platform is protected by trade secret and copyright laws.

In addition, we seek to avoid disclosure of our trade secrets by requiring
certain employees, customers and others with access to our

                                       11
<PAGE>

proprietary information to execute confidentiality agreements. We also seek to
protect our software, documentation and other written materials under trade
secret and copyright laws.

Despite our efforts to protect our proprietary rights, existing laws afford only
limited protection. Attempts may be made to copy or reverse engineer aspects of
our services or to obtain and use information that we regard as proprietary.
Accordingly, there can be no assurance that we will be able to protect our
proprietary rights against unauthorized third-party copying or use. Use by
others of our proprietary rights could materially harm our business.
Furthermore, policing the authorized use of our product is difficult and
expensive litigation may be necessary in the future to enforce our intellectual
property rights.

In the ordinary course of business, we have received, and may receive in the
future, notices from third parties claiming infringement of their proprietary
rights. Any claims, with or without merit, could be time-consuming, result in
costly litigation, cause delays or require us to enter into royalty or licensing
agreements, any of which could harm our business. Patent litigation in
particular has complex technical issues and inherent uncertainties. In the event
an infringement claim against us were successful and we could not obtain a
license on acceptable terms, license a substitute technology or redesign to
avoid infringement, our business would be harmed.

During September 2004, the Board of Directors of ImproveNet approved a licensing
agreement (the "Licensing Agreement") with Karen S. Bishop (the "Licensor") for
certain intellectual property including the service mark "1-800-Contractor" and
other related properties. There is no material relationship between the parties
outside of the Licensing Agreement. The license granted to us by the Licensor is
for the exclusive right to use a service mark, a telephone number and domain
names within a specified territory (the "Licensed Property"). The Licensor
receives a percentage of the gross revenue generated and collected from our use
of the Licensed Property paid on a monthly basis during the term of the
Licensing Agreement and is subject to annual minimum payments to Licensor as set
forth in the Licensing Agreement. We have an option to purchase the Licensed
Property. The term of the Licensing Agreement is for 100 years subject to the
following early termination provisions: We may terminate the Licensing Agreement
at our election or upon exercise of our option to purchase the Licensed
Property. The Licensor may terminate the Licensing Agreement for (i) our failure
to make required payments timely, (ii) our failure to comply with its
obligations under the Licensing Agreement after written notice of such failure
or (iii) the proper revocation or suspension of our authority to do business in
its state of incorporation or the state where our principal office is located.

GOVERNMENT REGULATION
---------------------
Our business is subject to rapidly changing laws and regulations. Although our
operations are currently based in Arizona, the United States of America
government and the governments of other states and foreign countries have
attempted to regulate activities on the Internet. The following are some of the
evolving areas of law that are relevant to our business:

     -    PRIVACY LAW: Current and proposed federal, state and foreign privacy
          regulations and other laws restricting the collection, use and
          disclosure of personal information could limit our ability to leverage
          our databases to generate revenues;

     -    BUILDING REQUIREMENTS: Our activities, and those of our service
          providers, are subject to various federal, state and local laws,
          regulations and ordinances relating to, among other things, the
          licensing of home improvement contractors, OSHA standards, building
          and zoning regulations and environmental laws and regulations relating
          to the disposal of demolition debris and other solid wastes. In
          addition, many jurisdictions require the contractor of record to
          obtain a building permit for each home improvement project. Because of
          this rapidly evolving and uncertain regulatory environment, we cannot
          predict how these laws and regulations might affect our business. In
          addition, these uncertainties make it difficult to ensure compliance
          with the laws and regulations governing the Internet. These laws and
          regulations could harm us by subjecting us to liability or forcing us
          to change how we do business.

Because of this rapidly evolving and uncertain regulatory environment, we cannot
predict how these laws and regulations might affect our business. In addition,
these uncertainties make it difficult to ensure compliance with the laws and
regulations governing the Internet. These laws and regulations could harm us by
subjecting us to liability or forcing us to change the manner in which we
conduct business.

EMPLOYEES
---------
As of December 31, 2004, we employed approximately 50 full-time employees on a
consolidated basis. None of our employees are represented by a labor union. We
have experienced no work stoppages as a result of employee related matters and
believe that our employee relations are good.

ITEM 2.  DESCRIPTION OF PROPERTY

                                       12
<PAGE>

Our principal administrative offices are located in Scottsdale, Arizona. During
March 2004, we also staffed our Scottsdale, Arizona offices to operate all
customer care call center functions including lead qualification, service
provider support and collections. Prior to this, these functions had been
performed by a third party service provider. Our Scottsdale, Arizona offices are
approximately 5,000 square feet and are covered under a lease agreement with
gross lease payments of approximately $5,100 per month, which expires in July
2005.

As of December 31, 2004, ImproveNet has no investments in real estate and has no
immediate plans to invest in real estate, interests in real estate, real estate
mortgages or any other securities or related real estate activities.

ITEM 3. LEGAL PROCEEDINGS

From time to time, we may be involved in litigation relating to claims arising
out of, or incidental to, our operations. We are currently engaged in various
legal proceedings that are incidental to our business and could materially
affect our business should an adverse judgment be entered against us. We intend
to vigorously defend these claims and expect to prevail in all cases.

One arbitration matter in Phoenix, Arizona involved First Systech International,
Inc., a predecessor to eTechLogix, our wholly-owned subsidiary. This proceeding
concerns the 1998 sale of an Enterprise Resource Planning software product to a
former client who demanded a refund of the purchase price. The matter was before
an arbitrator who entered an award against First Systech for $116,886 plus
simple interest at 10% per year. First Systech International reached agreement
with Friedman Corporation ("Friedman") pursuant to terms and conditions of a
Repayment and Security Agreement effective May 25, 2004 (the "Agreement") which
finalizes a payment plan for First Systech International's obligations for the
arbitration award that Friedman has paid. The final amount owed under the
Agreement is approximately $182,000 with interest accruing at 8% per annum from
April 2, 2004 and attorney's fees incurred by Friedman in the minimum amount of
$4,500 and not to exceed $10,000 as set forth therein. Payments of $5,000 per
month commenced June 20, 2004, increased to $10,000 per month on November 20,
2004 and are scheduled to increase to $12,500 per month during June 2005.
Following the June 2005 increase, payments will remain at $12,500 per month
until the balance is paid in full. Pursuant to provisions of the Agreement,
First Systech International has granted a security interest and lien on all of
its assets to secure performance of its obligations under the Agreement. First
Systech International continues to maintain ownership of all of the assets that
it has pledged.

In March 2004, we initiated litigation in Nova Scotia, Canada against the
Canadian corporation that had been operating our customer care center and
operations for the home improvement service provider matching service to enforce
and protect our rights under the services agreement regarding our proprietary
material. During March 2004, the Canadian court entered an order prohibiting the
Canadian corporation from utilizing, in any way, ImproveNet's proprietary
materials and from soliciting or contacting any ImproveNet home improvement
service provider for a specified period of time, which expired in June 2004.

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

No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 2004.

                                     PART II

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

Our Common Stock began trading on the Nasdaq National Market System under the
symbol "IMPV" on March 16, 2000 and subsequently, on the Over The Counter
Bulletin Board on June 29, 2001. The following table sets forth the high and low
sales prices of our Common Stock for the periods indicated, as reported on the
Over-The-Counter Bulletin Board:

                                       13
<PAGE>

                                                   High          Low
                                                   Sales        Sales
                                                   Price        Price
                                                 --------     --------
    Year ended December 31, 2003:
    -----------------------------
     First Quarter .........................     $   0.27     $   0.07
     Second Quarter ........................         0.12         0.07
     Third Quarter .........................         0.40         0.09
     Fourth Quarter ........................         0.45         0.11

    Year ended December 31, 2004:
    -----------------------------
     First Quarter .........................     $   0.23     $   0.09
     Second Quarter ........................         0.40         0.09
     Third Quarter .........................         0.35         0.15
     Fourth Quarter ........................         0.24         0.12

As of December 31, 2004, we had approximately 400 stockholders of record. We
have never paid any cash dividends on our stock, and we anticipate that we will
retain any future earnings, if any, for use in the operation and expansion of
our business. Accordingly, we do not anticipate paying any cash dividends in the
foreseeable future.

In June 2003, we borrowed $75,000 for a 90-day period represented by a
promissory note that we issued to an accredited investor. Warrants to purchase
200,000 shares of our common stock were also issued in this transaction. The
promissory note was renewed in September 2003 for $80,000, including accrued but
unpaid interest, and a warrant to purchase an additional 150,000 shares of our
common stock. The promissory note was paid in full in December 2003. The
issuances of the promissory notes and the warrants were made under applicable
registration exemptions from both state and federal securities laws including
section 4(2) of the Securities Act of 1933, as amended.

In December 2003 we completed a $400,000 private placement of 8% unsecured
convertible promissory notes having an initial maturity of December 15, 2005 to
a limited group of accredited investors. The issuance was made under applicable
registration exemptions from both state and federal securities laws including
section 4(2) of the Securities Act of 1933, as amended. Interest on these notes
was payable quarterly commencing March 15, 2004. The principal of each note and
all accrued but unpaid interest was convertible into shares of our common stock
at the rate of five shares for each one dollar of debt represented by the notes.
Proceeds received from the issuance of these notes are being used for working
capital and general corporate purposes. In addition, approved finders of the
participating accredited investors were collectively issued warrants to purchase
520,000 shares of our common stock. The warrants were also issued under
applicable registration exemptions from both state and federal securities laws
including section 4(2) of the Securities Act of 1933, as amended.

In June 2004, we raised $1,050,000, from the sale of 10,500,000 Common Shares
and three-year warrants to purchase 8,000,000 Common Shares at a strike price of
$0.15 per share in a private placement transaction to several accredited
investors (collectively, the "Investors"). The issuance was made under
applicable registration exemptions from both state and federal securities laws
including section 4(2) of the Securities Act of 1933, as amended. In connection
with the private placement transaction, we granted the right to designate a
nominee to our Board of Directors to one of the Investors. The funds received
are being used for general corporate purposes and to increase our financial
flexibility. As part of this financing transaction, the Investors also purchased
1,500,000 Common Shares from affiliates of three of our officers and directors
for an aggregate purchase price of $150,000. Each of these three selling parties
entered into a lock-up agreement restricting future sales of their common stock
for a specified period, as well as a voting agreement regarding the accredited
investor's designated nominee to our Board of Directors.

Separately, during June 2004 holders of $370,000 of principal of our 8.0%
convertible promissory notes (the "Converting Investors") elected to convert the
then outstanding principal and interest to Common Shares and warrants on similar
terms to the private placement offering described above. The conversion resulted
in the issuance of 3,707,400 Common Shares and three-year warrants to purchase
2,466,666 Common Shares at a strike price of $0.15 per share. The issuance was
made under applicable registration exemptions from both state and federal
securities laws including section 4(2) of the Securities Act of 1933, as
amended. The remaining $30,000 of the then outstanding principal of the 8.0%
convertible promissory notes, which was with affiliates of ImproveNet, was
repaid in the second quarter of 2004.

The following table summarizes equity compensation plan information for
ImproveNet, Inc.:

                                       14
<PAGE>

<TABLE><CAPTION>
                                                                                                  Number of Securities
                                                                                                  Remaining Available
                                                Number of Securities                              For Future Issuance
                                                 to be Issued Upon         Weighted-Average          Under Equity
                                                   Exercise of            Exercise Price of        Compensation Plans
                                                Outstanding Options      Outstanding Options,    (Excluding Securities
                                                Warrants and Rights      Warrants and Rights     Reflected in Column(a))
                                                --------------------     --------------------     --------------------
                                                        (a)                      (b)                       (c)
<S>                                                        <C>           <C>                                 <C>
     Equity compensation plans
       approved by security holders .......                3,020,159     $               0.26                2,293,281

     Equity compensation plans not
       approved by security holders .......                     --                       --                       --
                                                --------------------     --------------------     --------------------

     Total ................................                3,020,159     $               0.26                2,293,281
                                                ====================     ====================     ====================
</TABLE>

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

CRITICAL ACCOUNTING POLICIES

"Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our consolidated financial statements that have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and assumptions that affect the reported amount of assets
and liabilities at the date of the financial statements, the disclosures of
contingent assets and liabilities as of the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. On an
on-going basis, we evaluate our estimates and judgments, including those related
to revenue recognition, bad debt and credit allowances for accounts receivable
and impairment of long-lived assets. We base our estimates and judgments on
historical experience and on various other factors that are believed to be
reasonable under the circumstances. The result of these estimates and judgments
form the basis for making conclusions about the carrying value for assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions; changes
in these estimates as a result of future events may have a material effect on
ImproveNet's financial condition. The SEC suggests that all registrants list
their most "critical accounting policies" in Management's Discussion and
Analysis. A critical accounting policy is one which is both important to the
portrayal of the company's financial condition and results and requires
managements' most difficult, subjective or complex judgments, often as a result
for the need to make estimates about the effect of matters that are inherently
uncertain. Management believes the following critical accounting policies affect
its more significant judgments and estimates in the preparation of its
consolidated financial statements. These policies include, but are not limited
to, revenue recognition and bad debt and credit reserves.

OVERVIEW

HOME IMPROVEMENT INFORMATION SERVICES

We are a leading Internet-based home improvement services company that, through
our proprietary TrueMatch(TM) platform, connects homeowners to local screened
home improvement service providers throughout the United States. We were
recognized by Money Magazine as "Best of the Web" in 2003 under the Home
Improvement Category and were recently featured nationally on the Today Show,
MSNBC, CNNfn, CBS Marketwatch and locally on many news networks and in
newspapers. ImproveNet has been connecting homeowners with local screened home
improvement service providers since 1996. Our website, www.improvenet.com,
includes tens of thousands of pages of content and serves both homeowner and
home improvement service providers including architects, designers, builders and
contractors to assist with the completion of home improvement projects from
start to finish. Our website also features management tools, product showcases,
visualizers, advice from experts and active message boards targeting home
improvement content.

SOFTWARE DEVELOPMENT AND SALES

eTechLogix, a wholly-owned software division of ImproveNet, is a developer and
marketer of web based configuration and order entry software and services for
the manufacturers and distributors markets of building material products sold to
the home

                                       15
<PAGE>

improvement industry. During the fourth quarter of 2004, the Board of Directors
determined that our principal focus going forward would be ImproveNet's core
lead matching service and the products and services that compliment it. This
decision was based on a number of factors, which include, but are not limited
to, the opportunities in the Internet home improvement industry as set forth in
Part 1 Item 1 DESCRIPTION OF BUSINESS.. Based on this decision, we have actively
pursued, during the first quarter of 2005, disposition of substantially all of
the operations of eTechLogix. An agreement in principle has been reached with a
third party for the anticipated disposition and documents reflecting the
definitive agreement are currently being prepared and are expected to be
executed in the near future. Accordingly, the operations of eTechLogix, which
had been classified as a separate operating segment in previous filings, have
been classified as discontinued operations for all periods presented in the
financial statements included in this filing and in any financial data presented
elsewhere in this filing.

                               SOURCES OF REVENUE

During the third quarter of 2004, we implemented a new subscription-based
pricing model for new home improvement service providers joining our service
provider membership network. The model offers three different levels that home
improvement service providers can choose from to accommodate their financial and
professional needs. Benefits of some levels include email (for example,
name@improvenetpro.com), a website, online advertisements with ImproveNet
affiliates, a personal toll free number with immediate access to a dedicated
customer care representative, screened and verified home improvement leads, an
online console to manage the user's profile and home improvement project lead
management.

These three levels consist of: (i) Standard membership - no monthly fee, (ii)
Professional membership - $29.99 monthly fee and (iii) Master membership -
$199.99 monthly fee. We charge our home improvement service providers a fee for
each lead that they accept from our service. Lead fees currently charged to our
home improvement service providers for each level of membership are summarized
as follows:

          Project Lead
          Budget Range                Standard   Professional    Master
     -----------------------          --------     --------     --------

     $0 - $999 .............          $  10.00     $   7.00     $   5.00
     $1,000 - $4,999 .......             15.00        10.00         8.00
     $5,000 - $9,999 .......             32.00        25.00        16.00
     $10,000 - $24,999 .....             65.00        50.00        32.00
     $25,000 - $50,000 .....            100.00        75.00        50.00
     Over $50,000 ..........            120.00       100.00        60.00

Home improvement service providers who were part of our network prior to our
implementation of the subscription based pricing model and who have elected to
remain on our previous plan continue to utilize our service with no monthly fee,
however, these service providers are subject to "win" fees on all home
improvement projects obtained through the use of our services. These win fees
are based on a percentage of the total budgeted home improvement project value.
Lead fees and win fee percentages currently charged for these service providers
are summarized as follows:

             Project Lead                        Lead           Win
             Budget Range                         Fee           Fee
     ----------------------------              --------      --------

     $0 - $999 ..................              $   --            7.0%
     $1,000 - $4,999 ............                 10.00          5.0%
     $5,000 - $9,999 ............                 25.00          2.0%
     $10,000 - $24,999 ..........                 50.00          2.0%
     $25,000 - $50,000 ..........                 75.00          2.0%
     Over $50,000 ...............                100.00          2.0%

We believe that the subscription based pricing structure will result in a more
consistent cash flow stream as we will generate a flat monthly fee from many of
the home improvement service providers using our service while continuing to
generate revenue based on the quantity of leads sold. Additionally, we are
collecting payments from service providers participating in the subscription
based pricing model via credit card or ACH charges, which differs from the
previous model whereby we billed service providers for leads accepted and win
fees earned, and collected these charges at a later date. We believe charging
our customers at the time of sale will have a positive impact on collections and
will decrease the number of days our sales are outstanding. We plan to convert
home improvement service providers that are part of our network to the
subscription model over the next two quarters.

                      ADDITIONAL PLANNED SOURCES OF REVENUE

                                       16
<PAGE>

During the third quarter of 2004, we commenced development of two new
initiatives that are aimed at augmenting our home improvement information
services segment. These initiatives include 1-800-Contractor and an advertising
service known as "AdServePRO." Information on these initiatives is summarized as
follows:

1-800-CONTRACTOR

During September 2004 we entered into an exclusive licensing agreement for the
use of the phone number and website domain name related to "1-800-Contractor"
(the "Licensed Property"). The licensor receives a percentage of the gross
revenue collected from our use of the Licensed Property, payable on a monthly
basis during the term of the licensing agreement, which is subject to annual
minimum payments to the licensor. Improvenet also has an option to purchase the
Licensed Property. The term of the licensing agreement is for 100 years subject
to the following early termination provisions: we may terminate the licensing
agreement at our election or upon exercise of our option to purchase the
Licensed Property. The licensor may terminate the licensing agreement for (i)
our failure to make required payments timely, (ii) our failure to comply with
its obligations under the licensing agreement after written notice of such
failure or (iii) the proper revocation or suspension of our authority to do
business in its state of incorporation or the state where our principal office
is located.

During December 2004, we launched a new division of ImproveNet through the
licensing of the 1-800-Contractor (1-800-266-8722) telephone number, the
1800Contractor.com web property (domain names) and associated service marks.
This division will compliment our existing ImproveNet home improvement
information services by supplementing the online home improvement lead
generation service with an online and offline resource for homeowners to find
and research local contractors via the Internet or telephone.

Through 1-800-Contractor, we plan to create an online directory of homeowner
rated, screened service providers and contractors that can be accessed by
homeowners by calling 1-800-Contractor or by visiting the 1800Contractor.com
website. This will enable homeowners to obtain contractor contact data and
detailed company information via the telephone or Internet. During the first
quarter of 2005, we began generating revenue by selling directory listings to
local and national service providers in the home repair and installation
industry. There are currently three levels of listings in the 1-800-Contractor
directory: Standard, Pro and ProPLUS. Benefits of ProPLUS and Pro status include
a higher rank in the 1-800-Contractor directory, a webpage that profiles the
service provider, customer feedback and higher quantities of free phone leads
from the 1-800-Contractor telephone number.

Following the launch of 1-800-Contractor, service providers joining the
ImproveNet network in 2005 pay an additional flat monthly fee to be listed in
the 1-800-Contractor directory in addition to the monthly subscription fees
discussed above. ProPLUS and Pro 1-800-Contractor members are able to purchase
leads at the ImproveNet Professional rates shown above, while Standard
1-800-Contractor members are offered leads at the Standard rates shown above.
New service providers joining the ImproveNet network and 1-800-Contractor
directory in 2005 pay monthly subscription fees as follows:

     Standard .................................................... $   9.99
     Pro .........................................................    39.99
     ProPlus .....................................................    79.99
     Master (ProPLUS status in the 1-800-Contractor directory) ...   199.99

ADSERVEPRO

During the first half of 2005, we intend to offer a highly targeted advertising
program known as "AdServePRO" to businesses searching to promote their products
and services to consumers and service providers in the home improvement
industry. Advertisers will have the ability to feature their products and
services as paid listings in their choice of ImproveNet's marketing channels,
such as emails, newsletters and the web pages of ImproveNet.com,
ImproveNetPro.com and 1800Contractor.com. Each month ImproveNet reaches hundreds
of thousands of homeowners and home improvement service providers. Through our
touch points, businesses can strategically position their products and services
in front of their target buying groups during the time the consumer or service
provider is searching for, or ready to purchase, home improvement products and
services. AdServePRO's technology is intended to be a user-friendly web-based
application that will allow advertisers to manage their accounts online, from
setting up their campaign, creating the message, choosing their target audience
and setting the amount they wish to invest in their advertising program.

                            COST OF REVENUE STRUCTURE

                                       17
<PAGE>

Our cost of revenue primarily includes the cost of procuring leads and costs
associated with lead qualification. We procure home improvement leads by use of
the following methods: (i) Homeowners visiting our ImproveNet.com website and
submitting a home improvement project lead; (ii) Search engines including
Google, Yahoo and MSN; (iii) Lead generator service providers; (iv) Utilization
of affiliate programs with other home improvement related websites and (v)
Search engine optimization ("SEO") partners. We do not incur any costs related
to homeowner submissions made directly to our ImproveNet.com website. We pay
fees to search engines based on the number of times Internet users click on a
paid advertising link. Fees paid to lead generator service providers, affiliates
and SEO partners are primarily based on the quantity and quality of leads
provided.

We qualify certain leads internally through our lead qualification department.
The lead qualification process includes an analysis of the information provided
from the homeowner to ensure that the information is correct. For some larger
home improvement project submissions, this process includes verbally confirming
the information relative to the project directly with the homeowner.

              SELLING, GENERAL AND ADMINISTRATIVE EXPENSE STRUCTURE

Our selling, general and administrative expense primarily consists of payroll
and related costs and, prior to bringing our customer care center in-house
during March 2004, included the cost of outsourcing our sales, collections and
new member recruiting functions. Selling, general and administrative expense
also includes bad debt charges, rent, travel, recruiting, professional and
advisory services, marketing and advertising, depreciation and other general
overhead expenses.

      RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003

Our consolidated results of operations for the years ended December 31, 2004 and
2003 is as follows:

<TABLE><CAPTION>
                                                          Year Ended December 31,
                                            ----------------------------------------------------                     Percentage
                                                     2004                         2003                   Change        Change
                                            -----------------------      -----------------------      -----------      ------
<S>                                         <C>               <C>        <C>               <C>        <C>                <C>
     Revenue ..........................     $ 3,039,678       100.0%     $ 2,675,545       100.0%     $   364,133        13.6%
     Cost of revenue ..................       1,139,931        37.5%       1,055,656        39.5%          84,275         8.0%
                                            -----------      ------      -----------      ------      -----------      ------

     Gross profit .....................       1,899,747        62.5%       1,619,889        60.5%         279,858        17.3%
     Selling, general and
       administrative expense .........       2,754,293        90.6%       2,194,789        82.0%         559,504        25.5%
                                            -----------      ------      -----------      ------      -----------      ------

     Income (loss) from operations ....     $  (854,546)     -28.1%      $  (574,900)     -21.5%      $  (279,646)       48.6%
                                            ===========      ======      ===========      ======      ===========      ======
</TABLE>

REVENUE

A summary of our revenue for the years ended December 31, 2004 and 2003 is as
follows:

<TABLE><CAPTION>
                                                        Year Ended December 31,
                                            --------------------------------------------------                   Percentage
                                                     2004                        2003                 Change       Change
                                            ----------------------      ----------------------      ----------   ----------
<S>                                         <C>               <C>       <C>               <C>       <C>                <C>
       Lead fees ......................     $1,896,831        62.5%     $1,461,716        54.6%     $  435,115         29.8%
       Subscription fees ..............        125,499         4.0%           --           0.0%        125,499          N/A
       Win fees .......................        935,369        30.8%      1,198,191        44.8%       (262,822)      -21.9%
       Marketing and other revenue ....         81,979         2.7%         15,638         0.6%         66,341        424.2%
                                            ----------      ------      ----------      ------      ----------       ------

                                            $3,039,678       100.0%     $2,675,545       100.0%     $  364,133         13.6%
                                            ==========      ======      ==========      ======      ==========       ======
</TABLE>

Revenue was approximately $3,040,000 and $2,676,000 for the year ended December
31, 2004 and 2003, respectively, an increase of $364,000 or 13.6%. The increase
in revenue for the year ended December 31, 2004, as compared to the same period
in the prior year, was due to increased lead sales and subscription fees from
the subscription based pricing model, offset by a decline in win fees. We
anticipate win fees to continue to decline as a percentage of revenue and
subscription fees to increase as a percentage of revenue in the future as more
new contractors are established and existing contractors are converted to the
subscription based pricing model.

Overall, there was little impact on lead revenue as a result of lead pricing
changes associated with our adoption of the subscription based pricing model in
the third quarter of 2004. Fluctuations in lead revenue on a year over year
basis are primarily the result of net

                                       18
<PAGE>

lead revenue sales volume increases.

COST OF REVENUE

Cost of revenue was approximately $1,140,000 and $1,056,000 for the year ended
December 31, 2004 and 2003, respectively, an increase of $84,000 or 8.0%. As a
percentage of revenue, cost of revenue was 37.5% and 39.5% for the year ended
December 31, 2004 and 2003, respectively. The decrease in cost of revenue as a
percentage of revenue is due to lower costs associated with better terms on
leads procured from lead generators and affiliates during 2004 versus 2003,
offset slightly by increased lead costs associated with leads procured from
search engines, such as Google, Yahoo and MSN. Although leads procured from
search engine sources are of higher cost, we believe these leads to be more
beneficial to ImproveNet as they create a direct link between ImproveNet and the
consumer, which we believe strengthens our brand name recognition. During 2004,
cost of revenue associated with leads driven by search engines increased by over
100%, which reflects our emphasis on building and maintaining our brand name.
The overall increase in cost of revenue for the year ended December 31, 2004, as
compared to the same period in the prior year was due to increased costs related
to search engines of 18.4% and increased costs of qualifying leads internally of
10.0%, offset by decreased costs associated with lead generators and affiliates
of 10.3% and a decrease in costs from our previous customer care service
provider of 10.1%. There was little impact on our cost of revenue as a result of
bringing the customer care call center in-house in March of 2004, which, prior
to March 2004, had been outsourced to a third party.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE

Consolidated selling, general and administrative expense was approximately
$2,754,000 and $2,195,000 for the year ended December 31, 2004 and 2003,
respectively, an increase of $559,000 or 25.5%. Increases in bad debt expense
and non-cash stock-based compensation expense increased selling, general and
administrative expense 19.9% and 4.7%, respectively. During March 2004, we
staffed our Scottsdale, Arizona office to operate all customer care call center
functions including lead qualification, service provider support and
collections. Prior to this, these functions had been performed by a third party
service provider. Although the overall cost of operating the customer care call
center has not changed substantially, we have experienced some disruption in
customer support as a result of this transition, which has had a negative impact
on our bad debt expense for the year ended December 31, 2004.

OTHER INCOME (EXPENSE)

Other income (expense) is summarized as follows:

                                                      2004            2003
                                                   ----------      ----------

     Interest income .........................     $    8,605      $    2,597
     Interest expense and financing costs ....       (712,187)         (5,029)
     Relief of debt ..........................         14,023            --
     Miscellaneous income ....................        180,980          28,070
                                                   ----------      ----------

                                                   $ (508,579)     $   25,638
                                                   ==========      ==========
Interest income
---------------
Interest income increased for the year ended December 31, 2004 versus the same
period in the prior-year due to higher amounts of interest bearing investments
during the current period.

Interest expense and financing costs
------------------------------------
Interest expense and financing costs increased during the year ended December
31, 2004 versus the same period in the prior year as a result of a charge of
approximately $695,000 related to the modified conversion terms associated with
this conversion of $370,000 of principal of our previously outstanding 8.0%
convertible promissory notes.

Relief of debt
--------------
Relief of debt during 2004 and 2003 represents the favorable settlement of
amounts due to former vendors.

Miscellaneous income
--------------------
Due to the nature of certain potential financial penalties related to
registration rights granted to investors in our June 2004 private placement, the
most substantive of which would require ImproveNet to rescind the transaction at
the option of the investors should the

                                       19
<PAGE>

applicable registration statement not be declared effective and remain effective
by March 1, 2005, the Common Shares, warrants and related proceeds associated
with this offering were initially classified outside of equity until the
appropriate registration statement was declared effective. These amounts were
reclassified to equity during the fourth quarter of 2004, as the underlying
shares became fully registered in October 2004. The warrants, which were
initially classified as a liability, have been re-measured to their fair value
prior to the reclassification to equity in October 2004, resulting in additional
miscellaneous income of approximately $162,000 for the year ended December 31,
2004.

DISCONTINUED OPERATIONS, NET OF TAX

During the fourth quarter of 2004, the Board of Directors determined that our
principal focus going forward would be ImproveNet's core lead matching service
and the products and services that compliment it. This decision was based on a
number of factors, which include, but are not limited to, the opportunities in
the Internet home improvement industry discussed elsewhere in this document.
Based on this decision, we have actively pursued, during the first quarter of
2005, disposition of substantially all of the operations of eTechLogix. An
agreement in principle has been reached with a third party for the anticipated
disposition and documents reflecting the definitive agreement are currently
being prepared and are expected to be executed in the near future. Accordingly,
the operations of eTechLogix, which has been classified as a separate operating
segment in previous filings, has been classified as discontinued operations for
all periods presented in the financial statements included in this filing and in
any financial data presented elsewhere in this filing.

The following table summarizes financial data for eTechLogix for the years ended
December 31, 2004 and 2003, respectively:

                                                   2004           2003
                                                ----------     ----------
     Revenue ................................   $  443,365     $  518,002
     Operating income (loss) ................       83,286       (333,237)
     Net income (loss) ......................       86,030       (236,926)

Revenue declined in 2004 versus 2003 due to a shift in the focus of ImproveNet
from software development and sales to our core lead matching business. Overall
operating income (loss) and net income (loss) was better in 2004 versus 2003 as
a result of the settlement of an outstanding claim against eTechLogix in 2003
from Friedman Corporation, which is discussed in more detail in Item 3, Legal
Proceedings.

LIQUIDITY AND CAPITAL RESOURCES

Our principal capital requirements are to fund operations and capital
expenditures, which includes expenditures related to the development and
implementation of 1-800-Contractor and AdServePRO, which were discussed
previously herein. Significant sources of liquidity are cash on hand, borrowings
from our credit facilities and proceeds from debt and equity issuances. Our net
working capital as of December 31, 2004 was approximately $3,000, including
restricted cash, versus negative working capital of approximately $223,000 as of
December 31, 2003. The increase in net working capital primarily relates to the
financing transaction completed in June 2004, which is discussed further below.

FINANCING TRANSACTION

During June 2004, ImproveNet raised $1,050,000, from the sale of 10,500,000
Common Shares and three-year warrants to purchase 8,000,000 Common Shares at a
strike price of $0.15 per share in a private placement transaction to several
accredited investors (collectively, the "Investors"). The issuance was made
under applicable registration exemptions from both state and federal securities
laws including section 4(2) of the Securities Act of 1933, as amended. The
proceeds were allocated to the Common Shares and warrants based on the relative
fair value of each security at the time of issuance with $621,500 allocated to
the Common Shares and $428,500 allocated to the warrants. Due to the nature of
certain potential financial penalties related to registration rights granted to
the Investors, the most substantive of which would require ImproveNet to rescind
the transaction at the option of the Investors should the applicable
registration statement not be declared effective and remain effective by March
1, 2005, the shares of Common Stock were initially classified outside of equity
as mezzanine financing and the warrants to purchase Common Stock were initially
classified as a liability. During October 2004, the Common Shares and warrants
became fully registered, at which time the amounts were reclassified to equity.
Prior to the registration statement being declared effective, changes in the
fair value of the warrants were recognized as other income or expense in our
statement of operations. Changes in the fair value of the warrants resulted in
other income of approximately $162,000 recognized during 2004. In connection
with the private placement transaction, we granted the

                                       20
<PAGE>

right to designate a nominee to our Board of Directors to one of the Investors.

As part of the financing transaction described above, the Investors also
purchased 1,500,000 Common Shares from affiliates of three of our officers and
directors for an aggregate purchase price of $150,000. Each of these three
selling parties entered into a lock-up agreement restricting future sales of
their common stock for a specified period, as well as a voting agreement
regarding the accredited investor's designated nominee to our Board of
Directors.

Separately, during June 2004 holders of $370,000 of principal of our 8.0%
convertible promissory notes (the "Converting Investors") elected to convert the
then outstanding principal and interest to Common Shares and warrants on similar
terms to the private placement offering described above. The conversion resulted
in the issuance of 3,707,400 Common Shares and three-year warrants to purchase
2,466,666 Common Shares at a strike price of $0.15 per share. The issuance was
made under applicable registration exemptions from both state and federal
securities laws including section 4(2) of the Securities Act of 1933, as
amended. Due to the modified conversion terms associated with this conversion,
we recognized a charge in the amount of approximately $695,000. The remaining
$30,000 of the then outstanding principal of the 8.0% convertible promissory
notes, which was with affiliates of ImproveNet, was repaid in the second quarter
of 2004.

LINE OF CREDIT

During September 2004 we entered into a line of credit for $100,000 with a
national banking association. Interest accrues on all funds advanced on the line
of credit at 1/4 point over the bank's prime lending rate. The maturity of the
line of credit facility is September 14, 2005, at which time the payment of all
outstanding principal and accrued interest is due. There is no penalty for
prepayment of outstanding amounts prior to maturity. We have secured our
obligations under the line of credit with the pledge of a certificate of
deposit. As of December 31, 2004, there was approximately $62,000 drawn on this
line of credit. During the first quarter of 2005, this line of credit was paid
in full and closed.

Separately, we have an unsecured $95,000 line of credit agreement with a bank
through our subsidiary eTechLogix, Inc. The agreement calls for interest at the
bank's prime rate plus 2.75% and is due on demand. We had outstanding balances
on this line of credit of approximately $60,000 and $66,000 as of December 31,
2004 and 2003, respectively.

EQUITY ISSUANCE

The following table summarizes ImproveNet's Common Share issuances during the
year ended December 31, 2004:

<TABLE><CAPTION>
                                                                                      Number of
                                                                                    Common Shares
                                                                                      ----------
<S>                                                                                   <C>
     Private placement .........................................................      10,500,000
     Conversion of 8% convertible promissory notes .............................       3,707,400
     Stock based compensation of consultants, employees and directors ..........         972,617
     Common Shares issued upon exercise of options and warrants ................          40,000
                                                                                      ----------

     Common Shares issued during the year ended December 31, 2004 ..............      15,220,017
                                                                                      ==========
</TABLE>

CASH FLOWS

The following discussion relates to the major components of the changes in cash
flows for the years ended December 31, 2004 and 2003:

CASH FLOWS USED IN OPERATING ACTIVITIES

Cash flows used in operating activities was approximately $394,000 and $141,000
for the year ended December 31, 2004 and 2003, respectively. The increase in
cash used in operating activities is primarily due to an overall general
decrease in cash flows from operations.

CASH FLOWS USED IN INVESTING ACTIVITIES

                                       21
<PAGE>

Cash flows used in investing activities was approximately $153,000 and $22,000
for the year ended December 31, 2004 and 2003, respectively. The increase in
cash used in investing activities is primarily due to the development and
enhancement of our existing software systems and the purchase of equipment and
development of software to implement 1-800-Contractor and AdServePRO. We intend
to finance expenditures related to the 1-800-Contractor and AdServePRO
initiatives through currently available cash on hand and the issuance of
additional debt and / or equity securities if necessary.

CASH FLOWS FROM FINANCING ACTIVITIES

Cash flows provided by financing activities was approximately $962,000 and
$400,000 for the year ended December 31, 2004 and 2003, respectively. The
increase in cash flows from financing activities is due to the financing
transaction completed during the second quarter of 2004 offset by repayments of
debt and capital lease obligations.

OFF-BALANCE SHEET FINANCING

We have no off-balance sheet debt or similar obligations nor do we have any
transactions or obligations with related parties that are not disclosed,
consolidated into or reflected in our reported results of operations or
financial position. We do not guarantee any third party debt.

RISK FACTOR THAT MAY EFFECT OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION

You should carefully consider the following risk factors before making an
investment decision. If any of the following risks actually occur, our business,
financial condition or results of operations could be materially adversely
affected. In such cases, the trading price of our common stock could decline and
you may lose all or a part of your investment.

WE HAVE A HISTORY OF LOSSES AND WE MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY

We have continued to sustain losses for the past several years, however, with
funds received from a private placement in June 2004, we now have positive net
worth. Our operating losses have limited our ability to obtain vendor credit or
extended payment terms and bank financing on favorable terms, accordingly, we
depend on our cash and cash equivalent balances to fund our operations.

Prior to the merger of ImproveNet and eTechLogix in 2002 (the "Merger"), the
ImproveNet business operated at a significant loss. The ImproveNet business was
moved from California to Arizona following the Merger in December 2002 and has
been integrated into the infrastructure of eTechLogix, leveraging the then
existing technical, marketing and administrative personnel.

We will strive to make ongoing realignments, if required, to achieve positive
cash flow with our existing resources, however, no assurances can be made that
the funds received from the June 2004 private placement will be adequate or
sufficient to fund expansion, react to competitive pressures, or take advantage
of unanticipated opportunities that we may identify.

WE FACE CONTINUED CHALLENGES IN THE INTEGRATION OF THE SEPARATE BUSINESSES OF
IMPROVENET AND ETECHLOGIX FOLLOWING THE MERGER

We have not experienced the anticipated synergistic results from the integration
of the separate businesses of ImproveNet and eTechLogix following the Merger.
The strategies of cross-marketing service offerings, the opportunities of
expanded markets, the development of additional revenue streams, the enhanced
ability to raise capital and the availability of public currency for making
strategic acquisitions have had limited success to date, accordingly, during the
fourth quarter of 2004, we determined that our principal focus going forward
would be ImproveNet's core lead matching service and the products and services
that compliment it. This decision was based on a number of factors, which
include, but are not limited to, the opportunities in the Internet home
improvement industry discussed elsewhere in this document. Based on this
decision, we have actively pursued, during the first quarter of 2005,
disposition of substantially all of the operations of eTechLogix. An agreement
in principle has been reached with a third party for the anticipated disposition
and documents reflecting the definitive agreement are currently being prepared
and are expected to be executed in the near future. Accordingly, the operations
of eTechLogix, which had been classified as a separate operating segment in
previous filings, have been classified as discontinued operations for all
periods presented in the financial statements included in this filing and in any
financial data presented elsewhere in this filing.

BECAUSE WE ARE NO LONGER LISTED ON THE NASDAQ NATIONAL MARKET SYSTEM, THE
LIQUIDITY OF OUR COMMON STOCK HAS BEEN

                                       22
<PAGE>

SERIOUSLY LIMITED AND THERE IS CURRENTLY A LIMITED MARKET FOR OUR COMMON STOCK.

On June 29, 2001, we received a NASDAQ Qualification Panel Decision indicating
that we have failed to comply with the minimum bid price requirement for
continued listing, and we were delisted from the NASDAQ National Market System.
Our stock is currently being traded on the NASDAQ Over-The-Counter Bulletin
Board, however, the liquidity of our common stock is significantly lower than
when it was listed on the NASDAQ National Market System. The Bulletin Board is a
limited market and subject to substantial restrictions and limitations in
comparison to the NASDAQ system. Any broker/dealer that makes a market in our
stock or other person that buys or sells our stock could have a significant
influence over its price at any given time.

OUR COMMON STOCK IS SUBJECT TO PENNY STOCK REGULATION

Our shares are subject to the provisions of Section 15(g) and Rule 15g-9 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), commonly
referred to as the "penny stock" rule. Section 15(g) sets forth certain
requirements for transactions in penny stocks and Rule 15g-9(d)(1) incorporates
the definition of penny stock as that used in Rule 3a51-1 of the Exchange Act.
The Commission generally defines penny stock to be any equity security that has
a market price less than $5.00 per share, subject to certain exceptions. Rule
3a51-1 provides that any equity security is considered to be penny stock unless
that security is: Registered and traded on a national securities exchange
meeting specified criteria set by the Commission; authorized for quotation on
the NASDAQ Stock Market; issued by a registered investment company; excluded
from the definition on the basis of price (at least $5.00 per share) or the
registrant's net tangible assets; or exempted from the definition by the
Commission. Since our shares are deemed to be "penny stock", trading in the
shares will be subject to additional sales practice requirements on
broker-dealers who sell penny stock to persons other than established customers
and accredited investors.

OUR MARKETS ARE COMPETITIVE AND VOLATILE AND WE MAY SUFFER PRICE REDUCTIONS, BE
UNABLE TO ATTRACT HOMEOWNERS TO OUR WEBSITES, BE UNABLE TO EXPAND AND MAINTAIN
OUR SERVICE PROVIDER NETWORK OR ENTER INTO MULTI-YEAR COMMERCIAL CONTRACTS IF WE
DO NOT COMPETE EFFECTIVELY

The market for our services is intensely competitive, evolving and subject to
rapid technological change. To remain competitive, we must continue to enhance
and improve the ease of use, responsiveness, functionality and features of our
online and offline services in order to attract homeowners to our websites and
maintain our service provider network. We expect the intensity of competition to
increase in the future. Increased competition may result in changes in our
pricing model, fewer homeowners visiting our websites, service providers leaving
our network, less marketing revenue, reduced gross margins and loss of market
share. Any one of these factors could significantly reduce future profitability.
In addition, technological barriers to entry are relatively low. As a result,
current competitors, including local referral businesses and online referral
companies including ServiceMagic.com and Contractor.com, as well as potential
competitors such as The Home Depot, Lowe's and Sears Roebuck & Company, have
launched websites similar to ours that could gain broader market acceptance
based on content, products and services. Because of the localized nature of the
service provider matching services, our website presentation and the
personalized approach of our customer service and operations center, we believe
that we distinguish our service provider matching service from that of our
competitors, but cannot assure that our customers will recognize such
distinctions or that this distinction will sustain our business.

Some of our competitors have more resources and broader and deeper customer
access than we do. In addition, several of these competitors have, or can
readily obtain, extensive knowledge of the home improvement industry. Our
competitors may be able to respond more quickly than we can to new technologies
or changes in Internet user preferences and devote greater resources than we can
to the development, promotion and sale of their services. We may not be able to
maintain our competitive position against current and future competitors,
especially those with significantly greater resources and brand recognition.

HOMEOWNERS AND SERVICE PROVIDERS MAY BE RELUCTANT TO ACCEPT AN INTERNET-BASED
SERVICE PROVIDER MATCHING SERVICE

Currently most homeowners use traditional means, including word-of-mouth
referrals, Yellow Pages and local contractor matching services to obtain service
providers for their home improvement projects. In addition, many service
providers do not use the Internet for business purposes and may be reluctant to
become part of a network of service providers on an Internet-based service
provider matching service. If homeowners do not use our matching service or
service providers do not join our network, we will not be able to generate
significant revenues from either services or advertising.

IF WE DO NOT ATTRACT AND RETAIN A NETWORK OF HIGH QUALITY SERVICE PROVIDERS, OUR
BUSINESS COULD BE HARMED

We expect to derive the majority of our revenues from our network of service
providers in the form of payments for each homeowner

                                       23
<PAGE>

referral that we provide to the service provider and for subscription fees for
the use of our services and the 1-800-Contractor directory listing. Our business
is highly dependent on homeowners' use of our websites to find service providers
for their home improvement projects so that service providers will achieve a
satisfactory return on their participation in the ImproveNet program.

A key element of the growth of our business is the pace at which service
providers adopt the ImproveNet matching process. This adoption includes
responding to homeowner inquiries within 48 hours, providing a competitive, firm
quote to homeowners quickly, and paying lead fees to ImproveNet. Our inability
to screen and support service providers effectively, or the failure of our
service providers to respond professionally and in a timely manner to homeowner
inquiries, could result in low homeowner satisfaction and harm our business. In
addition, the failure of our service providers to win home improvement projects
and pay us lead, subscription and / or win fees could harm our business.

We must actively recruit new service providers and retain and motivate our
current service providers to ensure that we continually have adequate coverage.
We believe that service providers in the home improvement industry suffer from a
relatively high failure or turnover rate that makes it difficult for us to
retain service providers. Accordingly, we expect that not all of our service
providers will remain active participants in our network. If we are unable to
achieve low turnover among our network of service providers our business could
be harmed.

THE MARKETS IN WHICH WE COMPETE ARE CYCLICAL, WHICH CAN AFFECT OUR FINANCIAL
PERFORMANCE AND RESULTS

The demand for our service provider matching services is cyclical and fluctuates
from season to season during the year. Historically during the spring and
summer, the demand of homeowners to proceed with home improvement projects is
stronger than at other times of the year. Numerous factors may account for this
increased demand. As a result, the quantity and quality of the home improvement
project leads we receive at various times of the year fluctuates. This directly
affects the number of home improvement project leads we provide. Therefore,
revenues from lead fees and win fees may be negatively impacted at times when
the demand is less, and accordingly, financial performance and results may be
negatively impacted.

IF HOMEOWNERS FAIL TO REPORT AND SERVICE PROVIDERS FAIL TO REPORT AND PAY WIN
FEES TO US, DIRECTLY OR INDIRECTLY, OUR BUSINESS WOULD BE HARMED

Some of our service providers are responsible for paying us a win fee for each
job that they obtain from us. We ask service providers not to pass on the cost
of the win fee to the homeowner. However, we do not currently provide any
guarantee to homeowners that our service providers have not raised their rates
to cover the win fee nor do we audit or plan to audit our service providers that
are subject to win fees to confirm that they have not raised their rates.
Homeowners may believe that they are indirectly paying us our win fee through
the higher rates of service providers and, therefore, choose to select service
providers through word-of-mouth referrals, Yellow Pages, local contractor
matching services or other means rather than using our matching service. If
homeowners choose not to use our service, we will lose service revenues and
visitors to our websites and our business will be harmed.

We depend on our service providers and/or homeowners to report that they have
won a job, report the correct contract amount, and for some service providers,
pay us our win fee. We rely on our relationships with our service providers and
the incentive to receive future leads from us to encourage service providers to
report wins and if applicable, pay win fees. Currently, we do not have a control
or an oversight mechanism in place with either service providers or homeowners
to ensure that they report wins and pay win fees. If homeowners or service
providers do not report wins, the correct contract amounts, or for service
providers, pay us win fees, we will lose service revenues and our business will
be harmed.

WE ARE UNCERTAIN IF OUR NEW SUBSCRIPTION BASED PROGRAM WILL BE ACCEPTED

In July 2004, we introduced a new subscription based program to our existing and
prospective service providers for purchasing homeowner home improvement leads.
The subscription program has three different pricing levels with lead fees at
various rates. Two of those levels include a monthly subscription fee. None of
the three pricing levels includes win fees. Our expectation is that the majority
of our service providers will be converted to one of the pricing levels of the
subscription program eliminating win fees altogether. There are no assurances
that our existing and prospective service providers will be receptive to the new
subscription program or will be successfully converted to the subscription
program. If service providers are not receptive to the new subscription based
pricing structure, we will lose service revenues and our business will be
harmed.

WE ARE UNCERTAIN IF OUR NEW 1-800-CONTRACTOR DIRECTORY WILL BE ACCEPTED

                                       24
<PAGE>

In December 2004, we launched the 1-800-Contractor directory. This directory is
intended to compliment our existing ImproveNet home improvement services by
supplementing the online home improvement lead generation service with an online
and offline resource for homeowners to find and research local contractors via
the telephone or Internet. We have increased the monthly subscription fees
charged to new service providers joining the ImproveNet network in 2005 as they
are also provided with a listing in the 1-800-Contractor directory. We intend to
offer access to the directory to service providers who were part of our network
prior to the launch of 1-800-Contractor. There are no assurances that our
existing and prospective service providers will be receptive to the
1-800-Contractor directory, or that the directory will be utilized by homeowners
as a resource to access service providers. If service providers are not
receptive to the 1-800-Contractor directory, we will lose revenues and our
business will be harmed.

FAILURE TO FULFILL THE TERMS OF OUR LICENSE AGREEMENT RELATIVE TO
1-800-CONTRACTOR MAY RESULT IN THE LOSS CERTAIN RIGHTS WE HAVE UNDER THE
AGREEMENT, WHICH WOULD HARM OUR BUSINESS

In the event we fail to fulfill the terms of our license agreement regarding the
1-800-Contractor assets, the license could be cancelled and we could lose our
ability to utilize the 1-800-Contractor assets thereby terminating operation of
our 1-800-Contractor business division. We would lose revenue and our business
would be harmed.

WE DEPEND ON THIRD-PARTY RELATIONSHIPS TO ATTRACT VISITORS TO OUR WEBSITES

We have entered into commercial contracts with web based search engine companies
and suppliers of home improvement products and services to increase the number
of visitors to our websites. Under these contracts, search engine companies link
search requests to our website, and suppliers have placed links to our website
from their websites to allow their customers to visit our website if the
customers are interested in obtaining home improvement information or searching
for a service provider. We believe that increasing the number of visitors to our
websites will increase the number of job submissions. We cannot make assurances
that these contracts will lead to increased visits to our websites or that
increased visits to our websites will result in increased job submissions. If we
do not maintain our existing contracts on terms as favorable as currently in
effect or if we are not able to establish new contracts on commercially
reasonable terms, our business could be harmed.

Companies that we may pursue for a commercial contract may offer services
competitive with suppliers with which we currently have contracts. As a result,
these suppliers may be reluctant to enter into commercial contracts with us.

We purchase preferential placement on high-traffic websites. We believe these
websites can help us to increase the number of visitors to our websites. There
is intense competition for preferential placements on many of these websites
based upon competitive bidding of key word searches. If we lose our
relationships with any one of these websites, job submissions on our websites
may decrease and we may not be able to enter into commercially reasonable
contracts with replacement high-traffic websites, if at all. Additionally, if
the costs associated with obtaining quality job leads increase in the future, it
may have a material adverse effect on our business.

WE DEPEND ON THIRD-PARTY RELATIONSHIPS TO PROVIDE SOFTWARE TOOLS AND
INFRASTRUCTURE

We integrate third-party software into our service offerings on our websites. We
would be harmed if the providers from which we license software ceased to
deliver and support reliable products, to enhance their current products or to
respond to emerging industry standards. In addition, third-party software may
not continue to be available to us on commercially reasonable terms, or at all.
The loss of, or inability to maintain or obtain this software could limit the
features available on our websites, which could harm our business.

PRIOR TO APRIL 2004, WE WERE DEPENDENT ON A THIRD-PARTY RELATIONSHIP FOR THE
CUSTOMER SERVICE AND OPERATIONS OF OUR SERVICE PROVIDER MATCHING SERVICE.
ALTHOUGH THESE FUNCTIONS WERE MOVED IN-HOUSE DURING THE FIRST HALF OF 2004, IT
IS UNCLEAR IF THE TRANSITION HAS BEEN IMPLEMENTED SMOOTHLY

Prior to April 2004, our customer service and operations for the service
provider matching service were performed under terms of a services agreement
with a Canadian corporation in Nova Scotia, Canada, which provided for
termination without cause upon 180 days notice by the Canadian corporation. In
January 2004, the Canadian corporation provided written notice to us of
termination of the services agreement. In late March 2004, the transition of our
customer service and operations was made to our Scottsdale, Arizona offices. It
is unclear if the transition has been implemented smoothly or if the customer
service and operations will be performed adequately in the new location. There
is an element of goodwill associated with the customer relationship aspect of
the customer service center which could have been lost when the services
agreement was terminated. Early on, we experienced some disruption in customer
support, collections of accounts receivable and revenues following the time of
the transition of our customer care center.

                                       25
<PAGE>

WE CANNOT GUARANTEE THAT WE WILL BE ABLE TO MANAGE FUTURE GROWTH

Any future growth we may experience will present many challenges and place
additional pressure on our already limited resources and infrastructure. No
assurances can be given that we will be able to execute our business plans and
strategies and effectively manage future growth. Our future growth may place a
significant strain on our managerial, operational, financial and other
resources. Our success will depend upon our ability to manage growth
effectively, which will require that we continue to implement and improve our
operational, administrative, financial and accounting systems and controls and
continue to expand, train and manage our employees. We may not be able to adapt
our systems, procedures and controls to support increased operating levels and
we may not be able to achieve the rapid execution necessary to successfully
penetrate the building materials industry. Our inability to manage internal or
acquisition based growth effectively would cause a significant strain on our
resources and our resulting financial performance would be materially adversely
affected.

WE HAVE EXPERIENCED DIFFICULTY IN ACCURATELY FORECASTING OUR SALES, WHICH MAY
RESULT IN OUR ACTUAL REVENUE VARYING FROM OUR ESTIMATES

As a result of our limited operating history, it is difficult to accurately
forecast our revenues, and we have limited meaningful historical financial data
upon which to base operating expenses. We base our current and future expense
levels on our operating plans and estimates of future net sales, and our
expenses, with the exception of the direct costs of lead acquisition, are to a
large extent fixed. Sales and operating results are difficult to forecast
because they generally depend on the volume and timing of the orders we receive.
As a result, we may be unable to adjust our spending in a timely manner to
compensate for any unexpected revenue shortfall. This inability could cause our
net losses in a given period to be greater than expected.

OUR OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS AND MAY RESULT IN
CONTINUED LOSSES

As a result of our limited operating history, rapid growth and change in
business focus, and because of the emerging nature of the market in which we
compete, our historical financial data is of limited value in planning future
operating expenses. Our expense levels will be based in part on expectations
concerning future revenues. Our revenue is derived primarily from service and
product sales, which are difficult to forecast accurately. Revenues from our
service provider matching services are subject to credits made to the service
providers from time to time, and the amount of credits made during any
particular period are difficult to forecast, accordingly, credit allowances
represent a significant accounting estimate. We may be unable to adjust spending
in a timely manner to compensate for any unexpected shortfall in revenues. A
significant shortfall in demand for our products could have an immediate and
material adverse effect on our business, results of operations and financial
condition. Our business development and marketing expenses will increase
significantly as we expand our operations. To the extent that such expenses
precede or are not rapidly followed by increased revenue, our business, results
of operations and financial condition may be materially adversely affected.

OUR INABILITY TO COLLECT ACCOUNTS RECEIVABLE ON A TIMELY BASIS COULD CAUSE OUR
CASH FLOW TO BE IMPAIRED AND REDUCE OUR PROFITABILITY

While we have gained significant expertise in dealing with Internet distribution
and collection issues and have instituted credit review and approval procedures,
no assurances can be given that future unexpected problems and collection risks
will not develop from these and other customers, which could reduce our
profitability or increase our losses.

IF WE FAIL TO RETAIN QUALIFIED PERSONNEL, OUR ABILITY TO CONTINUE TO OPERATE
COULD BE HARMED

We depend on the continued service of our key technical, operational and
administrative personnel. The loss of the services of any of our personnel,
individually or as a group, could cause us to incur increased operating expenses
and divert other personnel time in searching for their replacements. We do not
have employment agreements with any employee, and we do not maintain any key
person life insurance policies for any of our employees. The loss of any of
personnel could harm our business.

THREE OF OUR EMPLOYEE BOARD MEMBERS ARE PRINCIPAL SHAREHOLDERS OF IMPROVENET,
WHICH LIMITS THE ABILITY OF OTHER SHAREHOLDERS TO INFLUENCE CORPORATE DECISIONS

Three of the current members of our Board of Directors, who also serve in senior
management positions, are principal shareholders of ImproveNet and can
significantly influence the election of our Board of Directors. As a practical
matter, these three members of our Board will continue to be principal
shareholders into the foreseeable future.

                                       26
<PAGE>

IF WE FAIL TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS, WE COULD LOSE THESE
RIGHTS AND OUR BUSINESS COULD BE HARMED

We depend upon our ability to develop and protect our intellectual property
rights, including our databases of homeowners and service providers and our
internally-developed matching criteria and algorithms, to distinguish our
services from our competitors' services. We rely on a combination of copyright,
trademark and trade secret laws, as well as confidentiality agreements and
licensing arrangements, to establish and protect our proprietary rights. We have
no issued patents. Our databases are protected by trade secret laws and our
matching service is protected primarily by trade secret and copyright laws.
Existing laws afford only limited protection of intellectual property rights.
Attempts could be made to copy or reverse engineer aspects of our processes or
services or to obtain and use information that we regard as proprietary.
Accordingly, we may not be able to protect our intellectual property rights
against unauthorized third-party copying or use. Furthermore, policing the
unauthorized use of our intellectual property is difficult, and expensive
litigation may be necessary in the future to enforce our intellectual property
rights. The use by others of our proprietary rights could harm our business.

OUR SERVICES COULD INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS CAUSING
COSTLY LITIGATION AND THE LOSS OF SIGNIFICANT RIGHTS

Third parties could claim that we have infringed their intellectual property
rights by claiming that our matching service infringes their patents, trade
secrets or copyrights. In the ordinary course of business, we have received, and
may receive in the future, notices from third parties claiming infringement of
their proprietary rights. In addition, providers of goods and services over the
Internet are increasingly subject to claims that they infringe patents that
cover basic elements of electronic commerce. The resolution of any claims could
be time-consuming, result in costly litigation, delay or prevent us from
offering our services or require us to enter into royalty or licensing
agreements, any of which could harm our business. In the event an infringement
claim against us is successful and we cannot obtain a license on acceptable
terms, license a substitute technology or redesign our services, our business
would be harmed. Furthermore, former employers or our current and future
employees may assert that our employees have improperly disclosed to us, or are
using confidential or proprietary information in our business.

IF WE EXPERIENCE SYSTEM FAILURES, OUR REPUTATION WOULD BE HARMED AND USERS MIGHT
SEEK ALTERNATIVE SERVICE PROVIDERS, CAUSING US TO LOSE REVENUES

We depend on the efficient and uninterrupted operation of our computer and
communications hardware and software systems. Substantially all of our computer
hardware for operating our web sites is currently located at AT&T in Phoenix,
Arizona with backups located at our facility in Scottsdale, Arizona. These
systems and operations are vulnerable to damage or interruption from
earthquakes, floods, fires, power loss, telecommunication failures and similar
events. They are also subject to break-ins, sabotage, intentional acts of
vandalism and similar misconduct, which may result in loss of and / or misuse of
sensitive information relative to ImproveNet and / or our member service
providers. We do not have fully redundant systems, have a limited formal
disaster recovery plan and have no alternative providers of hosting services,
and we do not carry business interruption insurance to compensate us for losses
that could occur. Despite any precautions we may take, the occurrence of a
natural disaster or other unanticipated problems either at AT&T or at our
facility could result in interruptions in our services. Any damage to, or
failure of, our systems could result in interruptions in our service. In
addition to placing an increased burden on our engineering staff, any system
failure could create user questions and complaints that must be responded to by
our customer support personnel. The system failures of various third-party
Internet service providers, online service providers and other website operators
could result in interruptions in our service to those users who require the
services of these third-party providers and operators to access our websites.
These interruptions could reduce our revenues and profits, and our future
revenues and profits will be harmed if our users believe that our system is
unreliable.

WE MAY HAVE CAPACITY RESTRAINTS THAT COULD LIMIT THE GROWTH OF, OR REDUCE OUR
REVENUES

The satisfactory performance, reliability and availability of our websites,
processing systems and network infrastructure are critical to our reputation and
our ability to attract and retain a large numbers of users. If the volume of
traffic, including at peak times, on our websites increases, we may need to
expand and upgrade our technology, transaction processing systems and network
infrastructure. We may not be able to accurately project the rate or timing of
these increases, if any, in the use of our services or to expand or upgrade our
systems and infrastructure in a timely manner to accommodate these increases.

We use internally developed systems for operating our services and processing
our transactions, including billing and collections processing. We must
continually improve these systems in order to accommodate the use of our
websites. If we add new features and functionality to our services, we could be
required to develop or license additional technologies. Our inability to add
additional software and hardware or upgrade our technology, transaction
processing systems or network infrastructure could cause unanticipated system
disruptions, slower response times, degradation in levels of customer support,
impaired quality of the users' experience, delays

                                       27
<PAGE>

in accounts receivable collection or losses of recorded financial information.
Our failure to provide new features or functionality also could result in these
consequences. The required hardware may not be readily available or affordable
and we may be unable to effectively upgrade and/or expand our systems in a
timely manner or to integrate smoothly any newly developed or purchased
technologies with our existing systems. These difficulties could harm or limit
our ability to expand our business.

WE COULD BE HELD LIABLE FOR PRODUCTS AND SERVICES

Homeowners may bring claims against us or our service providers, who may have
among other things, provided them with poor workmanship or caused bodily injury
or damage to property. Currently we have no insurance coverage for such
potential claims. In addition, claims, with or without merit, would result in
diversion of our financial and managerial resources.

WE DEPEND ON THE USE OF THE INTERNET; IF THE USE OF THE INTERNET DOES NOT GROW,
OUR REVENUES MAY NOT GROW AND COULD DECLINE AND OUR BUSINESS COULD BE HARMED

We depend on increased acceptance and use of the Internet. In particular, our
matching service depends upon service providers being willing to use the
Internet to find jobs through our service. We believe that service providers
generally have not traditionally used computers or the Internet to operate their
businesses. Demand and market acceptance for recently introduced products and
services over the Internet are subject to a high level of uncertainty. As a
result, acceptance and use of the Internet may not develop or a sufficiently
broad base of users may not adopt, or continue to use, the Internet as a medium
of commerce.

THE INTERNET IS CHARACTERIZED BY RAPIDLY CHANGING TECHNOLOGIES, FREQUENT NEW
PRODUCT AND SERVICE INTRODUCTIONS AND EVOLVING INDUSTRY STANDARDS

To succeed, we will need to adapt effectively to rapidly changing technologies
and continually improve the performance features and reliability of our
services. We could incur substantial costs in modifying our products, services
or infrastructure to adapt to these changes, and we may also lose customers and
revenues if our services fail to adapt to the rapid changes of the Internet.

Conversely, if the Internet experiences increased growth in number of users,
frequency of use and bandwidth requirements, the Internet infrastructure may be
unable to support the demands placed on it. The success of our business will
rely on the Internet providing a convenient means of interaction and commerce.
Our business depends on the ability of users to access information without
significant delays or aggravation.

FUTURE GOVERNMENT REGULATIONS AND LEGAL UNCERTAINTIES PERTAINING TO THE INTERNET
COULD DECREASE THE DEMAND FOR OUR SERVICES OR INCREASE THE COST OF DOING
BUSINESS

There is, and will likely continue to be, an increasing number of laws and
regulations pertaining to the Internet. These laws and regulations may relate to
liability for information retrieved from or transmitted over the Internet,
online content, user privacy, taxes or the quality of services. Any new law or
regulation pertaining to the Internet, or the adverse application or
interpretation of existing laws, could decrease the demand for our services or
increase our cost of doing business.

We are not certain how our business may be affected by the application of
existing laws governing issues such as property ownership, copyrights,
encryption and other intellectual property issues, taxation, libel, obscenity
and export or import matters. The vast majority of these laws were adopted prior
to the advent of the Internet. As a result, they do not contemplate or address
the unique issues created by the Internet and related technologies. Changes in
laws intended to address these issues could create uncertainty for or adversely
affect companies doing business on the Internet. This could reduce demand for
our services or increase the cost of doing business.

GENERAL ECONOMIC CONDITIONS MAY CHANGE DRAMATICALLY FROM YEAR TO YEAR

General economic conditions, which affect consumer confidence and home
improvement and home-building spending, including interest rates, the overall
level of economic activity, the availability of consumer credit and mortgage
financing and unemployment rates may change dramatically and impact our ability
to operate.

LEGISLATIVE AND REGULATORY INITIATIVES REGARDING THE COLLECTION AND USE OF OUR
USERS' PERSONAL INFORMATION MAY RESULT IN LIABILITY AND EXPENSES

Current computing and Internet technology allows us to collect personal
information about our users. In the past, the Federal Trade

                                       28
<PAGE>

Commission has investigated companies that have sold personal information to
third parties without permission or in violation of a stated privacy policy.
Currently, we collect personal information only with the users' consent and
under our privacy policy. If we begin collecting or selling personal information
without permission or in violation of our privacy policy, we could face
potential liability for compiling and providing information to third parties.

THE IMPOSITION OF ADDITIONAL STATE AND LOCAL TAXES ON INTERNET-BASED
TRANSACTIONS WOULD INCREASE OUR COST OF DOING BUSINESS AND HARM OUR ABILITY TO
BECOME PROFITABLE

One or more states could seek to impose additional income tax obligations or
sales and use tax collection obligations on out-of-state companies such as ours
that engage in or facilitate Internet-based commerce. A number of proposals have
been made at state and local levels that could impose taxes on the sale of
products and services through the Internet or the income derived from those
sales. These proposals, if adopted, could substantially impair the growth of
Internet-based commerce and harm our ability to become profitable.

SHARES ELIGIBLE FOR FUTURE SALE BY OUR CURRENT OR FUTURE STOCKHOLDERS MAY CAUSE
OUR STOCK PRICE TO DECLINE

If our stockholders or option and warrant holders sell substantial amounts of
our common stock in the public market, including shares issued upon the exercise
of outstanding options and warrants, then the market price of our common stock
could fall. A substantial number of shares of our common stock could be sold
into the public market. Sale of the registered shares by the selling
stockholders could cause the market price of our Common Stock to fall.

OUR INABILITY TO MAINTAIN THE EFFECTIVENESS OF OUR REGISTRATION STATEMENT
DECLARED EFFECTIVE ON OCTOBER 26, 2004 WOULD CAUSE US TO INCUR PENALTIES

Under terms and conditions of the Common Stock Subscription Agreement executed
with certain investors in a June 2004 private placement of common shares and
warrants to purchase common shares (the "Investors"), we owe an amount equal to
one percent (1%) of the purchase price paid by each Investor to such Investor
for every thirty (30) day period after November 1, 2004 that the applicable
registration statement on Form SB-2 is not declared effective by the Securities
and Exchange Commission. In addition, if the registration statement on Form SB-2
is not declared effective by March 1, 2005 or was declared effective and
subsequently ceased to be available for use by the Investors due to our fault,
and has not been declared effective again by March 1, 2005, then the Investors,
in their sole discretion, shall have the right to rescind all transactions under
the Common Stock Subscription Agreement and receive the full purchase price paid
for their respective investments totaling $1,050,000. During October, 2004, this
registration statement was declared effective, however, our inability to
maintain the effectiveness of this registration statement could have a material
adverse impact on us and may raise substantial doubt as to our ability to
continue as a going concern should the Investors invoke their right to rescind
the private placement transaction and receive the full purchase price of their
respective investments.

WE ARE UNCERTAIN IF ADSERVEPRO WILL LAUNCH SUCCESSFULLY OR IF IT WILL BE
ACCEPTED BY THE MARKETPLACE

During 2004, we commenced development of AdServePRO, an application that is
intended to be a highly targeted advertising program for businesses searching to
promote their products and services to consumers and service providers in the
home improvement industry. We have devoted a substantial amount of resources to
develop AdServePRO. We intend to launch AdServePRO in the first half of 2005. If
we are unable to successfully launch AdServePRO or if the marketplace does not
accept the product, we will lose future revenues and our business will be
harmed.

ITEM 7. FINANCIAL STATEMENTS

Reference is made to the consolidated financial statements, the report thereon
and the notes thereto, and the supplementary data commencing at page F-1 of this
Annual Report of Form 10-KSB, which financial statements, report, notes and data
are incorporated herein by reference.

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

NONE

ITEM 8A. CONTROLS AND PROCEDURES

DISCLOSURE CONTROLS AND PROCEDURES / EVALUATION OF DISCLOSURE CONTROLS AND
PROCEDURES

                                       29
<PAGE>

As of the end of the period covered by this report, we carried out an evaluation
under the supervision and with the participation of management, including our
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures pursuant to Rule
13a-15 of the Securities Exchange Act of 1934. Based upon this evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were adequate and effective and designed to
ensure that material information relating to us required to be disclosed by us
in the reports we file under the Exchange Act is recorded, processed, summarized
and reported within the required time periods.

CHANGES IN INTERNAL CONTROLS

During the period covered by this filing, there have been no changes in our
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.

                                    PART III

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information concerning the directors and executive officers of ImproveNet as of
the date of this filing is set forth below:

 Name                                Age             Position
-------------------------------     -----    --------------------------

 Jeffrey I. Rassas                    42  Chief Executive Officer, Director

 Homayoon J. Farsi                    51  President, Director

 Naser Ahmad                          51  Chief Technology
                                          Officer, Director

 Alok Mohan                           57  Chairman, Director (a)

 Jay Stead                            41  Director (a)

 Jeffrey Perry                        46  General Counsel & EVP Mergers &
                                          Acquisitions

(a)  Member of ImproveNet's Audit Committee

Biographical information regarding each of our directors and executive officers
is set forth below:

JEFFREY I. RASSAS

Mr. Rassas, 42, has served as chief executive officer of eTechLogix since
October, 2001. He became chief executive officer and a director of ImproveNet on
January 7, 2003. Mr. Rassas also helped launch and fund two private Arizona
companies, the TOLIS Group, Inc., a data back-up and recovery software company
supporting both the Linux and Unix operating systems, and Channel Pros, Inc., a
technology marketing and sales organization which services clients across the
country. Mr. Rassas founded EBIZ Enterprises, Inc., a Linux solution provider
and computer cluster developer, in 1995. The common stock of EBIZ Enterprises
has been traded on the NASD Over-The-Counter Bulletin Board. Mr. Rassas served
as chief executive officer of EBIZ Enterprises from 1995 to October, 2000 and as
its chairman of the board from 1995 until May 21, 2002. EBIZ Enterprises filed a
voluntary petition to reorganize under Chapter 11 of the Bankruptcy Code on
September 7, 2001. Its Plan of Reorganization was confirmed on April 11, 2002,
and became effective on May 21, 2002.

Between 1989 and 1994, Mr. Rassas founded and operated The Wilsaac Group, Inc.
dba DLC Consulting, an office services outsourcing firm for large corporations.
The Wilsaac Group, Inc. was acquired by a division of Air Canada in 1994. Mr.
Rassas co- founded ITS Travel Group, Inc., in 1985 and was involved in its
management until it was sold in 1989. By the time of its sale, it had become the
third largest travel organization in Arizona. From 1982 to 1985, Mr. Rassas held
the position of Magnetics Design

                                       30
<PAGE>

Engineer at CTM Magnetics.

HOMAYOON J. FARSI

Mr. Farsi, 51, is the co-chairman, president and a co-founder of eTechLogix. He
became president and a director of ImproveNet on January 7, 2003. He has over 20
years experience as an entrepreneur in the computer software industry. Mr. Farsi
is knowledgeable concerning manufacturing, distribution business processes and
information systems and has been instrumental in the development and launch of
numerous software products throughout his career. Mr. Farsi has held senior
technical and operations management positions with software and hardware
companies including Taylor Management Systems and Unisys, Inc.

In 1989, Mr. Farsi and Mr. Ahmad co-founded SysTech International, Inc., a Texas
corporation, which was the predecessor-in-interest to eTechLogix. In 1994,
SysTech International, Inc. was merged into an Arizona corporation named First
SysTech International, Inc. which changed its name to eTechLogix in 2000. Mr.
Farsi served as president of SysTech International, Inc. from 1989 to 1994 and
has served as president of eTechLogix since 1994. Mr. Farsi has an MS Degree in
Computer Systems from the University of Salford, Manchester, England.

NASER AHMAD

Mr. Ahmad, 51, is the co-chairman, chief technology officer and a co-founder of
eTechLogix. He became chief technology officer and a director of ImproveNet on
January 7, 2003. He has been active for over 25 years in the development of
computer solutions for distribution and manufacturing companies. Throughout his
career, Mr. Ahmad has held technical leadership positions with both
entrepreneurial ventures as well as Fortune 100 companies including Caterpillar
International, Inc., Sante Fe International and Taylor Management Systems.

In 1989, Mr. Ahmad and Mr. Farsi co-founded SysTech International, Inc., a Texas
corporation, which was the predecessor-in-interest to eTechLogix. In 1994,
SysTech International, Inc. was merged into an Arizona corporation named First
SysTech International, Inc. which changed its name to eTechLogix, Inc. in 2000.
Mr. Ahmad served as executive vice president and chief technology officer of
SysTech International, Inc. from 1989 to 1994 and has held the same positions
with eTechLogix since 1994.

At Sante Fe International, Mr. Ahmad was a member of the task force for
evaluating and determining the next generation of application systems for the
organization. At Caterpillar, he was the software development manager and the
chief architect of the Company's enterprise resource planning (ERP) distribution
system.

Mr. Ahmad has been instrumental in the development of technology products
throughout his career. He co-founded the National Institute of Technology in
Karachi, Pakistan, is a member of the Advisory council of the Darul Islam
University, Dhaka, Bangladesh and serves as a director of several privately held
U.S. and foreign corporations. Mr. Ahmad is a graduate of the University of
Karachi with a BA in Accounting and a postgraduate degree in Computer Science.

ALOK MOHAN

Mr. Mohan, 57, has been a director of Tarantella, Inc. (formerly SCO) since 1994
and became Chairman of the Board in April 1998. From May to December of 1994,
Mr. Mohan served as Senior Vice President, Operations and Chief Financial
Officer of the Company. In December 1994 he was elected a director and assumed
the position of President and Chief Operating Officer. He served as the
Company's Chief Executive Officer from July 1995 until April 1998.

Prior to joining Tarantella, Inc., Mr. Mohan was employed with NCR Corporation
for over 20 years. He served as Vice President and General Manager of the
Workstation Products Division, from January 1990 until July 1993. From July 1993
to May 1994 he served as Vice President of Strategic Planning and Controller
responsible for financial planning, analysis, and worldwide reporting.

Mr. Mohan serves as a director on the boards of Rainmaker Systems, Inc. and
Crystal Graphics. He is also a venture partner with Blue Chip Venture Company.
From November 2000 until July 2001, Mr. Mohan served as a director of EBIZ
Enterprises, Inc. a Linux solution provider and computer cluster developer. The
common stock of EBIZ Enterprises has been traded on the NASD Over-The-Counter
Bulletin Board. EBIZ Enterprises filed a voluntary petition to reorganize under
Chapter 11 of the Bankruptcy Code on September 7, 2001. Its Plan of
Reorganization was confirmed on April 11, 2002, and became effective on May 21,
2002.

                                       31
<PAGE>

JAY STEAD

Mr. Stead, 41, based in Auckland, New Zealand, became a director on January 7,
2003. He is currently the managing director of Mokka Enterprises, LLP, a
technology-oriented private investment firm focused on emerging companies, which
he joined in 2001. From 1999 to 2000 Mr. Stead was the President & CEO of
Sagebrush Corporation, an educational software company, and from 1994 to 1998
was a senior executive at Reynolds and Reynolds. In addition, Mr. Stead has held
key management positions with Allen-Bradley and McKinsey & Company. His career
includes general management, marketing and business development roles across
software, services, consulting, hardware and manufacturing sectors.

Mr. Stead holds a Bachelor of Science in Industrial Management from Purdue
University and received a Masters in Management from Northwestern's Kellogg
School of Management in 1989. Mr. Stead also serves on the board of directors
for MD Online and GolfLogix.

JEFFREY PERRY

Mr. Perry, 46, has served as general counsel of eTechLogix since May 2002 and
served as chief financial officer until December 2002. In January 2003, he began
his duties as executive vice-president mergers & acquisitions and general
counsel with ImproveNet. From October 2000 to April 2003 he has also served as
general counsel of EBIZ Enterprises, Inc., a Linux solution provider and
computer cluster developer. Shares of the common stock of EBIZ Enterprises have
been traded on the NASD Over-The-Counter Bulletin Board. Mr. Perry began private
law practice in 1988 and served as an investment manager and financial advisor
with Prudential Securities from 1997 to 2000. Mr. Perry previously founded and
held the position of president and principal financial officer for several
private companies involved in the development of proprietary consumer sports
products and sports themed gifts with distribution through a network of national
catalog companies.

Mr. Perry holds business, political science, and law degrees from Southern
Methodist University. He holds law licenses in Arizona and Texas.

None of the executive officers or directors of ImproveNet has, during the last
five years, been convicted in a criminal proceeding (excluding traffic
violations or similar misdemeanors) or has been a party to a civil proceeding
which resulted in a judgment, decree or final order enjoining further violations
of, or prohibiting activities subject to, federal or state securities laws or
finding any violation of such laws. All of the executive officers and directors
of ImproveNet are citizens of the United States.

AUDIT COMMITTEE FINANCIAL EXPERT

ImproveNet's Board of Directors has determined that Alok Mohan qualifies as a
"financial expert" as defined by Item 401 of Regulation S-B. Mr. Mohan also
meets the definition of an "independent" director.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

The Officers, Directors and those beneficially owning more than 10% of a class
of ImproveNet's equity securities registered under Section 12 of the Exchange
Act, shall file reports of ownership and any change in ownership with the
Securities and Exchange Commission. Copies of these reports are to be filed with
us.

To our knowledge, based solely on ImproveNet's review of copies of Section 16(a)
reports filed by officers, directors and greater than 10% shareholders with the
Securities and Exchange Commission, which have been received by ImproveNet and
written representations that no other reports were required for those persons
during the fiscal year ended December 31, 2004, we believe that all filing
requirements applicable to those persons were complied with except for the
following:

A report covering a single transaction was filed late by Mr. Rassas (or an
affiliate of Mr. Rassas); A report(s) covering four transactions was filed late
by Mr. Farsi (or an affiliate of Mr. Farsi); A report(s) covering four grants
under ImproveNet's 1999 Equity Incentive Plan was filed late by Mr. Stead; A
report(s) covering two grants under ImproveNet's 1999 Equity Incentive Plan was
filed late by Mr. James Schroepfer; and
No reports were made by Mr. Ahmad (or an affiliate of Mr. Ahmad), Mr. Mohan or
Mr. Ronald B. Cooper although reports were required to be filed.

                                       32
<PAGE>

CODE OF ETHICS

ImproveNet has adopted a Code of Ethics (as defined in Item 406 of Regulation
S-B) that applies to its principal executive, financial and accounting officers.
ImproveNet will provide a copy of its code of ethics, without charge, to any
investor that requests it. Requests should be addressed in writing to Mr.
Jeffrey Perry, Executive Vice President and General Counsel, 10799 North 90th
Street, Suite 200, Scottsdale, AZ 85260.

ITEM 10. EXECUTIVE COMPENSATION

The following table sets forth the annual compensation paid by ImproveNet to
certain of our executive officers whose annual compensation, including salary
and bonus, exceeded $100,000. The amounts shown include compensation for
services in all capacities that were provided to us and our subsidiary.

<TABLE><CAPTION>
                                                            SUMMARY COMPENSATION TABLE
                                                                                               Long Term Compensation
                                                                                               -----------------------
                                                             Annual Compensation                       Awards
                                                     -------------------------------------     -----------------------
                                                                                                               Secur-
                                                                                  Other          Rest-         ities
                                                                                  Annual        ricted       Underlying
                                                                                  Compen-       Stock         Options/
                                                      Salary         Bonus        sation        Awards          SARS
       Name and Principal Position          Year        ($)           ($)           ($)           ($)           (#)
-------------------------------------       ----     ---------     ---------     ---------     ---------     ---------
<S>                                         <C>      <C>           <C>           <C>           <C>           <C>
Jeffrey I. Rassas                           2004     $ 129,015     $    --       $    --       $    --            --
Chief Executive Officer                     2003     $ 174,166     $    --       $    --       $    --            --
                                            2002     $  60,000     $    --       $    --       $    --            --

Homayoon J. Farsi                           2004     $ 129,015     $    --       $    --       $    --            --
President                                   2003     $ 174,166     $    --       $    --       $    --            --
                                            2002     $  67,500     $    --       $    --       $    --            --

Naser Ahmad                                 2004     $ 129,015     $    --       $    --       $    --            --
Chief Technology Officer                    2003     $ 174,166     $    --       $    --       $    --            --
                                            2002     $  67,500     $    --       $    --       $    --            --
</TABLE>

OPTION/SAR GRANTS AND EXERCISES IN LAST FISCAL YEAR TO EXECUTIVE OFFICERS

There were no option / SAR grants or exercises during the year ended December
31, 2004 to any of the executive officers in the above table.

AGGREGATE OPTION/SAR EXERCISES AND FISCAL YEAR-END OPTION/SAR VALUES

the following table shows the value of unexercised options held by the executive
officers in the above table at the end of 2004:

<TABLE><CAPTION>
                                        Number of Securities
                                       Underlying Unexercised            Value of Unexercised
                                            Options/SARs at           In-the-Money Options/SARs
                                              Year-End (#)                 at Year-End ($)
                                     ----------------------------    ----------------------------
               Name                  Exercisable    Unexercisable    Exercisable    Unexercisable
     -----------------------------   -----------    -------------    -----------    -------------
<S>                                  <C>            <C>              <C>            <C>
     Jeffrey I. Rassas
     Chief Executive Officer .....         --             --         $   --         $   --

     Homayoon J. Farsi
     President ...................         --             --         $   --         $   --

     Naser Ahmad
     Chief Technology Officer ....         --             --         $   --         $   --
</TABLE>

                                       33
<PAGE>

DIRECTOR'S COMPENSATION

Directors currently receive no cash compensation from ImproveNet for their
services as members of the Board or for attendance at committee meetings.
Members of the Board are reimbursed for some expenses in connection with
attendance at Board and committee meetings. Under the Company's 1999 Equity
Incentive Plan, for 2004, Alok Mohan received 205,500 options to purchase shares
of Common Stock and 205,500 shares of Common Stock as bonus stock and Jay Stead
and Ronald Cooper, a board member during 2004, each received 137,000 options to
purchase shares of Common Stock and 137,000 shares of Common Stock as bonus
stock. Mr. Mohan was granted additional options and bonus stock which are
included in the figures set forth above for his role as the Chairman of the
Audit Committee.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The following table sets forth information regarding the beneficial ownership of
our common stock as of February 4, 2005 by: (i) all those known by ImproveNet to
be beneficial owners of more than five percent of its common stock, (ii) each
director and executive officer of ImproveNet, and (iii) all executive officers
and directors of ImproveNet as a group. Unless indicated below, the address for
each listed stockholder is c/o ImproveNet, Inc., 10799 N. 90th Street, Suite 200
Scottsdale, AZ 85260.

                                                  Outstanding        % of
   Name                                            Shares (1)     Shares (2)
     -----------------------------------------     ----------     ----------

     Kinderhook Partners, LP (3) .............     16,150,000           25.7%
     Jeffrey I Rassas (4) ....................      9,349,580           14.9%
     Naser Ahmad (5) .........................      8,875,580           14.1%
     Homayoon J. Farsi (6) ...................      8,619,580           13.7%
     Joel A. Stead (7) .......................      3,207,000            5.1%
     Jeffrey Perry (8) .......................        912,222            1.5%
     Alok Mohan (9) ..........................        393,000              *
     Jay Stead (10) ..........................        376,445              *

     All executive officers and directors
        as a group (6 persons) ...............     28,526,407           45.4%
                                                   ==========     ==========

* Less than one percent.

   1.   Beneficial ownership is determined in accordance with the rules of the
        Securities and Exchange Commission. In general, a person who has voting
        power or investment power with respect to securities is treated as s
        beneficial owner of those securities. Common shares subject to options
        and warrants currently exercisable or exercisable within 60 days of
        February 4, 2005 count as outstanding for computing the percentage
        beneficially owned by the person holding these options or warrants.

   2.   Percentages are based on 62,711,599 Common Shares outstanding as of
        March 15, 2005

   3.   Includes 6,460,000 shares issuable upon exercise of warrants at $0.15
        per share. The General Partner of Kinderhook Partners, LP is Kinderhook
        GP, LLC. Stephen J. Clearman is the managing member of Kinderhook GP,
        LLC. Kinderhook GP, LLC and Stephen J. Clearman each disclaim beneficial
        ownership of the shares except to the extent of their pecuniary interest
        therein.

   4.   Includes 9,299,580 Common Shares held indirectly by Hayjour Family
        Limited Partnership and 50,000 Common Shares held by a minor child.

   5.   Shares held indirectly by Ahmad Family Trust.

   6.   Shares held indirectly by Farsi Family Trust.

   7.   Includes 1,400,000 Common Shares held directly by Mr. Stead, 1,207,000
        Common Shares held indirectly by a trust and 600,000 warrants with
        strike prices ranging from $0.10 to $0.25 per share held indirectly by
        Joel A. Stead Trust.

   8.   Includes 778,889 options with a strike price of $0.05 and 133,333
        options with a strike price of $0.20.

                                       34
<PAGE>

   9.   Includes 205,500 Common Shares held directly by Mr. Mohan and 187,500
        options with a strike price of $0.20.

   10.  Includes 137,000 Common Shares held directly by Mr. Stead and 239,445
        options with strike prices ranging from $0.12 to $0.20.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Research and development
------------------------
We subcontract a portion of our research and development to companies wholly
owned by two of our officers. We incurred costs of approximately $106,000 and
$102,000 relative to these subcontracted services for the years ended December
31, 2004 and 2003, respectively.

Credit card use
---------------
To facilitate payments to certain vendors, we utilize credit cards held
personally by certain of our executive officers. ImproveNet has agreed to
indemnify these officers from any obligations arising from the use of these
credit cards for ImproveNet's business.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

Consolidated Financial Statements
---------------------------------
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Shareholders' Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements

Exhibits
--------
Exhibits to this report are listed in the Exhibit Index at the end of this
report

Reports on Form 8-K during the fourth quarter of 2004:
------------------------------------------------------

None

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

For the years ended December 31, 2004 and 2003, ImproveNet's Board of Directors
has selected Semple & Cooper, LLP as our independent auditors. Fees billed for
services rendered by Semple & Cooper, LLP for the years ended December 31, 2004
and 2003 are summarized as follows:

                                                   2004           2003
                                                ----------     ----------
     Audit fees ...........................     $   43,954     $   62,660
     Audit related fees ...................          7,930          9,374
     Tax fees .............................          4,661          9,238
     All other fees .......................           --             --
                                                ----------     ----------

     Total ................................     $   56,545     $   81,272
                                                ==========     ==========

Audit related fees were incurred in connection with certain financing
transactions that occurred during 2003 and 2004 as well as costs incurred
relative to the review of SEC filings related to the merger of ImproveNet and
eTechLogix, which occurred during the fourth quarter of 2002.

                                       35
<PAGE>

                                   SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, ImproveNet,
Inc. has duly caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.

Date: March 31, 2005
                            By: /s/ JEFFREY I RASSAS
                         ------------------------------
                                Jeffrey I Rassas
                             CHIEF EXECUTIVE OFFICER


                             By: /s/ HOMAYOON FARSI
                         ------------------------------
                                 Homayoon Farsi
                         ACTING CHIEF FINANCIAL OFFICER

                                POWER OF ATTORNEY

Know All Persons By These Presents, that each person whose signature appears
below constitutes and appoints Jeffrey I. Rassas and Homayoon Farsi as their
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for them and in their name, place and stead, in any and all
capacities, to sign any and all amendments to this Annual Report on Form 10-KSB,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Commission, granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in connection
therewith, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming our signatures as they may be signed by
ours said attorney-in-fact and any and all amendments to this Annual Report on
Form 10-KSB.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report on Form 10-KSB has been signed by the following persons in the capacities
and on the dates indicated.

                            By: /s/ JEFFREY I RASSAS
                         ------------------------------
                                Jeffrey I Rassas
                             CHIEF EXECUTIVE OFFICER


                             By: /s/ HOMAYOON FARSI
                         ------------------------------
                                 Homayoon Farsi
                  PRESIDENT AND ACTING CHIEF FINANCIAL OFFICER


                               By: /s/ NASER AHMAD
                         ------------------------------
                                   Naser Ahmad
                            CHIEF TECHNOLOGY OFFICER


                               By: /s/ ALOK MOHAN
                         ------------------------------
                                   Alok Mohan
                       CHAIRMAN OF THE BOARD OF DIRECTORS


                                By: /s/ JAY STEAD
                         ------------------------------
                                    Jay Stead
                                    DIRECTOR

Date: March 31, 2005

                                       36
<PAGE>

                                  EXHIBIT INDEX

EXHIBIT
 NUMBER                         DESCRIPTION OF DOCUMENT
--------  ----------------------------------------------------------------------

   2.1    Stock Purchase Agreement by and between the Registrant and The J.L.
          Price Corporation. (1)
   2.2    Asset Purchase Agreement by and between the Registrant and Contractor
          Referral Service, LLC. (1)
   2.3    Agreement and Plan of Merger by and between the Registrant,
          eTechLogix, Inc. and Etech Acquisition, Inc. dated July 30, 2002, as
          amended (2)
   2.4    Amendment No. 1 to Agreement and Plan of Merger dated October 1, 2002
          (7)
   2.5    Amendment No. 2 to Agreement and Plan of Merger dated November 12,
          2002 (7)
   3.1    Fourth Amended and Restated Certificate of Incorporation of the
          Registrant. (1)
   3.2    Amended and Restated Bylaws of the Registrant. (1)
   4.1    Specimen Stock Certificate. (1)
   10.1   Amended and Restated 1996 Stock Option Plan. (1)
   10.2   Form of 1999 Equity Incentive Plan. (1)
   10.3   Form of 1999 Employee Stock Purchase Plan. (1)
   10.4   Commercial Office Lease by and between Florcor I Limited Partnership
          and the Registrant. (1)
   10.5   Commercial Office Lease by and between Chestnut Bay LLC and the
          Registrant. (1)
   10.6   Employment agreement by and between the Registrant and Ronald Cooper.
          (1)
   10.7   Series A Preferred Stock and Warrant Purchase Agreement by and between
          the Registrant and certain investors of the Registrant dated June 30,
          1997. (1)
   10.8   Series B Preferred Stock and Warrant Purchase Agreement by and between
          the Registrant and certain investors of the Registrant dated March 17,
          1998. (1)
   10.9   Series C Preferred Stock Agreement by and between the Registrant and
          certain investors of the Registrant dated March 29, 1999. (1)
   10.10  Series D Preferred Stock Purchase Agreement by and between the
          Registrant and certain investors of the Registrant dated September 10,
          1999. (1)
   10.11  First Series E Preferred Stock Purchase Agreement by and between the
          Registrant and certain investors of the Registrant dated November 23,
          1999. (1)
   10.12  Second Series E Preferred Stock Purchase Agreement by and between the
          Registrant and certain investors of the Registrant dated November 23,
          1999. (1)
   10.13  Form of Warrant Purchase Agreement by and between the Registrant and
          certain investors of the Registrant dated December 7, 1999. (1)
   10.14  Fourth Amended and Restated Voting Agreement by and between the
          Registrant and certain investors of the Registrant dated November 23,
          1999. (1)
   10.15  Form of Indemnity Agreement by and between the Registrant and each of
          its directors and executive officers. (1)
   10.16  Internet-based Service Agreement between the Registrant and Owens
          Corning dated October 1, 1999. (1)
   10.17  Collaboration Agreement between the Registrant and E.I. du Pont de
          Nemours and Company dated December 3, 1999. (1)
   10.18  Internet Development, Marketing and Distribution Agreement between the
          Registrant and General Electric Appliances dated September 10, 1999.
          (1)
   10.19  Relationship Agreement between the Registrant and Microsoft
          HomeAdvisor dated December 7, 1999. (1)
   10.20  Agreement between the Registrant and CompleteHome Operations, Inc.
          dated December 13, 1999. (1)
   10.21  Form of 1996 Stock Option Plan Grant Notice. (1)
   10.22  Form of 1999 Equity Incentive Plan Stock Option Agreement. (1)
   10.23  Form of Warrant to Purchase an aggregate of 420,000 shares of common
          stock. (1)
   10.24  Form of Warrant to Purchase an aggregate of 10,000 shares of common
          stock. (1)
   10.25  Form of Warrant to Purchase an aggregate of 842,596 shares of common
          stock. (1)
   10.26  Form of Warrant to Purchase an aggregate of 96,400 shares of Series A
          preferred stock. (1)

                                       37
<PAGE>

   10.27  Form of Warrant to Purchase an aggregate of 47,009 shares of Series B
          preferred stock. (1)
   10.28  Form of Warrant to purchase 47,167 shares of Series C preferred stock.
          (1)
   10.29  Form of Warrant to purchase an aggregate of 326,000 shares of Series D
          preferred stock. (1)
   10.30  Fourth Amended and Restated Investor Rights Agreement by and between
          the Registrant and certain investors of the Registrant dated November
          23, 1999. (1)
   10.33  Commercial Office Lease by and between Bennett Center, LLC and the
          Registrant. (3)
   10.34  Improvenet, Inc. Stock Repurchase Agreement dated July 12, 2001. (4)
   10.35  Services Agreement dated December 16, 2002 regarding contractor
          matching operation (confidential treatment requested) (7)
   10.36  Commercial Office Lease by and between Phil & Brenda Frandsen and
          Registrant (8)
   10.37  Licensing Agreement dated September 22, 2004, as amended, by and
          between Improvenet, Inc. and Karen Bishop (10)
   14.1   Code of Ethics (9)
   16.1   Concurrence of PricewaterhouseCoopers LLP, former independent
          accountants, regarding resignation. (5)
   23.1   Consent of PricewaterhouseCoopers LLP, Independent Accountants. (3)
   24.1   Power of Attorney. (3)
   31.1   Certification of CEO pursuant to Exchange Act Rules 13a-14 and 15d-14
   31.2   Certification of Acting CFO pursuant to Exchange Act Rules 13a-14 and
          15d-14
   32.1   Certification of CEO pursuant to 18 U.S.C. Section 1350
   32.2   Certification of Acting CFO pursuant to 18 U.S.C. Section 1350
   99.1   Tender Offer Statement and Offer to Purchase All Shares of Common
          Stock, as amended. (6)
-------------------
(1) Incorporated by reference to the Registrant's Registration Statement on Form
S-1 (No. 333-92873), as amended.

(2) Incorporated by reference to the Registrant's Form 8-K filed on August 6,
2002.

(3) Incorporated by reference to the Registrant's Form 10-K for the fiscal year
ended December 31, 2000.

(4) Incorporated by reference to the Registrant's Form 10-K for the fiscal year
ended December 31, 2001.

(5) Incorporated by reference to the Registrant's Form 8-K filed on January 21,
2003.

(6) Incorporated by reference to the Registrant's Schedule TO with exhibits and
amendments thereto and eTechLogix's Schedule TO with exhibits and amendments
thereto.

(7) Incorporated by reference to the Registrant's Form 10-K for the fiscal year
ended December 31, 2002.

(8) Incorporated by reference to the Registrant's Form 10-QSB for the fiscal
year ended June 30, 2004.

(9) Incorporated by reference to the Registrant's Form 10-KSB for the fiscal
year ended December 31, 2003.

(10) Incorporated by reference to the Registrant's Form 8-K filed on September
28, 2004

                                       38
<PAGE>

The following consolidated financial statements are filed as part of this
report:



Independent Accountants' Report ...........................................  F-1

Consolidated Financial Statements:

Consolidated Balance Sheets as of December 31, 2004 and 2003 ..............  F-2

Consolidated Statements of Operations for the years ended
December 31, 2004 and 2003 ................................................  F-3

Consolidated Statements of Shareholders' Equity (Deficit)
for the years ended December 31, 2004 and 2003 ............................  F-4

Consolidated Statements of Cash Flows for the years ended
December 31, 2004 and 2003 ................................................  F-5

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


























<PAGE>

                         REPORT OF INDEPENDENT AUDITORS

To the Stockholders and Board of
Directors of ImproveNet, Inc.

We have audited the accompanying consolidated balance sheets of ImproveNet, Inc.
as of December 31, 2004 and 2003, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ImproveNet, Inc. as
of December 31, 2004 and 2003, and the results of its consolidated operations,
stockholders' equity (deficit), and its cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of
America.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company incurred net losses for the years ended
December 31, 2004 and 2003 and has a nominal amount of working capital as of
December 31, 2004. These factors raise doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The accompanying consolidated financial statements do
not include any adjustments to the amounts and classifications of assets or
liabilities that might result should the Company be unable to continue as a
going concern.


/S/ SEMPLE & COOPER, LLP
----------------------------------
CERTIFIED PUBLIC ACCOUNTANTS


Phoenix, Arizona
March 11, 2005

                                       F-1
<PAGE>

                                IMPROVENET, INC.
                           CONSOLIDATED BALANCE SHEETS

<TABLE><CAPTION>
                      ASSETS                                                                  2004             2003
                                                                                          -----------      -----------
<S>                                                                                       <C>              <C>
Current assets:
   Cash and cash equivalents ........................................................     $   555,784      $   378,131
   Restricted cash and cash equivalents .............................................         100,000             --
   Accounts receivable, net of allowance of approximately $284,000 and
       $238,000 as of December 31, 2004 and 2003, respectively ......................         170,715          303,166
   Prepaid expenses and other current assets ........................................          27,082            7,833
   Assets of discontinued operations ................................................          35,263          114,903
                                                                                          -----------      -----------

       Total current assets .........................................................         888,844          804,033

Property and equipment, net .........................................................         180,581           16,487
                                                                                          -----------      -----------

       Total assets .................................................................     $ 1,069,425      $   820,520
                                                                                          ===========      ===========

          LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Accounts payable .................................................................     $   340,115      $   329,819
   Accrued litigation related costs .................................................          66,302           99,550
   Deferred revenue .................................................................          25,740             --
   Line of credit ...................................................................          62,300             --
   Accrued expenses and other current liabilities ...................................          15,665            1,604
   Liabilities of discontinued operations ...........................................         376,099          595,635
                                                                                          -----------      -----------

       Total current liabilities ....................................................         886,221        1,026,608

Convertible notes payable ...........................................................            --            400,000
                                                                                          -----------      -----------

       Total liabilities ............................................................         886,221        1,426,608
                                                                                          -----------      -----------

Commitments and contingencies

Shareholders' equity:
   Common stock, $0.001 par value; 100,000,000 shares authorized; 54,430,332
       shares issued and outstanding as of December 31, 2004; 53,124,290 shares
       issued and 39,210,315 shares outstanding as of December 31, 2003 .............         54,431.           53,124
   Additional paid-in-capital .......................................................       2,604,850          539,770
   Accumulated deficit ..............................................................      (2,476,077)      (1,198,982)
                                                                                          -----------      -----------

                                                                                              183,204         (606,088)
   Less:   Treasury stock at cost; nil and 13,913,975 Common Shares as of
           December 31, 2004 and 2003, respectively .................................            --               --
                                                                                          -----------      -----------

       Total shareholders' equity ...................................................         183,204         (606,088)
                                                                                          -----------      -----------

       Total liabilities and shareholders' equity ...................................     $ 1,069,425      $   820,520
                                                                                          ===========      ===========

              The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                       F-2
<PAGE>


                                IMPROVENET, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE><CAPTION>
                                                                             2004              2003
                                                                         ------------      ------------
<S>                                                                      <C>               <C>
Revenue ............................................................     $  3,039,678      $  2,675,545
Cost of revenue ....................................................        1,139,931         1,055,656
                                                                         ------------      ------------

Gross profit .......................................................        1,899,747         1,619,889
Selling, general and administrative expense ........................        2,754,293         2,194,789
                                                                         ------------      ------------

Loss from operations ...............................................         (854,546)         (574,900)

Other income (expense)
   Interest income .................................................            8,605             2,597
   Interest expense and financing costs ............................         (712,187)           (5,029)
   Relief of debt ..................................................           14,023              --
   Miscellaneous income ............................................          180,980            28,070
                                                                         ------------      ------------

Net loss from continuing operations before income taxes ............       (1,363,125)         (549,262)
Provision for income taxes .........................................             --                --
                                                                         ------------      ------------

Net loss from continuing operations ................................       (1,363,125)         (549,262)
Income (loss) from discontinued operations, net of income taxes ....           86,030          (236,926)
                                                                         ------------      ------------

Net loss attributable to Common Shareholders .......................       (1,277,095)         (786,188)
                                                                         ============      ============

Basic and diluted earnings (loss) per share:
   Continuing operations ...........................................     $      (0.03)     $      (0.01)
                                                                         ============      ============
   Discontinued operations .........................................     $       0.00      $      (0.01)
                                                                         ============      ============
   Net loss ........................................................     $      (0.03)     $      (0.02)
                                                                         ============      ============
   Weighted average Common Shares outstanding -
       basic and diluted ...........................................       46,979,256        39,210,315
                                                                         ============      ============

         The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                       F-3
<PAGE>

                                IMPROVENET, INC.
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                 FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003

<TABLE><CAPTION>
                                                                                                                         Total
                                      Common Stock           Treasury Stock     Additional    Treasury                Shareholders'
                                ----------------------  -----------------------   Paid-In       Stock     Accumulated    Equity
                                  Shares       Amount     Shares       Amount     Capital    Subscribed     Deficit     (Deficit)
                                -----------  ---------  -----------  ---------  -----------  -----------  -----------  -----------
<S>                              <C>         <C>        <C>          <C>        <C>          <C>          <C>          <C>
Balances, December 31, 2002 ...  53,124,290  $  53,124          --    $    --   $   482,570  $(1,961,941) $  (412,794) $(1,839,041)

Detachable warrants issued in
   connection with
   convertible debt ...........        --         --            --         --        57,200         --           --         57,200
Payment of treasury stock
   subscribed .................        --         --            --         --          --      1,961,941         --      1,961,941
Net loss ......................        --         --            --         --          --           --       (786,188)    (786,188)
                                -----------  ---------  -----------  ---------  -----------  -----------  -----------  -----------

Balances, December 31, 2003 ...  53,124,290     53,124          --         --       539,770         --     (1,198,982)    (606,088)

Retirement of treasury stock .. (13,913,975)   (13,914)         --         --        13,914         --           --           --
Conversion of 8% convertible
   promissory notes ...........   3,707,400      3,708          --         --     1,061,593         --           --      1,065,301
Sale of common shares
   and warrants ...............  10,500,000     10,500          --         --       850,985         --           --        861,485
Stock-based compensation ......     972,617        973          --         --       132,628         --           --        133,601
Exercise of stock options .....      40,000         40          --         --         5,960         --           --          6,000
Net loss ......................        --         --                                                --     (1,277,095)  (1,277,095)
                                -----------  ---------  -----------  ---------  -----------  -----------  -----------  -----------

Balances, December 31, 2004 ...  54,430,332  $  54,431          --    $    --   $ 2,604,850  $      --    $(2,476,077) $   183,204
                                ===========  =========  ===========  =========  ===========  ===========  ===========  ===========

                      The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
                                       F-4
<PAGE>

                                IMPROVENET, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE><CAPTION>
                                                                                     2004              2003
                                                                                 ------------      ------------
<S>                                                                              <C>               <C>
 Cash flows from operating activities:
    Net loss from continuing operations ....................................       (1,363,125)         (549,262)
    Adjustments to reconcile net loss to net cash flows
        from operating activities -
            Depreciation ...................................................           61,817            40,149
            Non-cash stock-based compensation ..............................          133,601              --
            Changes in the fair value of warrants pending registration .....         (162,157)             --
            Induced conversion of 8% convertible promissory notes ..........          694,561              --
            Relief of debt .................................................          (14,023)             --
            Treasury stock subscribed ......................................             --           1,961,941
            Other non-cash items ...........................................              740            57,200
        Changes in operating assets and liabilities
               Accounts receivable .........................................          132,451            (9,242)
               Intercompany receivable......................................          138,487          (221,236)
               Prepaid expenses and other current assets ...................          (19,249)           41,131
               Receivable from stock transfer agent ........................             --             594,715
               Accounts payable ............................................          (17,869)          198,058
               Accrued litigation related costs ............................          (33,248)             --
               Deferred revenue ............................................           25,740              --
               Accrued expenses and other current liabilities ..............           28,084           123,474
               Accrued eTechLogix merger costs .............................             --          (2,378,029)
                                                                                 ------------      ------------

    Cash flows from operating activities ...................................         (394,190)         (141,101)
                                                                                 ------------      ------------

 Cash flows from investing activities:
    Purchase of property and equipment .....................................          (34,425)          (22,104)
    Capitalization of software and website development costs ...............         (118,639)             --
                                                                                 ------------      ------------

    Cash flows from investing activities ...................................         (394,190)         (141,101)
                                                                                 ------------      ------------

 Cash flows from financing activities:
    Proceeds from the private placement of Common Shares and warrants ......        1,050,000              --
    Proceeds from convertible notes payable ................................             --             400,000
    Borrowings on line of credit ...........................................           62,300              --
    Change in restricted cash and cash equivalents .........................         (100,000)             --
    Proceeds from notes payable ............................................             --                --
    Principal repayments of notes payable and capital lease obligations ....          (30,000)             --
    Proceeds from the exercise of options and warrants .....................            6,000              --
    Fees paid for financing transactions ...................................          (26,358)             --
                                                                                 ------------      ------------

    Cash flows from financing activities ...................................          961,942           400,000
                                                                                 ------------      ------------

Cash flows from discontinued operations ....................................         (237,035)         (276,948)
                                                                                 ------------      ------------

Increase (decrease) in cash and cash equivalents ...........................          177,653           (40,153)
Cash and cash equivalents, beginning of period .............................          378,131           418,284
                                                                                 ------------      ------------

Cash and cash equivalents, end of period ...................................     $    555,784      $    378,131
                                                                                 ============      ============

 Supplemental cash flow information:
        Interest paid ......................................................     $     36,606      $     16,189
                                                                                 ============      ============
        Income taxes paid ..................................................     $       --        $       --
                                                                                 ============      ============

    Non-cash activities:
        Conversion of notes payable into Common Stock ......................     $    370,000      $       --
                                                                                 ============      ============
        Capital expenditures accrued at December 31, 2004 ..................     $     28,164      $       --
                                                                                 ============      ============

                 The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                       F-5
<PAGE>

1.  ORGANIZATION OF BUSINESS AND BASIS OF PRESENTATION

The consolidated financial statements of ImproveNet, Inc. have been prepared in
accordance with accounting principles generally accepted in the United States.
The consolidated financial statements include the accounts of ImproveNet and its
wholly owned subsidiary, eTechLogix, Inc. ("eTechLogix") (collectively,
"ImproveNet", "we", "us", or "our"). All intercompany transactions and balances
have been eliminated in consolidation. Certain 2003 financial statement amounts
have been reclassified to conform with 2004 presentation.

We are a leading Internet-based home improvement services company that, through
our TrueMatch(TM) platform, connects homeowners to local screened home
improvement service providers throughout the United States. We commenced
operations in January 1996 as a regional contractor matching service. ImproveNet
was initially incorporated in California and was reincorporated in Delaware in
1998. We spent the majority of 1996 and 1997 building our database of home
improvement service providers, developing our services and technology,
recruiting personnel and raising capital. We launched our website,
www.ImproveNet.com, and homeowner / home improvement service provider matching
service on a national scale in August 1997. During 1999 we completed the
acquisition of two regional contractor referral companies: Contractor Referral
Services, LLC and the J.L. Price Corporation, both of which were integrated into
our operations during 2000. On March 15, 2000, we completed our initial public
offering and raised approximately $44.16 million in gross proceeds through the
sale of approximately 2.76 million Common Shares. Shares of our Common Stock
were initially listed on the NASDAQ National Market System. During the first
half of 2000, we spent substantial amounts on marketing and marketing related
activities, as well as the development and expansion of our service and
operations infrastructure. During 2002 ImproveNet merged with eTechLogix. The
merger was accounted for as a reverse merger as the previous owners of
eTechLogix received a controlling interest in ImproveNet subsequent to the
merger. During the fourth quarter of 2004, the Board of Directors determined
that our principal focus going forward would be on ImproveNet's core lead
matching service and the products and services that compliment it. This decision
was based on a number of factors, which include, but are not limited to, the
opportunities in the Internet home improvement industry. Based on this decision,
we have actively pursued, during the first quarter of 2005, disposition of
substantially all of the operations of eTechLogix. An agreement in principle has
been reached with a third party for the anticipated disposition and documents
reflecting the definitive agreement are currently being prepared and are
expected to be executed in the near future. Accordingly, the operations of
eTechLogix, which had been classified as a separate operating segment in
previous filings, have been classified as discontinued operations for all
periods presented in these financial statements.

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
Significant estimates include the allowance for doubtful accounts and credits,
liabilities for potential litigation and deferred taxes.

Our financial statements are presented on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. We have continued to sustain losses for the past
several years, but with funds received from our June 2004 private placement of
Common Stock and warrants, we now have positive shareholders' equity. The
financial statements do not include any adjustments to reflect the possible
future effects of the recoverability and classification of assets or the amounts
and classifications of liabilities that may result from the uncertainty of our
ability to continue as a going concern.

We strive to make ongoing realignments, if required, to achieve positive cash
flow with our existing cash resources. Recent strategic changes made to our
operations and additional sources and planned sources of revenue include the
following:

   -  During the third quarter of 2004, we implemented a new subscription-based
      pricing model for new home improvement service providers joining our
      service provider membership network. Prior to the implementation of the
      subscription based pricing model, home improvement service providers paid
      no monthly fee but were subject to "win" fees on all home improvement
      projects obtained through the use of our services. These win fees are
      based on a percentage of the total home improvement project value. We
      believe that the subscription based pricing structure will result in a
      more consistent cash flow stream as we will generate a flat monthly fee
      from many of the home improvement service providers using our service
      while continuing to generate revenue based on the quantity of leads sold.
      Additionally, we are collecting payments from service providers
      participating in the subscription based pricing model via credit card or
      ACH charges, which differs from the previous model whereby we billed
      service providers for leads sold and win fees earned and collected these
      charges at a later date. We believe charging our customers at the time of
      sale will have a positive impact on collections and will decrease the
      number of days our sales are outstanding. Some of the service providers
      that were part of our network prior to the implementation of the
      subscription based pricing model have remained on the previous pricing
      plan, however, we plan to convert these home improvement service providers
      to the subscription model during the first half of 2005.

                                       F-6
<PAGE>

   -  During December 2004, we launched a new division of ImproveNet through the
      licensing of the 1-800-Contractor (1-800-266-8722) telephone number, the
      1800Contractor.com web property (domain names) and associated service
      marks. This division will compliment the existing ImproveNet home
      improvement information services by supplementing the online home
      improvement service provider lead generation service with an online and
      offline resource for homeowners to find and research local contractors via
      the Internet or telephone. Through 1-800-Contractor, we plan to create an
      online directory of homeowner rated, screened service providers and
      contractors that can be accessed by homeowners by calling 1-800-Contractor
      or by visiting the 1800Contractor.com website. This will enable homeowners
      to obtain contractor contact data and detailed company information via the
      telephone or Internet. During the first quarter of 2005, we began
      generating revenue by selling directory listings to local and national
      home improvement service providers. Following the launch of
      1-800-Contractor, service providers joining the ImproveNet network in 2005
      pay an additional flat monthly fee to be listed in the 1-800-Contractor
      directory in addition to the monthly subscription fees discussed above.

   -  During the first half of 2005, we intend to offer a highly targeted
      advertising program known as "AdServePRO" to businesses searching to
      promote their products and services to consumers and service providers in
      the home improvement industry. Advertisers will have the ability to
      feature their products and services as paid listings in their choice of
      ImproveNet's marketing channels, such as emails, newsletters and the web
      pages of ImproveNet.com, ImproveNetPro.com and 1800Contractor.com.
      AdServePRO's technology is intended to be a user-friendly web-based
      application that will allow advertisers to manage their accounts online,
      from setting up their campaign, creating the message, choosing their
      target audience and setting the amount they wish to invest in their
      advertising program.

No assurances can be made that the funds received from the recent private
placement in June, 2004 will be adequate or sufficient to fund expansion, react
to competitive pressures or take advantage of unanticipated opportunities that
we may identify. Additionally, no assurances can be made that the recent
strategic changes made to our operations and additional sources and planned
sources of revenue discussed above will be implemented in a way that will have a
positive impact on our operations.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CASH AND CASH EQUIVALENTS AND RESTRICTED CASH

Cash and cash equivalents are defined as cash and short-term highly liquid
deposits with initial maturities of three months or less. As of December 31,
2004, restricted cash of $100,000 represents funds held as collateral for a line
of credit with a national banking association. As of December 31, 2004, there
was approximately $62,000 outstanding on this line of credit.

CONCENTRATIONS OF CREDIT RISK

Financial instruments that potentially subject ImprovNet to credit risk consist
primarily of cash and cash equivalents and trade accounts receivable.
Information on each of these types of financial instruments are as follows:

We maintain our cash balances at a national high credit quality financial
institution. Deposits not to exceed $100,000 are insured by the Federal Deposit
Insurance Corporation ("FDIC"). As of December 31, 2004 and 2003, we had
uninsured cash balances of approximately $568,000 and $291,000, respectively.

ImproveNet extends credit to customers, which results in accounts receivable
arising from its normal business activities. We do not require collateral or
other security to support financial instruments subject to credit risk. We
routinely assess the financial strength of our significant customers and, based
upon factors surrounding the credit risk of those customers and the large
overall relative size of our customer base, we believe that our accounts
receivable credit risk exposure is limited. Our customers are not concentrated
in any specific geographic region, but are concentrated in the home improvement
services industry.

ALLOWANCE FOR DOUBTFUL ACCOUNTS AND SALES CREDITS

ImproveNet maintains an allowance for doubtful accounts and sales credits based
on expected collections of sales. We establish our allowance for doubtful
accounts and sales credits based on the aging of our receivables, payment
performance factors, historical trends and other relevant information.
ImproveNet evaluates and revises its reserve on a monthly basis upon a review of
specific accounts outstanding and the history of uncollectible accounts.

                                       F-7
<PAGE>

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost less accumulated depreciation.
Improvements or betterments that extend the life of an asset are capitalized.
Expenditures for maintenance and repair costs are expensed as incurred.
Depreciation of property and equipment is computed by the straight-line method
at rates adequate to allocate the cost of applicable assets over the expected
useful lives of such assets. Amortization of leasehold improvements is computed
using the shorter of the lease term or the expected useful life of the assets.

Estimated useful lives are as follows:

           Furniture and fixtures ....................     5 - 7 Years
           Equipment .................................       5 Years
           Software and website development costs ....     3 - 5 Years
           Leasehold improvements ....................       2 Years

CAPITALIZED SOFTWARE DEVELOPMENT COSTS

ImproveNet capitalizes software development costs in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed." Capitalization of
computer software development costs begins upon the establishment of
technological feasibility for our computer software products. Technological
feasibility is generally based upon the achievement of a detail program design
free of high-risk development issues. The establishment of technological
feasibility and the ongoing assessment of recoverability of capitalized computer
software development costs requires considerable judgment by management with
respect to certain external factors, including, but not limited to,
technological feasibility, anticipated future gross revenues, estimated economic
life and changes in software and hardware technology. Amortization of
capitalized computer software development costs commences when the related
products become available for general release to customers. Amortization is
provided on a project-by-project basis and is the greater of the amount computed
using (a) the ratio that current gross revenues for a product bear to the total
of current and anticipated future gross revenues for that product or (b) the
straight-line method over the remaining estimated economic life of the product.
Research and development costs are charged to expense as incurred.

LONG-LIVED ASSETS

We account for long-lived assets in accordance with SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." The Statement requires
that long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Assets to be disposed of are reported at the lower of carrying
amount or fair value less cost to sell.

REVENUE RECOGNITION

Revenue is principally derived from lead fees, subscription fees and win fees.
We recognize lead fees at the time we match a homeowner and contractor and the
service provider becomes obligated to pay such fee. Subscription fees are
generally billed monthly and are recognized ratably over the period covered by
the subscription fee. Win fees are recognized at the time the service provider
or the homeowner notifies us that a job has been sold and the service provider
becomes obligated to pay such fee. Payments of any fees received in advance of
providing services are deferred until the period the services are provided.
ImproveNet establishes a refund reserve at the time of revenue recognition based
on our historical experience with customer credits. We also recognize revenue
from website related advertisements, which is recognized ratably over the period
in which the advertising is delivered to our customers.

ADVERTISING COSTS

We recognize advertising expenses in accordance with SOP 93-7, "Reporting on
Advertising Costs." As such, we expense advertising costs as they are incurred.
Advertising expense was approximately nil and $24,000 for the years ended
December 31, 2004 and 2003, respectively.

INCOME TAXES

We account for income taxes in accordance with SFAS No. 109, "Accounting for
Income Taxes." Accordingly, deferred income taxes have been provided to show the
effect of temporary differences between the recognition of revenue and expenses
for financial and income tax reporting purposes and between the tax basis of
assets and liabilities and their reported amounts in the financial

                                       F-8
<PAGE>
statements. In assessing the realizability of deferred tax assets, management
assesses the likelihood that deferred tax assets will be recovered from future
taxable income, and to that extent that recovery is not likely or there is
insufficient operating history, a valuation allowance is established. We adjust
the valuation allowance in the period we believe it is more likely than not that
deferred tax assets will or will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.

COMPREHENSIVE INCOME

The Company follows SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130
established standards for reporting of comprehensive income and its components
in a full set of general-purpose financial statements. There was no difference
between our net loss and our comprehensive loss for any periods presented in the
accompanying consolidated financial statements.

STOCK-BASED COMPENSATION PLANS

We have stock-based compensation plans accounted for under the recognition and
measurement principles of Accounting Principles Board Opinion ("APB") No. 25
"Accounting for Stock Issued to Employees," and related interpretations. Pro
forma information regarding the impact of stock-based compensation on net income
and earnings per share is required by SFAS No. 123 "Accounting for Stock-Based
Compensation," and SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure." Such unaudited pro forma information,
determined as if we had accounted for our employee stock options under the fair
value recognition provisions of SFAS No. 123, is illustrated in the following
table:

<TABLE><CAPTION>
                                                                           2004              2003
                                                                       ------------      ------------
<S>                                                                    <C>               <C>
     Net loss attributable to Common Shareholders as reported ....     $ (1,277,095)     $   (786,188)
     Stock-based employee compensation expense
         pursuant to SFAS No. 123, net of tax ....................          (77,119)          (28,300)
                                                                       ------------      ------------
     Pro forma net loss attributable to Common Shareholders ......     $ (1,354,214)     $   (814,488)
                                                                       ============      ============

     Basic and diluted loss per share:
         As reported .............................................     $      (0.03)     $      (0.02)
                                                                       ============      ============
         Pro forma ...............................................     $      (0.03)     $      (0.02)
                                                                       ============      ============
</TABLE>

The fair value of options granted during 2004 and 2003 was estimated using the
Black-Scholes option pricing model using the following assumptions:

                                                          2004          2003
                                                         ------        ------
     Annual dividend yield ......................         --            --
     Weighted-average expected lives (years) ....        10.00         10.00
     Risk-free interest rate ....................          4.0%          3.0%
     Volatility .................................        143.0%        146.0%

NET INCOME (LOSS) PER SHARE INFORMATION

Basic earnings (loss) per share is calculated by dividing income (loss)
available to Common Shareholders by the weighted average number of Common Shares
outstanding for the period. Diluted earnings (loss) per share is calculated
based on the weighted average shares of Common Stock outstanding during the
period plus the dilutive effect of Common Stock purchase warrants and stock
options using the treasury stock method and the dilutive effects of convertible
instruments using the if-converted method. Contingently issuable shares are
included in the computation of basic earnings (loss) per share when issuance of
the shares is no longer contingent. Due to the net losses attributable to Common
Shareholders for the year ended December 31, 2004 and 2003, basic and diluted
loss per share were the same, as the effect of potentially dilutive securities
would have been anti-dilutive. Dilutive securities not included in the diluted
loss per share calculation for the years ended December 31, 2004 and 2003 are as
follows:

                                       F-9
<PAGE>

                                                    2004           2003
                                                 ----------     ----------

     Options to purchase Common Shares .....        782,713        533,773
     Warrants to purchase Common Shares ....      1,327,307        426,155
                                                 ----------     ----------

     Total dilutive securities .............      2,110,020        959,928
                                                 ==========     ==========

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying values of our financial instruments included in current assets and
current liabilities approximated their respective fair values at each balance
sheet date due to the immediate or short-term maturity of these financial
instruments. The fair value of long-term notes payable and lease obligations is
based on current rates at which we could borrow funds with similar remaining
maturities.

NEW ACCOUNTING PRONOUNCEMENTS

                  Statements of Financial Accounting Standards
                  --------------------------------------------

SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity." SFAS No. 150 establishes standards for how an
issuer classifies, measures and discloses in its financial statements certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 requires that an issuer classify financial instruments that are within
its scope as liabilities, in most circumstances. Such financial instruments
include (i) financial instruments that are issued in the form of shares that are
mandatorily redeemable, (ii) financial instruments that embody an obligation to
repurchase the issuer's equity shares, or are indexed to such an obligation, and
that require the issuer to settle the obligation by transferring assets, (iii)
financial instruments that embody an obligation that the issuer may settle by
issuing a variable number of its equity shares if, at inception, the monetary
value of the obligation is predominantly based on a fixed amount, variations in
something other than the fair value of the issuer's equity shares or variations
inversely related to changes in the fair value of the issuer's equity shares and
(iv) certain freestanding financial instruments. SFAS No. 150 was effective for
contracts entered into or modified after May 31, 2003, and was otherwise
effective at the beginning of the first interim period beginning after June 15,
2003, however, in October 2003, the FASB indefinitely deferred the application
of certain provisions of SFAS No. 150 as they apply to mandatorily redeemable
minority interests. Adoption of SFAS No. 150 did not have a significant impact
on our financial statements.

SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." SFAS No. 149 amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The amendments
(i) reflect decisions of the Derivatives Implementation Group, (ii) reflect
decisions made by the FASB in conjunction with other projects dealing with
financial instruments and (iii) address implementation issues related to the
application of the definition of a derivative. SFAS No. 149 also modifies
various other existing pronouncements to conform with the changes made to SFAS
No. 133. SFAS No. 149 was effective for contracts entered into or modified after
June 30, 2003, and for hedging relationships designated after June 30, 2003,
with all provisions applied prospectively. Adoption of SFAS No. 149 did not have
a significant impact on our financial statements.

SFAS No. 123, "Share-Based Payment (Revised 2004)." SFAS No. 123R establishes
standards for the accounting for transactions in which an entity (i) exchanges
its equity instruments for goods or services, or (ii) incurs liabilities in
exchange for goods or services that are based on the fair value of the entity's
equity instruments or that may be settled by the issuance of the equity
instruments. SFAS No. 123R eliminates the ability to account for stock-based
compensation using APB 25 and requires that such transactions be recognized as
compensation cost in the income statement based on their fair values on the date
of the grant. SFAS No. 123R is effective for ImproveNet in the first interim
period beginning after December 15, 2005. We will transition to fair value based
accounting for stock-based compensation using a modified version of prospective
application ("modified prospective application"). Under modified prospective
application, as it is applicable to us, SFAS No. 123R applies to new awards and
to awards modified, repurchased, or cancelled after December 15, 2005.
Additionally, compensation cost for the portion of awards for which the
requisite service has not been rendered (generally referring to non-vested
awards) that are outstanding as of December 15, 2005 must be recognized as the
remaining requisite service is rendered during the period of and/or the periods
after the adoption of SFAS No. 123R. The attribution of compensation cost for
those earlier awards will be based on the same method and on the same grant-date
fair values previously determined for the pro forma disclosures required for
companies that did not adopt the fair value accounting method for stock-based
employee compensation. The adoption of SFAS No. 123R is expected to have a
significant impact on the Company's financial statements. The impact of adopting
SFAS No. 123R cannot be accurately estimated at this time, as it will depend on
the market value and the amount of share-based awards granted in future periods.

                                      F-10
<PAGE>

Future levels of compensation cost recognized related to stock-based
compensation awards (including the aforementioned expected costs during the
period of adoption) may be impacted by new awards and/or modifications,
repurchases and cancellations of existing awards before and after the adoption
of this standard.

              Financial Accounting Standards Board Interpretations
              ----------------------------------------------------

FIN No. 46, "Consolidation of Variable Interest Entities, an Interpretation of
Accounting Research Bulletin No. 51 (Revised December 2003)." FIN 46,
establishes accounting guidance for consolidation of variable interest entities
(VIE) that function to support the activities of the primary beneficiary. The
primary beneficiary of a VIE entity is the entity that absorbs a majority of the
VIE's expected losses, receives a majority of the VIE's expected residual
returns, or both, as a result of ownership, controlling interest, contractual
relationship or other business relationship with a VIE. Prior to the
implementation of FIN 46, VIEs were generally consolidated by an enterprise when
the enterprise had a controlling financial interest through ownership of a
majority of voting interest in the entity. The provisions of FIN 46 were
effective immediately for all arrangements entered into after January 31, 2003.
If a VIE existed prior to February 1, 2003, FIN 46 was effective at the
beginning of the first interim period beginning after June 15, 2003. However,
subsequent revisions to the interpretation deferred the implementation date of
FIN 46 until the first period ending after December 15, 2003. The adoption of
this standard did not have a significant impact on our financial statements.

FIN No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others -- an Interpretation of
FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34."
FIN 45 elaborates on the disclosures to be made by a guarantor in its interim
and annual financial statements about its obligations under certain guarantees
that it has issued. It also clarifies that a guarantor is required to recognize,
at the inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The initial recognition and
measurement provisions of FIN 45 were applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The disclosure
requirements of FIN 45 were effective for financial statements of interim or
annual periods ending after December 15, 2002, and were adopted in our financial
statements for the year ended December 31, 2002. The adoption of this standard
did not have a significant impact on our financial statements.

3. PROPERTY AND EQUIPMENT

Property and equipment consist of the following as of December 31, 2004 and
2003:

                                                        2004           2003
                                                     ----------     ----------

     Furniture and fixtures ....................     $    2,138     $    2,138
     Equipment .................................         54,067          7,794
     Software and website development costs ....        134,955           --
     Leasehold improvements ....................         12,171         12,171
                                                     ----------     ----------

                                                        203,331         22,103
     Less:  Accumulated depreciation ...........        (22,750)        (5,616)
                                                     ----------     ----------

     Property and equipment, net ...............     $  180,581     $   16,487
                                                     ==========     ==========

4. LINE OF CREDIT

During September 2004 we entered into a line of credit for $100,000 with a
national banking association. Interest accrues on all funds advanced on the line
of credit at 1/4 point over the bank's prime lending rate. The maturity of the
line of credit facility is September 14, 2005, at which time the payment of all
outstanding principal and accrued interest is due. There is no penalty for
prepayment of outstanding amounts prior to maturity. We have secured our
obligations under the line of credit with the pledge of a certificate of
deposit, accordingly, $100,000 is classified as restricted cash on the
accompanying financial statements as of December 31, 2004. As of December 31,
2004, there was approximately $62,000 outstanding on this line of credit. During
the first quarter of 2005, this line of credit was paid off and closed.

5. FINANCING TRANSACTION

Private Placement of Common Shares and Warrants
-----------------------------------------------

                                      F-11
<PAGE>

During June 2004, ImproveNet raised $1,050,000, from the sale of 10,500,000
Common Shares and three-year warrants to purchase 8,000,000 Common Shares at a
strike price of $0.15 per share in a private placement transaction to several
accredited investors (collectively, the "Investors"). The issuance was made
under applicable registration exemptions from both state and federal securities
laws including section 4(2) of the Securities Act of 1933, as amended. The
proceeds were allocated to the Common Shares and warrants based on the relative
fair value of each security at the time of issuance with $621,500 allocated to
the Common Shares and $428,500 allocated to the warrants. Due to the nature of
certain potential financial penalties related to registration rights granted to
the Investors, the most substantive of which would require ImproveNet to rescind
the transaction at the option of the Investors should the applicable
registration statement not be declared effective and remain effective by March
1, 2005, the shares of Common Stock were initially classified outside of equity
as mezzanine financing and the warrants to purchase Common Stock were initially
classified as a liability. During October 2004, the Common Shares and warrants
became fully registered, at which time the amounts were reclassified to equity.
Prior to the registration statement being declared effective, changes in the
fair value of the warrants were recognized as other income in our statement of
operations. Changes in the fair value of the warrants resulted in other income
of approximately $162,000 recognized during 2004. In connection with the private
placement transaction, we granted the right to designate a nominee to our Board
of Directors to one of the Investors.

As part of the financing transaction described above, the Investors also
purchased 1,500,000 Common Shares from affiliates of three of our officers and
directors for an aggregate purchase price of $150,000. Each of these three
selling parties entered into a lock-up agreement restricting future sales of
their common stock for a specified period, as well as a voting agreement
regarding the accredited investor's designated nominee to our Board of
Directors.

Private Placement of Convertible Notes Payable
----------------------------------------------
During December 2003, we completed a private placement to accredited investors
of $400,000 of 8% unsecured convertible promissory notes, each with a maturity
of December 15, 2005 and interest payable quarterly. The issuance was made under
applicable registration exemptions from both state and federal securities laws
including section 4(2) of the Securities Act of 1933, as amended. Under the
original terms of the promissory notes, the principal of each note and all
accrued but unpaid interest was convertible into shares of ImproveNet's Common
Stock at a rate of five shares for each one dollar of debt represented by each
note. During June 2004 holders of $370,000 of principal of our 8.0% convertible
promissory notes (the "Converting Investors") elected to convert the then
outstanding principal and interest to Common Shares and warrants on similar
terms to the private placement offering described above. The conversion resulted
in the issuance of 3,707,400 Common Shares and three-year warrants to purchase
2,466,666 Common Shares at a strike price of $0.15 per share. The issuance was
made under applicable registration exemptions from both state and federal
securities laws including section 4(2) of the Securities Act of 1933, as
amended. Due to the modified conversion terms associated with this conversion,
we recognized a charge in the amount of approximately $695,000. The remaining
$30,000 of the then outstanding principal of the 8.0% convertible promissory
notes, which was with affiliates of ImproveNet, was repaid in the second quarter
of 2004.

6. COMMITMENTS AND CONTINGENCIES

Legal proceedings
-----------------
From time to time, we may be involved in litigation relating to claims arising
out of, or incidental to, our operations. We are currently engaged in various
legal proceedings that are incidental to our business that could materially
affect our business should an adverse judgment be entered against us. We intend
to vigorously defend these claims and expect to prevail in all cases. In
connection with the defense of these claims and the settlement of previous
claims, we have accrued approximately $66,000 and $100,000 as of December 31,
2004 and 2003, respectively, which represents our best estimate of future costs
associated with these claims.

One arbitration matter in Phoenix, Arizona involved First Systech International,
Inc., a predecessor to eTechLogix, our wholly-owned subsidiary. This proceeding
concerns the 1998 sale of an Enterprise Resource Planning software product to a
former client who demanded a refund of the purchase price. The matter was before
an arbitrator who entered an award against First Systech for $116,886 plus
simple interest at 10% per year. First Systech International reached agreement
with Friedman Corporation ("Friedman") pursuant to terms and conditions of a
Repayment and Security Agreement effective May 25, 2004 (the "Agreement") which
finalizes a payment plan for First Systech International's obligations for the
arbitration award that Friedman has paid. The final amount owed under the
Agreement is approximately $182,000 with interest accruing at 8% per annum from
April 2, 2004 and attorney's fees incurred by Friedman in the minimum amount of
$4,500 and not to exceed $10,000 as set forth therein. Payments of $5,000 per
month commenced June 20, 2004, increased to $10,000 per month on November 20,
2004 and are scheduled to increase to $12,500 per month during June 2005.
Following the June 2005 increase, payments will remain at $12,500 per month
until the balance is paid in full. Pursuant to provisions of the Agreement,
First Systech International has granted a security interest and lien on all of
its assets to secure performance of its obligations under the Agreement. First
Systech International continues to maintain ownership of

                                      F-12
<PAGE>

all of the assets that it has pledged. As of December 31, 2004, a total of
approximately $145,000 was due under the terms of this agreement and is included
in "Liabilities of discontinued operations" on the accompanying balance sheets.

Other contractual arrangements
------------------------------
During September 2004 we entered into an exclusive licensing agreement for the
use of the phone number and website domain name related to "1-800-Contractor"
(the "Licensed Property"). The licensor receives a percentage of the gross
revenue collected from our use of the Licensed Property, payable on a monthly
basis during the term of the licensing agreement, which is subject to annual
minimum payments to the licensor. Improvenet also has an option to purchase the
Licensed Property. The term of the licensing agreement is for 100 years subject
to the following early termination provisions: ImproveNet may terminate the
licensing agreement at our election or upon exercise of our option to purchase
the Licensed Property. The licensor may terminate the licensing agreement for
(i) ImproveNet's failure to make required payments timely, (ii) ImproveNet's
failure to comply with its obligations under the licensing agreement after
written notice of such failure or (iii) the proper revocation or suspension of
ImproveNet's authority to do business in its state of incorporation or the state
where our principal office is located.

7. CAPITAL STOCK

Common Stock
------------
On March 15, 2000, we completed our initial public offering and raised
approximately $44.16 million in gross proceeds through the sale of approximately
2.76 million shares of Common Stock. ImproveNet has not declared or paid cash
dividends as of the date of these financial statements. During the years ended
December 31, 2004 and 2003, we had only one class of Capital Stock.

Common Stock Options
--------------------
ImproveNet has the following equity incentive and purchase plans in place as of
December 31, 2004:

   -  1996 Stock Option Plan: Under our 1996 Stock Option Plan, as amended, we
      may issue incentive stock options or non-statutory stock options to
      purchase up to 2,700,000 shares of Common Stock. Incentive stock options
      may be granted to employees at exercise prices not lower than fair market
      value at the date of grant, as determined by the Board of Directors.
      Non-statutory stock options may be granted to employees, directors and
      consultants, at exercise prices not lower than 85% of fair market value at
      the date of grant, as determined by the Board of Directors. The Board also
      has the authority to set the term of the options up to a maximum of ten
      years. Options granted generally vest over four years. Unexercised options
      expire three months after termination of employment with ImproveNet.

   -  1999 Equity Incentive Plan: ImproveNet's Board of Directors adopted the
      1999 Equity Incentive Plan (the "Incentive Plan") on December 3, 1999
      under which 1,300,000 shares have been reserved for issuance. The number
      of shares reserved under the Incentive Plan will automatically increase on
      January 1 of each year by the lesser of 4% of the total number of shares
      outstanding or 1,300,000 shares. The Board of Directors had implemented a
      program of automatic option grants to each non-employee director such that
      each non-employee director will receive options to purchase 20,000 shares
      of common stock upon commencement of service as a director, which will
      vest monthly over three years and 5,000 shares annually thereafter, which
      will vest monthly over twelve months. This program was abandoned in 2004,
      and grants may be made to non-employee directors, from time to time, as
      determined by the Board of Directors.

   -  Employee Stock Purchase Plan: ImproveNet's Board of Directors adopted the
      Employee Stock Purchase Plan (the "Purchase Plan") on December 3, 1999
      under which 300,000 shares have been reserved for issuance. The Purchase
      Plan was effected upon the effective date of our initial public offering.
      The number of shares reserved under the Purchase Plan will automatically
      increase on January 1 of each year by the lesser of an amount equal to 1%
      of the total number of shares outstanding, or 300,000 shares. Under the
      Purchase Plan, eligible employees may purchase common stock valued at the
      lesser of $25,000 or 15% of their compensation. The purchase price per
      share will be 85% of the common stock fair value at the lower of certain
      plan defined dates. The Purchase Plan was suspended on June 29, 2001.

The following table summarizes Common Stock Options outstanding as of December
31, 2004:

                                      F-13
<PAGE>

<TABLE><CAPTION>
            Options Outstanding                                  Options Exercisable
    ----------------------------------------------------  ---------------------------------
                           Weighted
                           Average           Weighted                          Weighted
      Quantity of         Remaining          Average        Quantity of         Average
        Options          Contractual         Exercise        Options           Exercise
      Outstanding        Life (Years)         Price        Outstanding           Price
    ----------------  ------------------  --------------  ---------------   ---------------
<S>         <C>                     <C>          <C>             <C>                <C>
            788,889                 7.3          $ 0.05          788,889            $ 0.05
             66,668                 9.3            0.09           66,668              0.09
             40,000                 8.1            0.12           25,556              0.12
            207,500                 9.7            0.13           16,667              0.13
            880,000                 8.7            0.15          271,458              0.15
            800,000                 9.0            0.20          200,000              0.20
            177,102                 4.3            0.25          177,102              0.25
             60,000                 5.3            6.25           55,000              6.25
    ----------------                                      ---------------

          3,020,159                 8.2            0.26        1,601,340              0.32
    ================                                      ===============
</TABLE>

The following table summarizes Common Stock Option activity for the years ended
December 31, 2004 and 2003:

                                                                    Average
                                                   Number of        Exercise
                                                     Shares           Price
                                                   ----------      ----------

     Outstanding - December 31, 2002 .........      1,092,991      $     0.67

     Options granted .........................        980,000            0.17
     Options exercised .......................           --
     Options forfeited .......................        (67,000)          (4.15)
                                                   ----------

     Outstanding - December 31, 2003 .........      2,005,991            0.31

     Options granted .........................      1,374,184            0.15
     Options exercised .......................        (40,000)          (0.15)
     Options forfeited .......................       (320,016)          (0.11)
                                                   ----------

     Outstanding - December 31, 2004 .........      3,020,159      $     0.26
                                                   ==========

Common Stock Warrants
---------------------
Common Stock Warrants outstanding at December 31, 2004 and 2003 primarily relate
to warrants issued in conjunction with financing transactions. The following
table summarizes Common Stock Warrants outstanding as of December 31, 2004:

               Number of         Exercise            Expiration
                Shares             Price                Date
           ------------------   ------------  --------------------------
                       5,000           1.00         June 16, 2007
                     200,000           0.10         June 27, 2007
                     150,000           0.25      September 25, 2005
                     500,000           0.16       December 4, 2005
                      20,000           0.16       December 12, 2005
                  10,466,666           0.15         June 27, 2005
           ------------------

                  11,341,666
           ==================

The following table summarizes Common Stock Warrant activity for the years ended
December 31, 2004 and 2003:

                                      F-14
<PAGE>

                                                                     Average
                                                   Number of         Exercise
                                                    Shares             Price
                                                 ------------      ------------

     Outstanding - December 31, 2002 .......        2,767,596      $       4.19

     Warrants issued .......................        2,370,000              0.16
     Warrants exercised ....................             --                --
     Warrants expired ......................       (1,500,000)            (0.15)
                                                 ------------

     Outstanding - December 31, 2003 .......        3,637,596              3.23

     Warrants issued .......................       10,466,664              0.15
     Warrants exercised ....................             --                --
     Warrants expired ......................       (2,762,596)            (4.20)
                                                 ------------

     Outstanding - December 31, 2004 .......       11,341,664      $       0.15
                                                 ============

8. INCOME TAXES

Significant components of our deferred income tax assets and liabilities are as
follows:

<TABLE><CAPTION>
                                                                        2004             2003
                                                                    ------------     ------------
<S>                                                                 <C>              <C>
     Deferred income tax assets (liabilities):
         Allowance for doubtful accounts and sales credits ....     $    115,000     $    116,000
         Excess of book over tax depreciation .................          (27,000)         (12,000)
         Federal net operating loss carryforwards .............        1,381,000          960,000
         Leasehold improvements ...............................          126,000          108,000
                                                                    ------------     ------------

     Total net deferred income tax assets .....................        1,595,000        1,172,000
     Less:  Deferred income tax valuation allowance ...........       (1,595,000)      (1,172,000)
                                                                    ------------     ------------

     Deferred income tax asset, net of valuation allowance ....     $       --       $       --
                                                                    ============     ============
</TABLE>

At December 31, 2004, we had federal and state net operating loss carryforwards
of approximately $4,060,000 and $2,680,000 respectively, which expire at various
times through [2024] and [2009], respectively. Due to the merger of ImproveNet
and eTechLogix in 2002, ImproveNet's pre-merger net operating losses are
currently limited in use. The amount of net operating losses that can be used on
an annual basis for the next twenty years is based on the value of ImproveNet at
the time of the merger and the adjusted applicable federal long-term rate.

9. DISCONTINUED OPERATIONS

During the fourth quarter of 2004, the Board of Directors determined that our
principal focus going forward would be on ImproveNet's core lead matching
service and the products and services that compliment it. This decision was
based on a number of factors, which include, but are not limited to, the
opportunities in the Internet home improvement industry. Based on this decision,
we have entered into an agreement during the first quarter of 2005 to dispose of
substantially all of the operations of eTechLogix. An agreement in principle has
been reached with a third party for the anticipated disposition and documents
reflecting the definitive agreement are currently being prepared and are
expected to be executed in the near future. Accordingly, the operations of
eTechLogix, which had been classified as a separate operating segment in
previous filings, have been classified as discontinued operations for all
periods presented in these financial statements. The assets and liabilities of
eTechLogix are presented in the Balance Sheets under the captions "Assets of
discontinued operation" and "Liabilities of discontinued operations." The
carrying amounts of the major classes of these assets and liabilities as of
December 31, 2004 and 2003 are summarized as follows:

                                      F-15
<PAGE>

<TABLE><CAPTION>
                                                                 2004           2003
                                                              ----------     ----------
<S>                                                           <C>            <C>
     Assets:
         Cash and cash equivalents ......................     $     --       $    4,284
         Accounts receivable, net .......................         21,156         27,306
         Property and equipment, net ....................         14,107         83,313
                                                              ----------     ----------

         Assets of discontinued operations ..............     $   35,263     $  114,903
                                                              ==========     ==========

     Liabilities:
         Accounts payable ...............................     $   28,222     $   71,180
         Accrued litigation related costs ...............        214,724        305,588
         Line of credit .................................         60,081         65,619
         Deferred revenue ...............................         49,992         49,292
         Obligations under capital lease obligations ....         18,401         96,224
         Other accrued expenses .........................          4,679          7,732
                                                              ----------     ----------

         Liabilities of discontinued operations .........     $  376,099     $  595,635
                                                              ==========     ==========
</TABLE>

Summarized statement of operations data for eTechLogix for the years ended
December 31, 2004 and 2003 is as follows:

                                                     2004           2003
                                                  ----------     ----------

     Revenue ..................................   $  443,365     $  518,002
     Operating income (loss) ..................       83,286       (333,237)
     Net income (loss) ........................       86,030       (236,926)

eTechLogix recognizes revenue in accordance with SOP 97-2, "Software Revenue
Recognition." This SOP provides guidance on revenue recognition of software
transactions. eTechLogix recognizes revenue principally from the development and
licensing of its software and from consulting and maintenance services rendered
in connection with such development and licensing activities. Maintenance
contract revenue is recognized on a straight-line basis over the life of the
respective contract. eTechLogix also derives revenue from the sale of third
party hardware and software which is recognized based on the terms of each
contract. Consulting revenue is recognized when the services are rendered. No
revenue is recognized prior to obtaining a binding commitment from the customer.
Revenue from fixed price software development contracts, which require
significant modification to meet the customer's specifications, is recognized on
the percentage-of-completion method using the units-of-work-performed method to
measure progress towards completion. Revisions in cost estimates and recognition
of losses on these contracts are reflected in the accounting period in which the
facts become known. Revenue from software package license agreements without
significant vendor obligations is recognized upon delivery of the software.
Contract terms may provide for billing schedules that differ from revenue
recognition and give rise to costs and estimated earnings in excess of billings
on uncompleted software contracts, and billings in excess of costs and estimated
earnings on uncompleted software contracts.

10. CUSTOMER CARE CENTER SERVICE AGREEMENT

ImproveNet entered into an agreement with a third party service provider to
operate and manage our customer care center including the home improvement
service provider matching operation. The agreement was effective on December 23,
2002, had a term of two years and was cancelable by ImproveNet with 90 days
written notice or by the service provider with 180 days written notice. The
agreement called for us to remit, on a weekly basis, 25% of collected revenues
related to the home improvement service provider matching function that the
service provider managed and operated. We were required to pay the service
provider an additional 2.5% of monthly revenues in excess of $400,000 but less
than $500,000 and an additional 5% of revenues greater than $500,000. In January
2004, the service provider provided written notice to us of termination of the
services agreement. We staffed our Scottsdale, Arizona offices for the customer
care call center operations, and in March 2004 we transitioned our customer
service operations in-house.

In March 2004, we initiated litigation in Nova Scotia, Canada against the
Canadian corporation that had been operating our customer care center and
operations for the home improvement service provider matching service to enforce
and protect our rights under the services agreement regarding our proprietary
material. During March 2004, the Canadian court entered an order prohibiting the
Canadian corporation from utilizing, in any way, ImproveNet's proprietary
materials and from soliciting or contacting any ImproveNet home improvement
service provider for a specified period of time, which expired in June 2004.

                                      F-16
<PAGE>

11. RELATED PARTY TRANSACTIONS

Research and development
------------------------
We subcontract a portion of our research and development to companies wholly
owned by two of our officers. We incurred costs of approximately $106,000 and
$102,000 relative to these subcontracted services for the years ended December
31, 2004 and 2003, respectively.

Credit card use
---------------
To facilitate payments to certain vendors, we utilize credit cards held
personally by certain of our executive officers. ImproveNet has agreed to
indemnify these officers from any obligations arising from the use of these
credit cards for ImproveNet's business.

12. RETIREMENT PLAN

Effective April 16, 1997, we adopted a 401(k) retirement plan. Employees are
eligible to participate in the plan after four (4) months of service. Salary
deferral may range from 1% to 15%. We match 100% of the amounts deferred by
employees, up to 6% of an employee's annual compensation. We did not match any
contributions during the years ended December 31, 2004 or 2003 relative to this
plan.

Effective November 1, 2003, we amended the 401(k) retirement plan. Subsequent to
November 1, 2003, we provide a 401(k) retirement plan, which allows
participating employees to elect to contribute up to 90% of their gross
compensation. The 401(k) plan is subject to certain government-mandated
restrictions which limit the amount of each employee's contribution. Employees
are eligible to participate 90 days after their date of hire. ImproveNet has not
made matching contributions under this plan during 2004 or 2003.

13. SUBSEQUENT EVENTS

Capital lease obligations
-------------------------
During the first quarter of 2005, we entered into various capital and operating
lease agreements for computers and computer equipment. A summary of future
minimum lease payments under these leases is as follows:

<TABLE><CAPTION>
                                                      Capital     Operating
                                                       Leases       Leases        Total
                                                     ----------   ----------   ----------
<S>  <C>                                             <C>          <C>          <C>
     2005 ......................................     $   12,986   $    6,401   $   19,387
     2006 ......................................         16,932        6,983       23,915
     2007 ......................................         16,932        6,983       23,915
     2008 ......................................         16,932          582       17,514
     2009 ......................................         14,058         --         14,058
     Thereafter ................................          3,371         --          3,371
                                                     ----------   ----------   ----------

     Total future minimum lease payments .......         81,211   $   20,949   $  102,160
                                                                  ==========   ==========
     Less:  amounts representing interest ......         26,002
                                                     ----------

     Present value of net minimum lease payments     $   55,209
                                                     ==========
</TABLE>
                                      F-17