<PAGE>   1

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   ----------

                                    FORM 10-K

(Mark One)

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

       For the fiscal year ended June 30, 2000.

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

       For the transition period from _____________ to ___________


                        Commission File Number: 000-28469

                               PET QUARTERS, INC.
             (Exact name of registrant as specified in its charter)



                Arkansas                                62-169-8524
    (State or other jurisdiction of        (I.R.S. Employer Identification No.)
     incorporation or organization)

         720 East Front Street
             Lonoke, Arkansas                             72086
 (Address of principal executive offices)              (Zip Code)

       Registrant's telephone number, including area code: (501) 676-9222

        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

   Common Stock, $.001 par value traded on the Over-the-Counter Bulletin Board

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 [ ]

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K ( Section 229.405 of this chapter) is not contained
herein, and will not 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-K or any amendment of this Form 10-K [X]

         On September 5, 2000 there were outstanding 19,957,648 shares of the
registrant's Common Stock, $.001 par value.

         The aggregate market value of the 9,293,855 shares of Common Stock held
by non-affiliates of the registrant as of September 5, 2000 was $10,019,937.42.

         DOCUMENTS INCORPORATED BY REFERENCE

         Not Applicable.


<PAGE>   2



PART I

Item 1.  Business.

                                   THE COMPANY
BACKGROUND

         General.

         Executive Offices. The Company's executive offices are located at 720
East Front Street, Lonoke, Arkansas 72086. The Company's telephone number is
(501) 676-9222.

                                    BUSINESS
GENERAL

OUR COMPANY

         OUR DEVELOPMENT. Pet Quarters, Inc. was incorporated on May 22, 1997,
under the laws of the State of Arkansas. Currently, our principal business is to
sell pet supplies over the Internet and through mail-order catalogs. We offer
over 7,500 items, or stock keeping units (SKUs), for pets on our web site, which
is located at www.allpets.com, and approximately 2,500 SKUs in each of our pet
catalogs, AllPets(R) and Dog's Outfitter(R).

STRATEGIC ACQUISITIONS

         Humboldt Industries. As of August 1, 1999, we acquired Humboldt
Industries Incorporated and its affiliated company, Maplewood Industries, Inc.,
for cash of $4.6 million and Pet Quarters common stock valued at $4.6 million.
Humboldt is a fulfillment company (i.e., a company which fulfills orders and
ships products purchased from Pet Quarters). Prior to the acquisition, Humboldt
circulated the mail-order pet catalogs that we now distribute. The acquisition
provided Pet Quarters with its in-house fulfillment operation (i.e., the ability
to fulfill orders and ship products directly to customers of Pet Quarters). In
addition to the fulfillment operation, Humboldt provided an existing base of
retail and wholesale customers, both domestically and internationally. Maplewood
circulates the Maplewood Crafts catalog and the Plastic Canvas catalog and
distributes a wide variety of craft kits and craft supplies, primarily to retail
consumers. Maplewood shares the Humboldt infrastructure, resources, and
associated costs. In this Form 10-K, we sometimes refer to Humboldt and
Maplewood collectively as the "Catalog Division."

         WeRPets.com, Inc. On April 27, 2000, we acquired all of the outstanding
equity securities of WeRPets.com, Inc. ("WeRPets") in exchange for 703,316
shares of Pet Quarters common stock. WeRPets is an emerging online pet-related
company that has developed strong relationships with The Health Network and
Galaxy.com (www.galaxy.com). WeRPets has an agreement to be the sole and
exclusive pet portal on www.galaxy.com and has the worldwide exclusive license
to selected content produced by The Health Network in HTML and streaming video
formats. Galaxy.com, a leading vertical Internet directory, provides fast,
contextually relevant searches of the Internet for numerous vertical markets,
including health, education, international, shopping, pets and more. The Health
Network is the first 24 hour-a-day cable channel dedicated to health care that
includes programming on animal care, behavior, and training provided by
veterinarians and other professionals. We believe that this acquisition
continues to strengthen our position in the Internet pet space and is an
integral step in our content-driven business strategy.


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<PAGE>   3


         Chartendure, Ltd. Effective May 1, 2000, we acquired Chartendure, Ltd.,
a company organized under the laws of the United Kingdom, for 400,000 shares of
Pet Quarters common stock. Chartendure has existing relationships with various
veterinary organizations and other pet professionals in the United Kingdom and
throughout Europe. Through these relationships, Chartendure will provide web
site content regarding pet care, feeding, and health issues for pet owners. We
intend to enter into contracts with these pet professionals to provide
continuous content for the web site. The agreement to acquire Chartendure for
400,000 shares of our common stock supercedes a prior agreement with the
principal shareholder of Chartendure that included a purchase price based upon
the accomplishment of certain milestones. The number of shares issued is less
than one-half of the shares that would have been issued if all milestones were
satisfied.

         AllPets.com, Inc. On May 30, 2000, we acquired AllPets.com, Inc.
through the exchange of 3,652,785 shares of Pet Quarters common stock for all of
the outstanding equity securities of AllPets. AllPets.com is a destination site,
providing in-depth content, robust community, and high quality commerce targeted
to the pet enthusiast. AllPets offers visitors its Petcyclopedia, an on-line
reference guide with over 1,400 articles covering all pet categories and a
bi-weekly magazine with approximately twenty new articles in each issue. AllPets
also offers users an on-line community, including message boards, chat rooms,
and an "Ask the Expert" feature, which allows pet owners to receive advice from
expert veterinary staff.


DOMESTIC PET PRODUCTS AND SERVICES INDUSTRY

         LARGE AND GROWING INDUSTRY. According to industry sources, Americans
spent approximately $23 billion on their pets in 1998, more than they did on
toys ($20.6 billion), on recorded music ($13.2 billion), or on books sold
through general retailers ($12 billion). Pets remain an integral part of family
life in the United States with 58 million, or 59%, of 98 million U.S. households
owning one or more pets. By 2001, the pet products and services industry is
expected to grow to $28.5 billion.

         PET OWNERSHIP BREAKOUT. The popularity of dogs and cats as pets in
America is unrivaled and continues to be the primary driver of the pet products
and services industry.

<TABLE>
<CAPTION>
                                   PET OWNERSHIP IN THE UNITED STATES
                                   ----------------------------------
                                                                   Total # of U.S.
                                   Total # of Pets   % of Total      Households        % of Total
                                     (Millions)         Pets         (Millions)        Households
                                   ---------------   ----------    ---------------     ----------
<S>                                <C>               <C>           <C>                 <C>
         Cats                            59               30             32               33
         Dogs                            53               27             36               37
         Fish                            56               28              6                6
         Birds                           14                7              5                5
         Rabbits & Ferrets                6                3              2                2
         Rodents                          5                3              2                2
         Reptiles                         4                2              1                1
                  TOTAL                 197              100%
</TABLE>

        Source: American Veterinary Medical Association

         Although the number of cats (59 million) surpasses the number of dogs
(53 million), four million more U.S. households own dogs than cats. According to
the Pet Industry Joint Advisory Council, virtually all dog owners purchase their
pets 1-5 packages of treats per month, 66% give their pets gifts, more than 50%
give their pets Christmas presents, and 25% give their pets birthday presents.


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<PAGE>   4


         FAVORABLE DEMOGRAPHIC TRENDS. Demographic trends suggest that the
recession-resistant pet products and services industry will continue to grow for
years to come.

         o        Continued Family Formation. Most pets are owned by families
                  with children between the ages of 5 and 15. Families with
                  children under 18 years old are projected to grow at a steady
                  pace over the next several years.

         o        Pet Ownership Increasingly Linked to Affluence. Furthermore,
                  the income distribution among pet-owning households is
                  increasingly skewed towards higher income brackets that can
                  afford to spend more on pet products. According to the
                  American Veterinarian Medical Association, 64.6% of households
                  with incomes of $60,000 or more own a pet.

<TABLE>
<CAPTION>
                  HOUSEHOLD INCOME                                  HOUSEHOLDS OWNING A PET
                  ----------------                                  -----------------------
<S>                                                                 <C>
                   Less than $12,500                                        47.80%
                   $12,500 to $24,999                                        55.6
                   $25,000 to $39,000                                        60.7
                   $40,000 to $59,999                                        64.8
                   $60,000 or more                                           64.6
</TABLE>

                  Source: The American Veterinarian Medical Association

         INCREASED CONSUMER SPENDING ON PETS. The $13 billion pet food segment
of the pet products and services industry breaks down into non-premium
supermarket brands and premium brands. Historically, the segment has been
dominated by supermarket brands such as Alpo, Kal Kan, and Purina, which
represent roughly 55% of all pet food supplies and are primarily sold through
grocery stores, convenience stores, and other mass merchant outlets. These
brands grow at a low single-digit annual rate, carry lower gross margins, and
are generally considered less nutritious than premium brands.

         Through the 1980s, the supermarket brands had relatively little retail
competition. Over the past five years, however, supermarket brands have lost
market share. Premium brands such as Iams, Nutro, and Science Diet, which were
generally not available through supermarkets or mass merchants due to
manufacturers' restrictions, have increased in popularity as consumers have come
to understand the importance of diet in ensuring their pets' health. Premium
brand sales have increased at a compound annual growth rate of approximately 18%
over the past five years and now account for an estimated 25% of the total pet
food segment.

         The Company believes that premium purchases have increased due to the
demographic trends previously discussed, growing concern for animal welfare and
nutrition, recommendations by veterinarians and breeders, and the increasing
availability and variety of premium pet food products. The Company believes that
as consumers focus on pet health and care, they tend to purchase more and higher
quality pet products and services. This trend has had a positive effect on the
$5 billion non-food pet products segment and the $6 billion pet services
segment. We do not currently offer pet food products directly, but we intend to
discuss the possibility of fulfilling pet food orders with third parties.

         Typically, pet products are purchased on impulse during a customer's
regular visit to purchase pet food, cat litter, or flea control products. Demand
for non-bulk products is less price sensitive than for pet food and other bulk
products. Consequently, non-bulk, non-food pet products are less frequently
discounted, resulting in higher gross margins. For this reason, the pet supply
industry has attracted strong interest from supermarkets, although due to space
constraints, supermarkets tend to carry a limited assortment of basic items such
as collars, dog chews, leashes, flea collars, and toys. Pet supply stores carry
a wider variety of these basic items and an assortment of other products such as
grooming products, pet carriers, cat furniture, doghouses, vitamins, treats, and
veterinary products.


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<PAGE>   5


         The pet services segment includes veterinary, boarding, grooming, and
training services. Approximately 92% of all households with dogs and 78% of all
households with cats seek veterinary care at least once a year, and veterinary
expenditures in the United States have grown at a 9.5% compounded annual growth
rate since 1991. Although pet services vendors generally enjoy high margins,
execution and liability concerns generally restrict the ranks of such vendors to
larger and more experienced specialty retailers.

INTERNET AND RETAIL E-COMMERCE TRENDS

         SURGING INTERNET USAGE. International Data Corporation ("IDC")
estimates that there were 97 million Web users worldwide at the end of 1998 and
anticipates this number will grow to approximately 320 million users by the end
of 2002. In addition to the increase in the number of users, both the frequency
of use and the amount of time spent online have grown significantly. In 1998,
nearly 60% of all online households accessed their online service at least once
a day, increasing from only 35% the previous year. Industry observers believe
that this trend will continue in the future as more people use the Internet as a
source of information and news and as a convenient "virtual" marketplace in
which to conduct a wide variety of retail purchases.

         The rapidly increasing popularity of Internet usage among a broad range
of age groups and demographic profiles is self-evident. From online news
services and government databases to online bookstores and brokerage firms, the
Internet is now a permanent fixture in the economic and social landscape of the
United States. Although the PC is expected to remain the core means of Internet
access, Intelliquest predicts that by 2000 alternative means of Internet access
will be the driving force of growth. Currently, an estimated 3.7 million people
use a handheld computer to go online, while 3.1 million access the Internet via
a TV-set-top box or WebTV.

         RETAIL E-COMMERCE. According to a study released by the University of
Texas Center for Research in Electronic Commerce on June 10, 1999, the Internet
economy in 1998 generated revenues of $301.4 billion in the United States. The
study, commissioned by Cisco Systems, estimates that of the overall figure,
approximately one third, or $101 billion, can be attributed to e-commerce, with
much of the balance attributed to infrastructure and applications. Between 1995
and 1998, the Internet economy grew by 174.5%, compared with a worldwide
economic growth rate of 3.8% during the same period. Finally, the study shows
that a large part of Internet growth can be attributed to the transfer of
existing economic activity to the Internet rather than the creation of totally
new Internet activities.

         Although estimates vary, the Yankee Group projects the U.S. consumer
segment of e-commerce to grow to $10 billion by 2000 while IDC forecasts $26.8
billion -- there is a consensus that the Internet e-commerce channel will be a
substantial component of both consumer-to-business and business-to-business
transactions in the future. According to Forrester Research, the total value of
goods and services purchased over the Internet is expected to increase to $1.3
trillion in 2003.

         We believe that growth in Internet usage and e-commerce is being fueled
by a number of factors including:

         o        A large and growing installed base of personal computers in
                  the workplace and home;

         o        Advances in the performance and speed of personal computers
                  and modems;

         o        Improvements in network security, infrastructure, and
                  bandwidth


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<PAGE>   6


                  (including the development of high-speed connectivity options
                  for Internet users);

         o        Easier and cheaper access to the Internet; and

         o        The rapidly expanding availability of online content and
                  commerce sites.

         An April 1999 study by Greenfield Online found that 39% of U.S.
Internet users spend less time shopping in offline stores and malls than on the
Internet. This finding is significant because Americans with Internet access
account for 60% of the total consumer buying power in the United States. An
April 1999 study by ActivMedia showed the online premium specialty goods market
is flourishing, with the majority of premium specialty goods sites already
operating at a profit. The study found that the revenue generated by sites
specializing in items such as gourmet food, personal care, and branded consumer
products is rising steadily. Sales in 1999 are expected to increase tenfold over
1998, while sales in 2000 are expected to be four times greater than in 1999.

         The unique characteristics of the Internet provide a number of
advantages for online retailers. Online retailers are able to "display" a larger
number of products than traditional store-based or catalog retailers at a lower
cost. In addition, online retailers are able to frequently adjust their featured
selections, editorial content, shopping interfaces, and pricing, providing
significant merchandising flexibility. The minimal cost to publish on the
Internet, the ability to reach and serve a large and global group of customers
electronically from a central location, and the potential for personalized
low-cost customer interaction provide additional economic benefits for online
retailers. Unlike traditional retail channels, online retailers do not have the
burdensome costs of managing and maintaining a retail store infrastructure or
the significant printing and mailing costs of catalogs. Online retailers can
also easily obtain demographic and behavioral data about customers, increasing
opportunities for direct marketing and personalized services.

OUR BUSINESS STRATEGY

         Our primary objective is to become a leading seller of pet products and
supplies to both consumers and pet professionals through our web sites and
mail-order catalogs. To achieve this goal, we intend to provide our customers
with an efficient, low cost, and value-added shopping experience. Key elements
of our business strategy include:

         Authoritative Content. We believe that Pet Quarters' ultimate success
depends upon our ability to enrich our customer's shopping experience by giving
them access to authoritative information on a variety of pet issues. Through
strategic relationships with leading pet professional organizations and other
authoritative sources of pet-related information, we intend to offer visitors to
our web site the most authoritative and useful advice available.

         Strategic Acquisitions. An integral part of our business development
has been the acquisition of businesses that can add value to our existing
organization or satisfy another element of our business strategy. Below is a
list of acquisitions we have completed to date and a brief description of its
addition to the Company or our business plan.

         o    Humboldt Industries - provided the Company with an in-house
              fulfillment center and a base of consumer and professional catalog
              customers

         o    Chartendure - provided relationships with leading pet
              professionals and professional organizations in Europe to provide
              authoritative content for our website


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<PAGE>   7


         o    WeRPets - added exclusive content and networking possibilities
              through strategic relationships with The Health Network and
              Galaxy.com

         o    AllPets - contributed in-depth content and an existing community
              of pet owners and enthusiasts

         We continue to explore acquisition opportunities that would provide us
with additional content, customers, or new technology.

         Strategic Relationships. We currently have strategic relationships with
The Health Network, Galaxy.com, and many pet professionals, including
veterinarians, throughout the United States and Europe. These relationships
provide content for our website, product and other advice, and sales referrals.
We intend to maintain and expand these relationships and to build new
relationships as opportunities arise. We continually seek to form strategic
relationships that will increase our access to online customers, build brand
recognition, and expand our online presence.

         Superior Customer Service. Through our in-house fulfillment and
distribution system, we are able to accurately fill orders and quickly and
efficiently ship products. In addition, we offer customers a complete in-house
service department which can effectively respond to customer inquiries. By
having these operations in-house, we can control costs, improve profit margins,
and provide higher quality customer service. We believe these attributes will
lead to greater customer satisfaction and retention.

         Wholesale (Business-to-Business) Sales. We currently sell products to
pet professionals on a wholesale basis, primarily through our Dog's Outfitter(R)
catalog. We have expanded these sales through development of a separate web
site, www.dogsoutfitter.com, where wholesale customers can purchase products,
exchange information, and access important and useful industry data. We believe
that the wholesale pet segment is largely ignored by competitive internet
retailers. By offering pet professionals convenient wholesale shopping and
authoritative information, we expect to gain consumer referrals to our
allpets.com web site and secure valuable endorsements from the professional
community.

         International Sales. We currently sell our products to consumers and
pet professionals internationally, primarily through our Dog's Outfitter(R)
catalog. Approximately 2.5% of our sales in fiscal 1999 occurred outside of the
United States. As our brand expands and through the relationships we have
developed with the acquisition of Chartendure Ltd., we intend to grow our
international sales to take advantage of the global marketplace afforded
internet supply companies.

OUR PROPERTY

         REAL PROPERTY. The Company is headquartered in Lonoke, Arkansas. The
Lonoke facility is located at 720 East Front Street and includes a single
building of approximately 50,000 square feet of warehouse and distribution space
and 5,000 square feet of office space. This property had an appraised value of
$975,000 as of October 1997, and has an outstanding lien in the amount of
$429,989. In April 2000, we entered into an agreement to sell the property for
$560,000. The offer expired on September 1, 2000. The Company is pursuing other
options concerning the sale of the facility. The Company expects to sell these
assets at their current book value. After the merger of the company's operations
at the Hazelton, Pennsylvania property, we decided the sale of the Arkansas
property for cash was more important to the Company than continuing to own the
facility, given the need for working capital. The proceeds from this sale will
be used to reduce debt and for working capital purposes.

         Our Hazelton, Pennsylvania, distribution center is the primary
fulfillment center and includes a call center, order processing, a catalog
design department, and a warehouse operation which stocks more


                                       7
<PAGE>   8


than 14,000 separate SKUs. The Hazelton facility includes an office and
warehouse facility of approximately 63,500 square feet and is located on a
10-acre site. The July 31, 1999 acquisition of Humboldt Industries did not
include acquisition of the Hazelton facility or the ten acres of property
associated with it. Rather, Pet Quarters currently leases these facilities and
owns an option to purchase the building and the ten (10) acre site which expires
on August 5, 2004. At this facility, the Company employs approximately 80
persons including telemarketers, warehouse personnel, customer service
representatives, accounting, purchasing, technology, marketing, and
merchandising staff.

         Our California office is located in the Historical District of downtown
Los Angeles. We currently lease approximately 2,700 square feet of office space.
At this location, the majority of our web site content is created and managed.

         The properties described above are the only properties owned or leased
by the Company. The Company currently has no plans to purchase or lease
additional properties, and intends to expand the Hazelton, Pennsylvania facility
before investing in new properties. Management of the Company believes that all
properties are adequately insured against casualty and risk.

<TABLE>
<CAPTION>
                                                     AREA IN SQUARE FEET
                                                   -----------------------
           PROPERTY LOCATION          ACREAGE      OFFICE/RETAIL    WAREHOUSE
           -----------------          -------      -------------    ---------
<S>                                   <C>             <C>             <C>           <C>
I.       California Facilities           0            2,700                0     (Leased)
II.      Arkansas Facilities            10            5,000           50,000
III.     Pennsylvania Facilities        10            8,500           50,000     (Leased)
</TABLE>

INTELLECTUAL PROPERTY

         We have received Federal Trademark registration from the U.S. Patent
and Trademark Office for "Pet Quarters.com" and "PQ" and have applied for
various other brand names, and associated logos. We also own or license several
other state and federal trademarks used by our strategic acquisitions, including
"AllPets.com," "Dog's Outfitter," and "Home Pet Shop." Our competitors or others
may use these marks or marks similar to ours, which could impede our ability to
build brand identity and could lead to customer confusion. In addition, there
could be potential trademark or trademark infringement claims brought by owners
of other registered trademarks or trademarks that incorporate variations of the
terms used in trademarks we own or use. Any claims or customer confusion related
to our trademarks, or our failure to obtain trademark registration, would
negatively affect our business. In addition, the laws of some foreign countries
do not protect our proprietary rights to the same extent as do the laws of the
U.S., and effective copyright, trademark, and trade secret protection may not be
available in such jurisdictions. Our efforts to protect our intellectual
property rights may not prevent misappropriation of our content. Our failure or
inability to protect our proprietary rights could substantially harm our
business.

Item 3.  Legal Proceedings.

         Not Applicable.


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


         No matters were submitted to a vote of shareholders during the fourth
quarter of fiscal year 1999.


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PART II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters.


                                  COMMON STOCK


<TABLE>
<CAPTION>
                                                             HIGH                     LOW
                                                             ----                     ---
<S>                                                          <C>                    <C>
         FISCAL 1999
         First Quarter.......................                1-11/16                  11/32
         Second Quarter......................                2                         6/32
         Third Quarter.......................                1-13/16                   9/16
         Fourth Quarter......................                4-19/32                   7/8

         FISCAL 2000
         First Quarter.......................                6-9/16                    2-15/16
         Second Quarter......................                3-11/32                   1
         Third Quarter.......................                5-19/32                   2-21/32
         Fourth Quarter......................                3-27/32                   1-7/32
</TABLE>


                          DESCRIPTION OF CAPITAL STOCK

         Pet Quarters is authorized to issue forty million (40,000,000) shares
of common stock par value $0.001 per share and ten million (10,000,000) shares
of preferred stock par value $0.001 per share. The voting powers, designations,
and preferences of the preferred stock may be fixed by the board of directors.

COMMON STOCK

         Each share of Common Stock entitles the holder thereof to one vote for
each share on all matters submitted to the stockholders. The Common Stock is not
subject to redemption or to liability for further calls. Holders of Common Stock
will be entitled to receive such dividends as may be declared by the Board of
Directors of Pet Quarters out of funds legally available therefore and to share
pro rata in any distribution to stockholders. The stockholders have no
conversion, preemptive, or other subscription rights. Shares of authorized and
unissued Common Stock are issuable by the Board of Directors without any further
stockholder approval.

PREFERRED STOCK

         The Board of Directors is authorized, without further action by the
stockholders, to issue, from time to time, shares of Preferred Stock in one or
more classes or series and to fix the designations, voting rights, liquidation
preferences, dividend rights, conversion rights, rights and terms of redemption
(including sinking fund provisions), and certain other rights and preferences of
the Preferred Stock. The issuance of shares of Preferred Stock under certain
circumstances could adversely affect the voting power of the holders of Common
Stock and may have the effect of delaying, deferring, or preventing a change in
control of the Company.

         On May 9, 2000, Pet Quarters designated 50,000 shares of preferred
stock as Series A Convertible Preferred Stock, with the following terms, rights,
and privileges:

         (a) Dividends. The holders of the Shares are not entitled to receive
dividends from the Company.


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<PAGE>   10

         (b) Liquidation. Upon any liquidation, dissolution, or winding up of
the Company, whether voluntary or involuntary, the holders of the Series A stock
shall be entitled, before any distribution or payment is made upon any shares of
any other class of stock of the Company, to be paid $100 per share.

         (c) Redemption. Subject to certain conditions and one year after the
initial date of issuance, the Series A stock may be redeemed (all or none) by
the Company upon the payment in cash of the sum of One Hundred Dollars ($100).

         (d) Conversion. At any time, holders of the Series A stock may convert
all or a portion of those shares into a number of shares of common stock,
computed by multiplying the number of shares to be converted by $100 (the
purchase price of the Series A stock) and dividing the result by the conversion
price. The conversion price is equal to $1.3816. The conversion price may be
adjusted from time to time to account for any stock splits, stock dividends,
recapitalizations, mergers, assets sales, a below market issuance of common
stock, or similar events.

TRANSFER AGENT

         The Company has appointed Continental Stock Transfer Corporation as the
transfer agent and registrar of the Common Stock and Preferred Stock.



                                       10
<PAGE>   11


Item 6.  Selected Financial Data.

                             SUMMARY FINANCIAL DATA


<TABLE>
<CAPTION>
                                                           Fiscal Year Ended
                                                 2000            1999            1998
                                             ------------    ------------    ------------
<S>                                          <C>             <C>             <C>
STATEMENT OF OPERATIONS DATA:
Net sales                                    $ 13,731,147    $    262,470    $     43,835
Gross profit                                    4,284,747          56,696          21,927
Total operating expenses                       12,849,848       1,114,966         855,119
Operating loss                                 (8,565,101)     (1,058,270)       (833,192)
Net loss                                      (11,318,087)     (1,052,265)       (816,179)
Net loss per common stockholders              (14,718,087)     (1,052,265)       (816,179)
Basic and diluted net loss per share                (1.18)          (0.09)          (0.10)
Weighted average shares outstanding
used to compute basic and diluted net
loss per share                                 12,482,101      11,453,000       8,568,125

Total assets                                   21,846,952       1,042,285       1,489,059
Notes payable, capital leases and
convertible debenture                           1,951,877         325,000             -0-
Total stockholders' equity                     16,444,458         501,278       1,042,285
</TABLE>


         The sales increase from 1999 to 2000 is primarily the result of the
purchase of Humboldt Industries in August 1999 and a substantive increase in
revenues generated over the Internet. Additionally, the Company purchased
WeRPets.com in April 2000, Chartendure Ltd. in May 2000 and AllPets.com in May
2000. These acquisitions resulted in significant non-cash and non-recurring
expenses.

Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations.

         The following discussion and analysis contains some forward-looking
statements which are based upon the plans, goals, and objectives of Pet Quarters
and its management. Such statements are subject to various risks and
uncertainties, including the inability to access financing. We have various
loans outstanding, which are due upon demand and could require additional
infusions of capital if one or more lenders called the loans for payment. Our
longer-term development plans also require additional capital for completion.
Consequently, the reader should consider that such uncertainties and risks may
cause actual results to vary materially from those stated plans, goals, and
objectives outlined below.

Balance Sheet Data as of June 30, 2000 Compared to June 30, 1999

         Assets. The total assets as of June 30, 2000 were $21,846,952 as
compared to $1,042,285 as of June 30, 1999. Assets attributed to the Internet
segment were $13,697,272 and $8,149,680 to catalog operations. Most of the
increase resulted from the purchase of Humboldt Industries in August 1999. We
had current assets of $3,302,340 including cash of $164,128 and inventories of
$1,674,002 as of June 30, 2000 as compared to current assets of $76,413
including cash of $37,726 and inventories of $33,783 as of June 30, 1999. The
Company is pursuing the sale of the Arkansas facility. These assets are
reflected as Land and Building held for sale in the amount of $500,000. The
Company recorded an expected loss on sale of $400,000 during the quarter ended
March 31, 2000.


                                       11
<PAGE>   12


         Long-term fixed assets include land, building and improvements, and
furniture and fixtures. The items total $513,871 net of accumulated depreciation
as of June 30, 2000 as compared to $935,487 net of accumulated depreciation as
of June 30, 1999. On April 14, 2000 we accepted an offer to sell the facility in
Lonoke, Arkansas for $560,000 before expenses and commissions. The offer expired
on September 1, 2000. The Company is pursuing other options concerning the sale
of the facility and the Company expects to sell these assets at their current
book value. The purchase of Humboldt Industries has eliminated the original
purpose of the facility and we believe it is in the best interest of
shareholders to increase our cash reserve or eliminate or reduce debt
outstanding with a sale.

         Goodwill, net of accumulated amortization, was $17,524,514 as of June
30, 2000. The goodwill results from the purchases of Humboldt Industries,
WeRPets.com, Chartendure Ltd., and AllPets.com, Inc. Currently, we are
amortizing the purchases on a five-year, three-year, two-year, and three-year
schedules, respectively. There was no corresponding entry from the prior period.

         Intangible assets in the amount of $506,227 include capitalized costs
associated with our website. We anticipate website design and development costs
will continue and will be capitalized in conformity with generally accepted
accounting principles and Statement of Position (SOP) 98-1.

         Liabilities. Liabilities totaled $5,402,494 as of June 30, 2000. Total
liabilities as of June 30, 1999 were $541,007. Current liabilities include
accounts payable of $2,904,205 as of June 30, 2000 as compared to $203,394 as of
June 30, 1999. Our accrued expenses increased to $546,412 as of June 30, 2000
from $12,613 at June 30, 1999. The increases are primarily the result of the
acquisitions during the past fiscal year.

         During the year, we borrowed $4,600,000 from the Sun Valley Trust. The
principal balance increased to $4,830,000 in November 1999. The principal was
reduced in February 2000 by $1,000,000 payment and the $3,830,000 remaining
balance of the obligation to the Sun Valley Trust was due in full on May 10,
2000. On May 9, 2000 the remaining balance to the Sun Valley Trust was retired
by the payment of $2,421,500 and the conversion of the remaining balance to
convertible preferred stock.

         At June 30, 2000, the Company had related party debt in the amount of
$615,178, capital leases in the amount of $296,699 and other unsecured debt in
the amount of $90,000. Additionally, after the end of the fiscal year ended June
30, 2000 the Company secured a line of credit in the amount of $950,000. This
line of credit is secured with the assets of PQ Acquisition common stock, which
holds the assets of Humboldt Industries. A portion of this line of credit has
been used to retire the capital leases in the Pennsylvania facility.

         The current portion of capital leases and notes payable in the amount
of $260,936, a portion of which is secured by telephone hardware and computer
equipment in the Pennsylvania facility. After the end of the fiscal year ended
June 30, 2000 these capital leases were paid off in full.

         On May 5, 2000 the Company borrowed $1,000,000 from AMRO International
through a convertible debenture. The debenture carries an interest rate of 6%.
The debenture can be converted into Pet Quarters, Inc. common stock at the
option of AMRO International. The proceeds of the debenture were used in the
payoff of the Sun Valley Trust note. The debenture matures on November 5, 2000.

         Stockholders Equity. Common shares increased from 9,800,195 as of June
30, 1999 to 18,147,783 as of June 30, 2000. The increase in shares outstanding
reflects the issuance to investors of private placements offered by Pet
Quarters, Inc., the issuance of shares to purchase Humboldt Industries,
WeRPets.com, Chartendure Ltd., AllPets.com, and the granting of shares to Pet
Quarters, Inc. officers and employees. Additionally, we raised $3,464,200
through the issuance of preferred shares in May 2000.


                                       12
<PAGE>   13


The preferred shares carry an interest rate of 0% and are convertible into Pet
Quarters, Inc. common shares at $1.3816. Additional Paid In Capital increased
from $2,498,867 as of June 30, 1999 to $33,109,661 as of June 30, 2000. The
acquisitions of Humboldt Industries, WeRPets.com, Chartendure Ltd., and
AllPets.com produced the largest part of the increase from 1999 to 2000.
Retained deficit increased to $16,586,531 in June 30, 2000 from $1,868,444 on
June 30, 1999. Total stockholders equity as of June 30, 2000 was $16,444,458 as
compared to $501,278 as of June 30, 1999.

         Total liabilities and stockholders equity was $21,846,952 and
$1,042,285 as of June 30, 2000 and June 30, 1999 respectively.

RESULTS OF OPERATIONS FOR THE TWELVE MONTHS ENDED JUNE 30, 2000 COMPARED WITH
THE TWELVE MONTHS ENDED JUNE 30, 1999

         Sales. Sales for the twelve months ended June 30, 2000 were $13,731,147
as compared to $262,470 for the twelve months ended June 30, 1999 primarily as a
result of the acquisition of Humboldt Industries. Catalog sales for fiscal 2000
were $13,080,388 and $650,759 were Internet sales. The sales for 2000 include
catalog sales of Humboldt Industries for eleven months and Pet Quarters, Inc.
for twelve months. All sales in the period ended June 30, 1999 were Internet
sales.

         Operating Expenses. Cost of sales was $9,446,400 for the twelve months
ended June 30, 2000 as compared to $205,774 for the same period in 1999, which
was 69% percent of sales in 2000 and 78% percent in 1999. Selling expenses
increased to $2,184,748 for the period ending in 2000 as compared to $489,272
during the same period in 1999. The increase was primarily the result of catalog
costs resulting from the acquisition of Humboldt Industries on August 1, 1999.
General and administrative expenses were $8,545,016 during the twelve months
ended June 30, 2000 as compared to $588,870 during the same period in 1999. The
increase is attributed to the purchases of Humboldt Industries, WeRPets.com,
Chartendure Ltd., AllPets.com and the expense associated with the acquisition
Wellstone Acquisition Corporation that totaled $782,453. In March 2000, we
recorded a write-down of the land and building in Lonoke, Arkansas in the amount
of $400,000. We intend to sell the warehouse and office space in Lonoke,
Arkansas, and the write-down was based on the difference between the book value
of the property and the cash value management believes the Company will receive
after a sale. Depreciation and amortization increased to $2,120,084 in 2000 from
$36,824 in 1999. This increase includes the amortization of goodwill related to
the purchases of Humboldt Industries, WeRPets.com, Chartendure Ltd., and
AllPets.com.

         Interest Expense. Interest expense increase to $770,866 for the twelve
months ended June 30, 2000 as compared to $290 for the same period in 1999. The
increase is entirely related to the Bridge Loan for the purchase of Humboldt
Industries through the Sun Valley Trust (Bridge Loan), the convertible debenture
and other debt issued for working capital purposes. The Bridge Loan was retired
in full on May 9, 2000.

         Other Expenses. Pet Quarters incurred other expenses associated with
the Bridge Loan during the twelve month period ended June 30, 2000, including
loan origination fees in the amount of $651,671 and troubled debt restructuring
expense in the amount of $1,339,461. There were no corresponding expenses in
1999.

         Net Loss. Net Loss for the twelve months ended June 30, 2000 was
$11,318,087 as compared to a loss of $1,052,265 for the same period in 1999. The
loss from operations totaled $8,565,101 in 2000 (which included $6,676,943 from
the Internet and $1,888,158 from the catalog) compared to a loss from operations
of $1,058,270 in 1999, all in Internet. The loss for the twelve months ended
June 30, 2000 was impacted by non-cash items including amortization of the
goodwill on the acquisitions of Humboldt Industries, WeRPets.com, Chartendure
Ltd., AllPets.com, expense for stock awards and options granted,


                                       13
<PAGE>   14


the expense of the common stock issued for the Bridge Loan extension, the
beneficial conversion feature associated with the convertible notes issued in
November 1999 and the convertible preferred stock issued in May, the purchase of
Wellstone Acquisition Corporation and the write-down of the facility in
Arkansas.

RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED JUNE 30, 1999 COMPARED WITH
FISCAL YEAR ENDED JUNE 30, 1998

         General. The period ending June 30, 1998 contains all of the costs
associated with a start up Internet company for a full year; however,
Pet Quarters was a fully operating entity for approximately the last two months
of that fiscal year. The primary reason is that the Pet Quarters website was not
fully operational until May 1998.

         Sales. Sales for the year ended June 30, 1999 were $262,470 compared to
$43,835 in fiscal 1998. The Company believes that the Christmas season will
typically provide revenues that are significantly higher in the December quarter
than at other times of the year. The Company experienced a large increase in
order flow during the Christmas season of 1998 in comparison to the other
quarters during the year.

         Operating Expenses. Cost of sales was $205,774 for 1999 and $21,908 for
1998. The Company operated on a 22% margin in fiscal year 1999. This compares to
50% for 1998. The selling expenses were $196,497 in 1998 and $489,272 in 1999
and primarily consisted of both web-based and traditional publications, with web
sites and advertisers making up the bulk of the selling expenses. The increase
for fiscal year 1999 from fiscal year 1998 reflected increased operating
activity in 1999 versus 1998. General and administrative expenses for fiscal
1998 were $647,114 and $588,870 in 1999. The expenses included salaries, general
expenses, professional fees for legal and accounting, travel, website
maintenance and other miscellaneous expenses. The slightly higher amount
recorded in 1998 is primarily due to the one-time start up cost of the business.
During fiscal year 1998, the Company recorded depreciation and amortization on
office equipment, computer and telephone equipment, warehouse equipment, and the
Lonoke, Arkansas facility. Similar items were depreciated in fiscal year 1999.
The largest depreciable asset of Pet Quarters during both years is the facility
in Lonoke, Arkansas. The building is being depreciated on a forty-year life.

         Net Loss for Common Stockholders. The loss in fiscal year 1998 of
$816,179 increased to a loss in fiscal year 1999 of $1,052,265, resulting
largely from the increase in selling expenses.

Liquidity and Capital Resources

         At June 30, 2000, we had $164,128 in cash and cash equivalents. Since
our inception, we have financed our operating cash flow needs primarily through
private offering of equity securities and debt. Cash utilized in operating
activities was $2,808,398 for the twelve months ended June 30, 2000 and $649,731
for the year ended June 30, 1999.

         Net cash utilized in investing activities was $4,245,692 for the twelve
months ended June 30, 2000 and $11,386 for the year ended June 30, 1999. The use
of cash for investing activities was primarily attributed to the purchase of
Humboldt Industries, the purchase and development of the web site, and purchases
of equipment.

         Net cash provided by financing activities was $7,180,492 for the twelve
months ended June 30, 2000. During the twelve months, we raised $2,642,605 from
the issuance of common stock. Net cash provided by financing activities was
$323,000 for the year ended June 30, 1999, which was primarily attributed to
borrowings. In May 2000 we raised $2,055,300 in cash through the issuance of
34,642


                                       14
<PAGE>   15


shares of our Series A Convertible Preferred Stock. Additionally, $1,408,500 of
principal was converted from the Bridge Loan into the Series A Convertible
Preferred Stock.

         In August 1999, we borrowed $4,600,000 from the Sun Valley Trust and
issued 153,334 shares of our common stock to the Trust as an origination fee for
such loan, which related to the acquisition of Humboldt Industries. Much of the
cash provided from financing activities was used to repay the Bridge Loan, which
was fully retired in May, 2000. The remaining cash from financing activities was
used for working capital purposes.

         We expect negative cash flow from operations to continue until revenues
are increased. We believe an increase in revenues will be accomplished through
increased traffic to our web site and through an increase in catalog sales.

         We currently expect that the net proceeds from the equity line of
credit, together with our available funds will be sufficient to meet our
anticipated needs for working capital and capital expenditures through the next
two years, however there can be no guaranties that this will occur. We may need
to raise additional funds prior to the expiration of such period if, for
example, we pursue business or technology acquisitions or experience operating
losses that exceed our expectations. If we raise additional funds through the
issuance of equity or debt securities, such securities may have rights,
preferences, or privileges senior to the rights of our common stock, and our
stockholders may experience additional dilution. We cannot be certain that
additional financing, when required, will be available to us on acceptable
terms, or at all.


Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.

         The debt instruments of Pet Quarters, excluding capital leases,
convertible debt and preferred stock, are notes, a secured line of credit, and a
variable note, which carry market rates of interest. A change in the interest
rate of any of these notes will not in the judgment of management create a
material change or risk in the business of the Company.


Item 8.  Financial Statements and Supplementary Data.

<TABLE>
<CAPTION>
                       Q1 2000       Q2 2000       Q3 2000       Q4 2000       Q1 1999       Q2 1999       Q3 1999       Q4 1999
                     -----------   -----------   -----------   -----------   -----------   -----------   -----------   -----------
<S>                  <C>           <C>           <C>           <C>           <C>           <C>           <C>           <C>
Net sales              2,510,752     3,688,148     3,674,670     3,857,577        58,455        80,403        65,202        58,410
Gross profit             832,545     1,253,203     1,043,034     1,155,965        24,941        24,055        22,833       (15,133)
Net loss              (1,260,360)   (2,742,323)   (3,451,996)   (3,863,408)     (194,161)     (150,712)     (181,684)     (525,708)
Preferred stock
   deemed dividend            --            --            --    (3,400,000)           --            --            --            --
Net loss per share         (0.12)        (0.24)        (0.28)        (0.54)        (0.02)        (0.01)        (0.02)        (0.04)
</TABLE>


Item 9.  Changes in and Disagreements with Accountants on Accounting and
         Financial Disclosure.

         None.


                                       15
<PAGE>   16


PART III

Item 10.  Directors and Executive Officers of the Registrant.


                                   MANAGEMENT

DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS

         The following table gives certain information regarding directors,
executive officers, promoters, and central persons of the Company as of June 1,
2000:

<TABLE>
<CAPTION>
              Name                        Age           Position
              ----                       -----          --------
<S>                                       <C>           <C>
              Steven Dempsey              44            Chairman and CEO
              Niloo Howe                  31            President
              Mike Kelly                  37            Executive Vice President
              Gregg Rollins               42            Chief Financial Officer and Secretary
              Robert M. Brown, III        53            Director
              Frank Creer                 36            Director
              J. Tod Fetherling           35            Director
              Dino Moshova                37            Director
              Jerrell W. Shelton          54            Director
              Judith Patterson            57            Manager
</TABLE>


         The information set forth below identifies the principal occupation and
activities of the directors and executive officers during the past five years:

         MR. STEVEN DEMPSEY has served as President and Chief Executive Officer
of the Company since May 1998. He was a vice president of Sales and Marketing at
PaineWebber, Inc., between February 1989 and November 1997. Mr. Dempsey was
appointed a director in June 1998. Mr. Dempsey graduated from Hendrix College in
1978 with a Bachelor of Arts degree with an emphasis on economics.

         MS. NILOO HOWE currently serves as President of the Company and has
held that position since June 2000. Prior to joining the Company, Ms. Howe was
CEO and President of Allpets.com, Inc. from June 1999 to June 2000. From July
1996 to June 1999, Ms. Howe was an Associate and Manager with McKensey &
Company, a management consulting firm, where she provided strategy, marketing,
and change management services to various clients. Ms. Howe was a corporate and
entertainment attorney with O'Melveny & Meyers LLP from January 1995 to May
1996. Ms. Howe received her law degree from Harvard Law School and her Bachelor
of Arts from Columbia College.

         MR. MIKE KELLY is currently an Executive Vice President and has been
employed since September 1, 1999. Mr. Kelly was a Vice President/General Manager
with Sporting Dogs Specialties (PetSmart Direct) between April 1987 and April
1998, and Vice President of Home Trends from April 1998 until August 1999. Mr.
Kelly graduated from Rochester Institute of Technology in 1986.

         MR. GREGG ROLLINS has been employed as the Chief Financial Officer of
the Company since April 1999. Mr. Rollins was a senior vice president with
Leiblong Associates from 1998 until April 1999 and was an account vice
president, assistant manager, and sales manager with Paine Webber between


                                       16
<PAGE>   17


1988 and 1998. Mr. Rollins graduated from Oklahoma Baptist University with a
degree in Business Administration in 1980.

         MR. ROBERT M. BROWN, III is a New York-based investment banker and
private investor. Mr. Brown is a former managing director of Lehman Brothers,
where he worked from 1978 to 1994. In 1995 he joined Creditanstalt Investment
Bank ("CAIB") of Austria. In 1998, Mr. Brown left CAIB and formed B-III Capital
LLC for which he serves as Chairman and President. He is a founder and Chairman
of Web of Care.com, Inc., an Internet-based home healthcare community and
e-commerce enterprise. Mr. Brown holds a B.A. in Economics from Carnegie Mellon
University and an M.B.A. from the University of Michigan. He is a trustee and
member of the investment committee of Carnegie Mellon University.

          MR. FRANK CREER, a director of the Company since July, 2000, is
managing partner in the venture capital firm Zone Ventures, L.P. Prior to
joining Zone Ventures in 1998, Mr. Creer was a partner in Wasatch Venture Fund
from June, 1994 to April, 1998. Mr. Creer has a Bachelor of Science degree in
University Studies with a Finance and Entrepreneurial emphasis from the
University of Utah.

         MR. J. TOD FETHERLING, a director of the Company, is CEO of Galaxy,
Inc., an internet search engine. Mr. Fetherling served as President of
AHN.com/the Health Network, an internet e-Health company from April, 1998 to
May, 2000. Mr. Fetherling was Interactive Manager of Brown-Forman, a distributor
of distilled spirits from November, 1998. Mr. Fetherling was Interactive Manager
of Columbia/HCA from December, 1994 to November, 1997. Mr. Fetherling served as
Practice Manager of Jewish Hospital from March, 1993 to December, 1994. Mr.
Fetherling received a Bachelor of Science in Business Administration from the
University of Tennessee.

         MR. DINO MOSHOVA is a Director of the Company and has been a director
since inception. Mr. Moshova currently serves as a consultant to the Company,
providing technology services related to the Company's website. Mr. Moshova has
operated Moonbark Web Designer since September 1997. From September 1984 until
September 1997, Mr. Moshova owned and operated Leisure Video of New York. Mr.
Moshova graduated from Fordham University.

         MS. JUDITH PATTERSON was the Vice President of Operations for Humboldt
Industries, Inc. from July 1986 until May 2000 and is currently a Manager in the
catalog division. From 1981 until July 1986, Ms. Patterson was Operations and
Distribution Manager for Doskocil Manufacturing Company, the leading
manufacturer of in-flight kennels in the world.

         MR. JERRELL W. SHELTON is an information/publishing executive with over
30 years of business experience in all phases of information/publishing,
manufacturing, services and telecommunication industries. For the last 18 years,
he has functioned as Chief Executive Officer of public and private companies of
international scope. Most recently, Mr. Shelton was the CEO of NDC Holdings,
Inc., the fourth largest independent yellow pages publisher in the United
States, and a holding of Three Cities Research. Prior to NDC, Mr. Shelton was
CEO of Continental Graphics Holdings Inc., an Apollo Partners holding, with
operations in specialized information processing, information/publishing
products, engineering support services, imaging services and networks, and
motion picture film processing. Previously, Mr. Shelton was CEO of The Thomson
Business Information Group (TBIG) of the Thomson Corporation. Mr. Shelton holds
a Bachelor of Science in Business Administration from the University of
Tennessee and a Masters of Business Administration from Harvard University.


                                       17
<PAGE>   18


Item 11.  Executive Compensation.

EXECUTIVE COMPENSATION

         The following table sets forth all compensation paid by Pet Quarters
for services rendered by our Chief Executive Officer and our three other highest
paid executive officers during the last three fiscal years:

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                       LONG-TERM COMPENSATION
                                                                                                      SECURITIES
                                                                                      RESTRICTED      UNDERLYING
                                      FISCAL        SALARY/        OTHER ANNUAL     STOCK AWARD(S)   OPTIONS/SARS
NAME AND PRINCIPAL POSITION            YEAR         BONUS($)     COMPENSATION ($)        ($)              (#)
<S>                                   <C>           <C>          <C>                <C>              <C>
Steven B. Dempsey,
Chairman and CEO                       2000         100,000                                              350,000(3)
                                       1999         100,000             0                 0                    0
                                       1998          55,000             0                 0                    0

Niloo Howe,
President (1)                          2000         100,000
                                       1999         100,000             0

Mike Kelly,
Executive Vice President               2000         135,000                                              200,000
                                       1999         135,000             0                221,875(2)            0

Gregg Rollins,
Chief Financial Officer                2000          92,000                                              350,000(3)
                                       1999          85,000          None                 0              225,000
</TABLE>

(1)      Ms. Howe joined the Company in June, 2000, after consummation of our
         acquisition of Allpets.com. The compensation figures shown for all of
         fiscal year 1999 and fiscal year 2000 up to June 1, 2000 represent
         amounts paid by Allpets.com prior to the acquisition. The options
         granted were Allpets options that can be converted into Pet Quarters
         options.

(2)      Shares were held in Pet Quarters lock-box and were delivered to Mr.
         Kelly on September 1, 2000, the end of one year of employment.

(3)      These shares were issued pursuant to the Company's Management Incentive
         Plan. The Company has reserved 2.5 million shares for issuance to
         officers, directors, consultants and employees of the Company.


                                       18
<PAGE>   19


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

                                     NUMBER OF     PERCENT OF TOTAL
                                    SECURITIES       OPTIONS/SARS
                                    UNDERLYING        GRANTED TO                                      GRANT DATE
   FISCAL                         OPTIONS GRANTED    EMPLOYEES IN     EXERCISE PRICE   EXPIRATION   PRESENT VALUE
    YEAR              NAME              ($)           FISCAL YEAR         ($/SH)          DATE           ($)
<S>            <C>                <C>              <C>                <C>              <C>          <C>
     1999      Gregg Rollins         225,000            100%            1.125           04/01/04          253,125
     2000      Gregg Rollins         350,000             50%            1.6875           06/01/05         295,313

     2000      Mike Kelly            200,000                            2.96875         12/23/99          593,750
     2000      Steve Dempsey         350,000             50%            1.6875            06/01/05        295,313
</TABLE>



EMPLOYMENT CONTRACTS

         We have entered into employment agreements with most of our executive
officers as well as certain other employees, including the following persons:

         Messrs. Dempsey and Rollins entered into employment agreements with the
Company on June 6, 2000, providing for base annual compensation of $100,000 and
$92,000, respectively. Pursuant to such employment agreements, each such officer
is eligible for additional year-end bonus compensation to be determined pursuant
to an incentive bonus plan. Each employment agreement is for a term of two
years, and unless terminated or not renewed by the Company or not renewed by the
employee, the term will continue thereafter on a year-to-year basis on the same
terms and conditions existing at the time of renewal. Each of the employment
agreements provides that, in the event of a termination of employment by the
Company, except for specific instances of "cause" as defined in the employment
agreement, such employee shall be entitled to receive from the Company such
employee's then current salary for a period specified in the agreement. Each
employment agreement contains a covenant not to compete with the Company for a
period of one year immediately following the termination of his employment.

         Ms. Howe entered into an employment agreement with the Company on May
30, 2000, providing for base annual compensation of $100,000. Ms. Howe is also
eligible to receive additional year-end bonus compensation. The agreement is for
a term of one year, and unless terminated or not renewed by the Company or not
renewed by the employee, the term will continue thereafter on a year-to-year
basis on the same terms and conditions existing at the time of renewal. The
employment agreement provides that, in the event of a termination of employment
by the Company, except for specific instances of "cause" as defined in the
employment agreement, Ms. Howe shall be entitled to receive from the Company her
then current salary for a period specified in the agreement. The employment
agreement contains a covenant not to compete with the Company for a period of
one year immediately following the termination of employment.

         Mike Kelly entered into an employment agreement with the Company,
providing for a base annual compensation of $135,000. The agreement is for a
term of two years, unless earlier terminated by the Company or the employee. The
employment agreement obliges Mr. Kelly to devote his full attention to the
Company's operations and restricts his right to compete against Pet Quarters
upon departure.


                                       19
<PAGE>   20


Item 12.  Security Ownership of Certain Beneficial Owners and Management.


                             PRINCIPAL STOCKHOLDERS

         The Company was founded by Matthew Hoff and Michael Parnell in May of
1997. Mr. Hoff contributed $4,100 for 4,100,000 shares of the Company's $.001
par value common stock. Mr. Parnell contributed $2,000 for 2,000,000 shares of
common stock. During June and July of 1997, the Company conducted a private
offering of securities pursuant to Rule 504 of Regulation D. In the course of
this offering, the Company raised $105,000 in proceeds from the sale of
1,050,000 shares of common stock at $.10 per share. The offering was made to
twenty-one persons, including public investors not affiliated with the Company.
The Company offered its securities through its officers and directors on a
best-efforts basis. Consequently, there were no underwriting discounts or
commissions. Following these two offerings, the Company had a total of 7,150,000
shares of common stock outstanding.

         In August 1997, the Company conducted a second private offering of
securities pursuant to Rule 504 of Regulation D. In this offering, common stock
was sold at $.50 per share to fifty-two persons, many of whom were current
shareholders, raising an additional $860,000, less offering costs of $31,567.
This offering was extended to persons who were affiliates with the Company or
some private investors. The Company offered its securities through its officers
and directors on a best-efforts basis. Consequently, there were no underwriting
discounts or commissions.

         The Company filed appropriate documentation to allow its stock to be
traded on the Over-the-Counter-Bulletin-Board (OTCBB), and in October 1997, the
Company's stock began to trade on the OTCBB.

         In November 1997, the Company issued 1,777,500 shares of its common
stock to acquire land and a building from Ammonia Hold, Inc. The stock had a
fair market value of $888,750 and Ammonia Hold has a substantial ownership
interest in Pet Quarters.

         In June 1999, we repurchased 2,000,000 shares of our common stock from
Matthew Hoff. During the fiscal year ended on June 30, 1999, we issued 180,000
shares of our common stock to employees. These shares were issued to retain the
service of top management personnel. On September 9, 1999, 95,000 additional
shares of common stock were issued to Humboldt Industries employees to retain
them in management. An additional 1,146,417 shares were issued to acquire
Humboldt Industries and 153,334 were issued as part of the financing for the
Humboldt Industries acquisition. A total of 60,195 shares were issued to three
(3) vendors of Pet Quarters in order to secure their service during fiscal year
1999. Each of the above transactions were private transactions which did not
involve a public offering. The transactions were exempted pursuant to Section
4(2) and other provisions of the Securities Act of 1933, as amended.


                                       20
<PAGE>   21

         SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

<TABLE>
<CAPTION>
                                                     NUMBER OF SHARES
                                                       BENEFICIALLY
              NAME                CLASS OF SECURITY        OWNED        PERCENTAGE OWNED
<S>                               <C>                <C>                <C>
Ammonia Hold, Inc. (1)            Common Stock          1,647,500              8%
10 Gunnebo Drive
Lonoke, AR 72086

Matthew J. Hoff  (2)              Common Stock          1,060,452              5%
10 Gunnebo Drive
Lonoke, AR 72086

Michael Parnell (3)               Common Stock          1,207,170              6%
10 Gunnebo Drive
Lonoke, AR 72086

Steven Dempsey (4)                Common Stock          1,085,156              5%
720 E. Front
Lonoke, AR 72086

Dino Moshova (5)                  Common Stock            692,328              3%
720 E. Front
Lonoke AR 72086

Gregg Rollins (6)                 Common Stock            512,078              3%
720 E. Front
Lonoke, AR 72086

Mike Kelly                        Common Stock             50,000               *
1 Maplewood Drive
Hazelton, PA 18201

Robert M. Brown III (7)           Common Stock            502,392              3%
720 E. Front
Lonoke, AR 72086

J. Tod Fetherling                 Common Stock             35,166               *
720 E. Front
Lonoke, AR 72086

Jerrell W. Shelton                Common Stock             49,232               *
720 E. Front
Lonoke, AR 72086

Niloo Howe (8)                    Common Stock            765,871              4%
720 E. Front
Lonoke, AR 72086

Frank Creer (9)                   Common Stock                  0               *
720 E. Front
Lonoke, AR 72086

Zone Ventures, L.P.               Common Stock          1,111,974              6%
Limited Partnership
400 Seaport Court
Suite 250
Redwood City, CA 94063
</TABLE>


                                       21
<PAGE>   22


<TABLE>
<CAPTION>
<S>                               <C>                <C>                <C>
AMRO International (10)           Common Stock          1,944,474              10%
c/o Westminster Securities
100 Park Ave., 28th Floor
New York, NY 10017

All officers and directors as a   Common Stock         10,663,793
group and 5% shareholders as a
group
</TABLE>

----------

(1)      The Board of Directors of Ammonia Hold, Inc., are Michael D. Parnell,
         President and CEO; Dan N. Thompson, CFO; Robert S. Ligow, Charles
         Nickle, and William Ketchum. Any transaction concerning Pet Quarters,
         Inc., including the disposition or purchase of common stock, requires
         board authorization, effected by a vote of the majority of the
         directors.

(2)      Includes 60,000 shares held for Mr. Hoff's minor children, which he is
         custodian. The Matthew J. Hoff Trust was dissolved after fiscal year
         2000.

(3)      Includes 637,179 shares directly owned by Mr. Parnell and 569,991
         shares which may be acquired through the conversion of shares of Series
         A Convertible Preferred Stock.

(4)      Includes 910,156 shares directly owned by Mr. Dempsey and 175,000
         shares subject to stock options.

(5)      Includes 517,328 shares owned directly by Mr. Moshova and 175,000
         shares subject to stock options.

(6)      Includes 5,500 shares held by Mr. Rollins' minor children, 400,000
         shares subject to stock options, and 18,095 shares which may be
         acquired through conversion of shares of Series A Convertible Preferred
         Stock.

(7)      Includes 430,013 shares subject to stock options and 72,379 shares
         which may be acquired through the conversion of shares of Series A
         Convertible Preferred Stock.

(8)      Includes 510,162 shares owned directly by Ms. Howe and 255,709 shares
         subject to stock options.

(9)      Mr. Creer is a Managing Director of Zone Ventures, L.P.

(10)     Includes 723,798 shares which may be converted into common stock from a
         6% convertible debenture.

         At this time, the Company is not involved in or aware of any
arrangements that will result in a change of control of the Company.

             SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         The Company became subject to the reporting requirements of Section 16
of the Securities Exchange Act on March 10, 2000. The following persons were
late in filing a Form 3 to report their ownership in the Company: Steve Dempsey,
Gregg Rollins, Niloo Howe, Robert Brown, Frank Creer, J. Tod Fetherling, Dino
Moshova, Jerry Shelton and Mike Kelly. The Company is not aware of any person
failing to file or being late in filing a Form 4 or Form 5.


                                       22
<PAGE>   23


Item 13.  Certain Relationships and Related Transactions.

                           *RELATED PARTY TRANSACTIONS

BRIDGE LOAN

         The following persons, who are directors or officers of the Company or
hold 5% or more of the Company's common stock, were beneficiaries of the Trust,
which loaned the Company $4,600,000 (the "Bridge Loan") to purchase Humboldt
Industries. The dollar value of the beneficial interest of each person in the
Bridge Loan and his or her relationship to the Company is set forth opposite his
or her name.

<TABLE>
<S>                                      <C>                  <C>
         Dino Moshova                    $23,000              Director
         Gregg Rollins                   $90,000              Chief Financial Officer
         Steven Dempsey                  $50,000              President and Chief Executive Officer
         Michael Parnell                 $750,000             Founder
         Jemima S. Parnell               $110,000             Mother of Michael Parnell
</TABLE>

         In connection with the extension of the Bridge Loan on November 10,
1999, we borrowed a total of $204,723 from Michael Parnell and the Matthew J.
Hoff Trust, which was evidenced by two notes payable. On January 27, 2000, the
notes payable were converted into 409,446 shares of common stock.

STOCK GRANTS

         On September 9, 1999, we made grants of common stock totaling 95,000
shares to three Humboldt employees. The grants were made to retain the services
of these persons and included 5,000 shares to Judith Patterson, 40,000 shares to
Melanie Rosenzweig, and 50,000 shares to Mike Kelly. This stock vested on August
5, 2000 for Patterson and Rosenzweig and September 1, 2000 for Kelly.

OTHER TRANSACTIONS

         Ammonia Hold, Inc. has made several advances to Pet Quarters in various
amounts totaling $140,000 as of June 1, 2000, which are each represented by a
promissory note from Pet Quarters. Each promissory note bears interest at a rate
of 8%.

         On December 17, 1999, Michael Parnell loaned Pet Quarters $204,989.49
pursuant to a promissory note. The proceeds of the loan were used to reduce
short-term bank indebtedness. The promissory note bears interest at a rate of
10% per annum and is due July 31, 2001. The current balance is $154,989. The
promissory note is secured by our land and building located in Lonoke, Arkansas.

         We borrowed $225,000 from the Matthew J. Hoff Trust on March 3, 2000,
pursuant to a promissory note that bears interest at a rate of 10% per annum.
The proceeds of this loan were used as the cash portion of the purchase price of
Wellstone Acquisition Corporation. The current balance is $175,000. The
promissory note is due on July 31, 2001 and is secured by our land and building
located in Lonoke, Arkansas.

         Robert Brown's wholly-owned company, B-III Capital LLC ("B-III
Capital") has a contract with the Company to advise and assist the Company in
raising capital and acquisition advisory services. The contract provides that
B-III Capital will receive a monthly retainer of $5,000, reimbursement for usual
business expenses and success fees in connection with financing and acquisition
transactions. Mr. Brown has received $131,650 in payments from the Company under
the terms of his contract in fiscal 2000 and $117,032 in payments in fiscal
2001. Mr. Brown is currently owed $240,548 for services rendered on behalf of
the Company under the terms of the B-III Capital contract. Mr. Brown did not
receive


                                       23
<PAGE>   24


compensation from the Company in fiscal 1999. In connection with the execution
of the contract with B-III Capital, Mr. Brown individually received an option to
purchase 573,350 shares of our common stock, at an exercise price of $1.00 per
share. To date, 477,791 shares under the option have vested. The remaining
shares vest on a monthly basis of 23,889 shares each month.

         Dino Moshova, a director of the Company, was paid $69,670 to date as a
consultant for his web-site development services. Mr. Moshova was paid $52,000
during fiscal 1999 for web-site development services. Currently, Mr. Moshova is
paid $92,000 annually for his services.

PART IV

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K.


   (a)   1.       Financial Statements are included beginning on page 25.

   (a)   2.       Financial Statements required by Item 8 are included with the
                  Financial Statements identified above.

   (a)   3.       See Exhibit Index on page 52.

   (b)            On March 6, 2000 the Company filed a report on Form 8-K
                  announcing the acquisition of Wellstone Acquisition
                  Corporation in exchange for 130,208 shares of the Company's
                  common stock. This transaction is more fully described in Note
                  3 to the financial statements. On May 5, 2000 the Company
                  filed a Form 8-K reporting the acquisition of all of the
                  shares of WeRPets.com, Inc. in exchange for 703,316 shares of
                  the Company's common stock. This transaction is more fully
                  described in Note 3 to the financial statements. Neither of
                  these acquisitions required the preparation and filing of
                  separate financial statements.


                                       24
<PAGE>   25


CONSOLIDATED FINANCIAL STATEMENTS


Pet Quarters, Inc. and Subsidiaries
Years ended June 30, 2000, 1999 and 1998 with Reports of Independent Auditors





                                       25
<PAGE>   26



                       Pet Quarters, Inc. and Subsidiaries

                        Consolidated Financial Statements


                    Years ended June 30, 2000, 1999 and 1998




                                    Contents

<TABLE>
<S>                                                                          <C>
Report of Ernst & Young LLP, Independent Auditors.............................27
Report of Crouch, Bierwolf & Chisholm, Independent Auditors...................28


Audited Consolidated Financial Statements

Consolidated Balance Sheets...................................................29
Consolidated Statements of Operations.........................................31
Consolidated Statements of Stockholders' Equity...............................32
Consolidated Statements of Cash Flows.........................................34
Notes to Consolidated Financial Statements....................................35
</TABLE>


                                       26
<PAGE>   27


                Report of Ernst & Young LLP, Independent Auditors

Stockholders and Board of Directors
Pet Quarters, Inc.

We have audited the accompanying consolidated balance sheets of Pet Quarters,
Inc. and subsidiaries as of June 30, 2000 and 1999, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Pet Quarters, Inc.
and subsidiaries at June 30, 2000 and 1999, and the consolidated results of
their operations and their cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As more fully described in
Note 2, the Company has operating losses and is dependent upon future financing
to continue operations. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The consolidated financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.




Little Rock, Arkansas                                          Ernst & Young LLP
August 31, 2000


                                       27
<PAGE>   28


                          Independent Auditors' Report


To the Stockholders and Board of Directors
Pet Quarters, Inc.

We have audited the accompanying balance sheet of Pet Quarters, Inc. as of June
30, 1998 and the related statement of operations, stockholders' equity and cash
flows for the year ended June 30, 1998 and the two months ended June 30, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pet Quarters, Inc. as of June
30, 1998 and the results of their operations and cash flows for the year ended
June 30, 1998 and the two months ended June 30, 1997 in conformity with
generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2, the Company's
operating loss raise substantial doubt about it ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

                                                     Crouch, Bierwolf & Chisholm


October 25, 1998
Salt Lake City, Utah


                                       28
<PAGE>   29


                       Pet Quarters, Inc. and Subsidiaries

                           Consolidated Balance Sheets


<TABLE>
<CAPTION>
                                                                             June 30
                                                                       2000            1999
                                                                   ------------    ------------
<S>                                                                <C>             <C>
Assets
Current assets:
   Cash and cash equivalents                                       $    164,128    $     37,726
   Accounts receivable                                                  175,608           2,654
   Inventories (Note 5)                                               1,674,002          33,783
   Prepaid expenses                                                     637,425           2,250
   Land and building held for sale (Note 4)                             500,000              --
   Other current assets                                                 151,177              --
                                                                   ------------    ------------
Total current assets                                                  3,302,340          76,413



Property, plant and equipment (Notes 4 and 5):
   Land                                                                      --         225,000
   Buildings and improvements                                            33,600         708,600
   Furniture and equipment                                              596,038          35,072
                                                                   ------------    ------------
                                                                        629,638         968,672
Less accumulated depreciation                                          (115,767)        (33,185)
                                                                   ------------    ------------
                                                                        513,871         935,487


Goodwill, net of accumulated amortization
   of $2,162,156 at June 30, 2000 (Note 3)                           17,524,514              --
Intangible assets, net of accumulated amortization of
   $95,707 and $10,138 at June 30, 2000 and 1999, respectively          506,227          30,385
                                                                   ------------    ------------
Total assets                                                       $ 21,846,952    $  1,042,285
                                                                   ============    ============
</TABLE>


                                       29
<PAGE>   30


<TABLE>
<CAPTION>
                                                                                               June 30
                                                                                         2000            1999
                                                                                     ------------    ------------
<S>                                                                                  <C>             <C>
Liabilities and stockholders' equity
   Current liabilities:
   Accounts payable                                                                  $  2,904,205    $    203,394
   Accrued expenses                                                                       546,412          12,613
   Convertible debenture, net of discount (Note 11)                                       950,000              --
   Notes payable to related parties (Note 5)                                              615,178         325,000
   Current portion of notes and capital leases payable (Note 10)                          125,763              --
                                                                                     ------------    ------------
Total current liabilities                                                               5,141,558         541,007

Long-term portion of notes and capital
   leases payable (Note 10)                                                               260,936              --
                                                                                     ------------    ------------
Total liabilities                                                                       5,402,494         541,007

Commitments and contingencies (Notes 3 and 8)                                                  --              --

Stockholders' equity:
   Convertible preferred stock, $.001 par value per share, 10,000,000 shares
     authorized; 34,642 shares issued and outstanding at June 30,
     2000                                                                                      35              --
   Common stock, $.001 par value per share, 40,000,000  shares authorized;
     18,147,783 and 9,800,195, shares issued and outstanding at June 30, 2000
     and 1999, respectively                                                                18,148           9,800
   Additional paid-in capital                                                          33,109,661       2,498,867
   Accumulated deficit                                                                (16,586,531)     (1,868,444)
                                                                                     ------------    ------------
                                                                                       16,541,313         640,223
   Less unamortized stock compensation                                                    (96,855)       (138,945)
                                                                                     ------------    ------------
Total stockholders' equity                                                             16,444,458         501,278
                                                                                     ------------    ------------
Total liabilities and stockholders' equity                                           $ 21,846,952    $  1,042,285
                                                                                     ============    ============
</TABLE>




See notes to consolidated financial statements.


                                       30
<PAGE>   31


                       Pet Quarters, Inc. and Subsidiaries

                      Consolidated Statements of Operations


<TABLE>
<CAPTION>
                                                                       Years ended June 30
                                                              2000            1999            1998
                                                          ------------    ------------    ------------
<S>                                                       <C>             <C>             <C>
Sales, net of allowances and discounts                    $ 13,731,147    $    262,470    $     43,835
Cost of sales                                                9,446,400         205,774          21,908
                                                          ------------    ------------    ------------
                                                             4,284,747          56,696          21,927

Operating expenses and costs:
     Selling                                                 2,184,748         489,272         196,497
     Administrative and general                              8,545,016         588,870         647,114
     Depreciation and amortization                           2,120,084          36,824          11,508
                                                          ------------    ------------    ------------
                                                            12,849,848       1,114,966         855,119
                                                          ------------    ------------    ------------
Loss from operations                                        (8,565,101)     (1,058,270)       (833,192)

Other income (expense):
     Interest expense                                         (770,866)           (290)         (4,384)
     Bridge Loan origination fee (Note 9)                     (651,671)             --              --
     Troubled debt restructuring expense (Note 9)           (1,339,461)             --              --
     Other income                                                   --           2,809          15,001
     Interest income                                             9,012           3,486           6,396
                                                          ------------    ------------    ------------
                                                            (2,752,986)          6,005          17,013
                                                          ------------    ------------    ------------

Loss before income tax benefit                             (11,318,087)     (1,052,265)       (816,179)
Income tax benefit                                                  --              --              --
                                                          ------------    ------------    ------------
Net loss                                                   (11,318,087)     (1,052,265)       (816,179)

Deemed dividend on preferred stock (Note 7)                 (3,400,000)             --              --
                                                          ------------    ------------    ------------
Net loss for common stockholders                          $(14,718,087)   $ (1,052,265)   $   (816,179)
                                                          ============    ============    ============

Net loss for common stockholders per common share:
Basic                                                     $      (1.18)   $      (0.09)   $      (0.10)
                                                          ============    ============    ============
Diluted                                                   $      (1.18)   $      (0.09)   $      (0.10)
                                                          ============    ============    ============
Weighted average shares outstanding
Basic                                                       12,482,101      11,453,000       8,568,125
                                                          ============    ============    ============
Diluted                                                     12,482,101      11,453,000       8,568,125
                                                          ============    ============    ============
</TABLE>

See notes to consolidated financial statements.


                                       31
<PAGE>   32


                       Pet Quarters, Inc. and Subsidiaries
                 Consolidated Statements of Stockholders' Equity


<TABLE>
<CAPTION>
                                    Convertible
                                  Preferred Stock            Common Stock       Additional                Unamortized
                                              Par                     Par        Paid-In     Accumulated     Stock
                              Shares         Amount     Shares       Amount      Capital       Deficit    Compensation    Total
                            -----------    ---------  -----------   ---------  -----------   -----------  ------------ -----------
<S>                         <C>            <C>        <C>           <C>        <C>           <C>          <C>          <C>
Balance at July 1, 1997              --    $      --    7,150,000   $   7,150  $   103,950   $        --  $         -- $   111,100
   August 8, 1997,
     restricted shares
     issued for cash at              --           --      119,500         120       59,630            --            --     59,750
     $.50
   Shares issued for land
     and building                    --           --    1,777,500       1,777      886,973            --            --     888,750
   Shares issued for cash
     at $0.50 less
     offering costs of
     $31,567                         --           --    1,720,000       1,720      826,713            --            --     828,433
   Shares issued for cash
     and services                    --           --      790,000         790      394,210            --            --     395,000
   Shares issued for cash
     at $0.50                        --           --        3,000           3        1,497            --            --       1,500
   Net loss                          --           --           --          --           --      (816,179)           --    (816,179)
                            -----------    ---------  -----------   ---------  -----------   -----------  ------------ -----------
Balance at June 30, 1998             --           --   11,560,000      11,560    2,272,973      (816,179)           --   1,468,354
   Shares bought from
     founder and
     subsequently canceled           --           --   (2,000,000)     (2,000)          --            --            --      (2,000)
   Restricted stock issued
     to employees                    --           --      180,000         180      183,570            --      (183,750)         --
   Amortization of stock
     compensation                    --           --           --          --           --            --        44,805      44,805
   Shares issued for
     services (Note 8)               --           --       60,195          60       42,324            --            --      42,384
   Net loss                          --           --           --          --           --    (1,052,265)           --  (1,052,265)
                            -----------    ---------  -----------   ---------  -----------   -----------  ------------ -----------
Balance at June 30, 1999             --           --    9,800,195       9,800    2,498,867    (1,868,444)     (138,945)    501,278
   Shares issued for
     acquisition of
     Humboldt Industries             --           --    1,146,417       1,147    4,598,853            --            --   4,600,000
   Shares issued as
     origination fee for
     Bridge Loan                     --           --      153,334         153      651,518            --      (651,671)         --
   Shares issued for legal
     services (Note 8)               --           --        4,334           4       18,416            --            --      18,420
</TABLE>

(continued)


                                       32
<PAGE>   33


                       Pet Quarters, Inc. and Subsidiaries

           Consolidated Statements of Stockholders' Equity (continued)

<TABLE>
<CAPTION>
                           Convertible Preferred
                                   Stock               Common Stock        Additional                   Unamortized
                                          Par                     Par        Paid-In    Accumulated        Stock
                            Shares       Amount     Shares       Amount      Capital       Deficit      Compensation      Total
                            -------     --------  -----------  ----------  -----------  ------------    ------------  ------------
<S>                         <C>         <C>       <C>          <C>         <C>          <C>             <C>           <C>
Restricted stock issued
  to employees                   --     $     --      105,000  $      105  $   411,926  $         --    $   (412,031) $         --
Amortization of loan
  origination fee                --           --           --          --           --            --         651,671       651,671
Stock issued for Bridge
  Loan origination fee
  refinancing                    --           --      275,000         275      482,735            --              --       483,010
In the money feature of
  convertible debt issued
  in conjunction with
  Bridge Loan refinancing        --           --           --          --      626,452            --              --       626,452
Shares issued to
  investors for cash             --           --      178,964         179      256,234            --              --       256,503
Revocation of employee
  stock grant                    --           --      (10,000)        (10)     (11,240)           --           5,979        (5,271)
Shares issued under
  subscription agreement         --           --    1,176,715       1,177    2,384,925            --              --     2,386,102
Debt converted to stock          --           --      409,446         410      204,314            --              --       204,724
Shares issued for the
  acquisition of Wellstone       --           --      130,208         130      557,323            --              --       557,453
Stock options issued for
  services (Note 8)              --           --           --          --    1,325,402            --              --     1,325,402
Amortization of stock
  compensation                   --           --           --          --           --            --         448,142       448,142
Shares issued for the
  acquisition of
  WeRPets.com, Inc               --           --      703,316         703    2,460,903            --              --     2,461,606
Shares issued for the
  acquisition of
  Charterdure, Ltd.              --           --      400,000         400      724,600            --              --       725,000
Shares issued for the
  acquisition of
  AllPets.com, Inc.              --           --    3,652,785       3,653    8,664,600            --              --     8,668,253
Shares issued for legal
  services (Note 8)              --           --       22,069          22       39,978            --              --        40,000
Convertible debenture
  discount and non-cash
  interest (Note 11)             --           --           --          --      350,000            --              --       350,000
Issuance of convertible
  preferred stock            34,642           35           --          --    3,463,765            --              --     3,463,800
Deemed dividend on
  convertible preferred
  stock                          --           --           --          --    3,400,000    (3,400,000)             --            --
Net loss                         --           --           --          --           --   (11,318,087)             --   (11,318,087)
                            -------     --------  -----------  ----------  -----------  ------------    ------------  ------------
Balance at June 30, 2000     34,642     $     35   18,147,783  $   18,148  $33,108,661  $(16,586,531)   $    (96,855) $ 16,444,458
                            =======     ========  ===========  ==========  ===========  ============    ============  ============
</TABLE>

See notes to consolidated financial statements.



                                       33
<PAGE>   34



                       Pet Quarters, Inc. and Subsidiaries

                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                             Years ended June 30
                                                                    2000            1999            1998
                                                                ------------    ------------    ------------
<S>                                                             <C>             <C>             <C>
Operating activities
Net loss                                                        $(11,318,087)   $ (1,052,265)   $   (816,179)
Adjustments to reconcile net loss to
   net cash used in operating activities:
     Depreciation                                                    117,901          16,836           6,211
     Amortization of goodwill and intangibles                      2,002,183          19,988           5,297
     Non-cash interest expense                                       310,000              --              --
     Beneficial conversion feature on convertible debt               626,452              --              --
     Amortization of loan origination fees                         1,134,681              --              --
     Amortization of stock compensation expense                      442,871          44,805              --
     Stock and options issued for services                         1,383,822          42,384         360,000
     WellStone Impairment                                            557,453              --              --
     Bridge loan default penalty refinanced                          230,000              --              --
     Write down of land and building held for sale                   400,000              --              --
     Changes in operating assets and liabilities, net of
       acquisitions:
         Accounts receivable                                         (12,639)            357          (3,011)
         Inventories                                                 473,248          39,446         (73,229)
         Prepaid expenses                                           (441,837)          7,178          (9,428)
         Other assets                                               (146,886)         36,238         (52,968)
         Accounts payable                                          1,201,009         189,715          13,679
         Accrued expenses                                            231,431          11,472           1,141
         Unearned income                                                  --          (5,885)          5,885
                                                                ------------    ------------    ------------
Net cash used in operating activities                             (2,808,398)       (649,731)       (562,602)

Investing activities
Acquisition of Humboldt, net of cash                              (4,446,927)             --              --
Cash acquired in stock acquisition of Allpets.com                    412,444              --              --
Purchases of property, plant, and equipment                         (104,467)        (11,386)        (97,338)
Purchases and development of web sites                              (106,742)             --              --
                                                                ------------    ------------    ------------
Net cash used in investing activities                             (4,245,692)        (11,386)        (97,338)

Financing activities
Proceeds from issuance of common stock                             2,642,605              --         924,683
Proceeds from issuance of preferred stock                          2,055,300              --              --
Proceeds, net of payments made, from debt                          2,482,587         325,000              --
Redemption of common stock                                                --          (2,000)             --
                                                                ------------    ------------    ------------
Net cash provided by financing activities                          7,180,492         323,000         924,683
                                                                ------------    ------------    ------------
Net increase (decrease) in cash and cash equivalents                 126,402        (338,117)        264,743
Cash and cash equivalents at beginning of period                      37,726         375,843         111,100
                                                                ------------    ------------    ------------
Cash and cash equivalents at end of period                      $    164,128    $     37,726    $    375,843
                                                                ============    ============    ============

Supplemental disclosure of cash flow information:
     Cash paid for interest                                     $    435,504    $        290    $      1,384
                                                                ============    ============    ============
</TABLE>

See notes to consolidated financial statements.


                                       34
<PAGE>   35


                       Pet Quarters, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements

                                 June 30, 2000


1. Summary of Significant Accounting Policies

Organization and Nature of Business

Pet Quarters, Inc. and subsidiaries (the "Company") was organized under the laws
of the state of Arkansas on May 22, 1997. The Company sells pet supplies to both
retail and wholesale customers through catalogs and e-commerce. In August 1999
the Company purchased Humboldt Industries whose primary business was catalog
sales. As a result of this acquisition, the Company has altered its approach by
combining a traditional catalog company that is migrating its customer base to
the Internet, and expanding its Internet-only customers through the catalog.

Consolidation

The consolidated financial statements include the accounts of all wholly owned
subsidiaries, which include Chartendure Limited, WeRPets.com, Inc., PQ
Acquisition Company, Inc. (the survivor of Humboldt and Maplewood acquisitions),
Wellstone Acquisition Corporation and Allpets.com, Inc. (See Note 3).

The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.

Inventories

Inventories are valued at the lower of cost, principally determined by the
first-in, first-out method, or market. Inventories at June 30, 2000 and 1999,
consist principally of pet supplies purchased for retail sale.

Property, Plant, and Equipment

Property, plant and equipment are recorded at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the
depreciable assets, which range from five years for furniture and equipment to
thirty-nine years for buildings and improvements.


                                       35
<PAGE>   36


                       Pet Quarters, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements

                            June 30, 2000 (continued)


Income Taxes

The Company provides for income taxes based on the liability method. No benefit
for income taxes has been made due to net operating loss carryforwards that may
offset future taxable income.

Stock-Based Compensation

The company records stock based compensation using provisions of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, for
the preparation of its basic consolidated financial statements. Such provisions
require the company to recognize compensation cost over the vesting period for
the difference between the quoted market price of an award at the date of grant
and the purchase or exercise price of the shares.

Goodwill

The excess of acquisition costs over the fair values of net assets acquired in
business combinations treated as purchase transactions ("goodwill") is being
amortized on a straight-line basis over its estimated life, 2 to 5 years
currently. The Company periodically evaluates the existence of goodwill
impairment on the basis of whether the goodwill is fully recoverable from the
projected undiscounted net cash flows of the related business unit. The amount
of goodwill impairment, if any, is measured based on projected discounted future
operating cash flows using a discount rate reflecting the Company's average cost
of funds.

Intangible Assets

Intangible assets are amortized on a straight-line basis over their estimated
lives, ranging from 3 to 5 years. Intangible assets at June 30, 2000 and 1999,
primarily consist of web site development costs and trademarks.

Advertising Costs

The Company expenses advertising costs, other than direct response advertising
as they are incurred. Advertising expenses of approximately $1,526,000 and
$430,000 were incurred for the years ended June 30, 2000 and 1999, respectively.
There were no advertising expenses incurred for the year ended June 30, 1998.

The Company's wholly owned subsidiaries, Humboldt Industries, and affiliates,
account for catalog costs in accordance with Statement of Position 93-7,
"Reporting on Advertising Costs" in connection with the marketing of their
direct response product catalogs. The cost to produce mail catalogs are
amortized over the period of benefit, which is less than one year using the
ratio of current period revenue to the total current and estimated future period
revenues. Capitalized direct response advertising costs at June 30, 2000 were
$631,000.


                                       36
<PAGE>   37


                       Pet Quarters, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements

                            June 30, 2000 (continued)


Concentration of Credit Risk

The Company's services are provided primarily to customers throughout the United
States. The Company receives payment largely by customers' use of credit cards
for both catalog and internet sales. The Company performs ongoing credit
evaluations and generally does not require collateral. Historically, credit
losses have been within management's expectations.

Revenue Recognition

Revenue from product sales is recognized upon shipment of merchandise, net of an
allowance for estimated customer returns and discounts.

Shipping and Handling

Fees received from shipping and handling activities are included as revenue.
Costs incurred for shipping and handling are included as a component of cost of
goods sold.

Impairment of Assets

The Company accounts for any impairment of its long-lived assets using Statement
of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
SFAS No. 121 requires recognition of impairment of long-lived assets in the
event the net book value of such assets exceeds the future undiscounted cash
flows attributable to such assets.

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.

Recent Accounting Pronouncements

In March 1998, the Accounting Standards Executive Committee ("AcSEC") issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". Under the SOP, qualifying
computer software costs are required to be capitalized and amortized against
income over the software's estimated useful life. The SOP is effective for
fiscal years beginning after December 15, 1998. The Company adopted SOP 98-1
effective July 1, 1999.


                                       37
<PAGE>   38


                       Pet Quarters, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements

                            June 30, 2000 (continued)


In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 is
effective for fiscal years beginning after June 15, 2000 and will be adopted by
the Company for the period beginning July 1, 2000. SFAS No. 133 requires that
all derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of the derivatives will be recorded each period in
current earnings or other comprehensive income depending on whether a derivative
is designated as part of a hedge transaction, and if it is, the type of hedge
transaction. The Company does not expect that the adoption of SFAS No. 133 will
have a material impact on the Company's results of operations, financial
position, or cash flows.

Reclassifications

To conform to the 2000 presentation, certain accounts for 1999 and 1998 have
been reclassified. The reclassifications had no effect on net loss for 1999 and
1998.

2. Going Concern Uncertainty

The accompanying consolidated financial statements have been presented in
conformity with generally accepted accounting principles, which contemplates
continuation of the Company as a going concern. However, the Company has a
significant working capital deficiency and has incurred operating losses since
its formation. Management believes that actions presently being taken will
provide for the Company to continue as a going concern. Such actions may include
but are not limited to utilizing the Equity Line of Credit (see Note 12), a
strategic partnership or acquisition that would provide the Company with the
necessary capital, or sale of certain assets. However, there are no assurances
that management will be able to secure additional equity capital or complete any
other strategic transactions that will permit the Company to meet its current
obligations.

3. Acquisitions

Humboldt and Maplewood

On August 1, 1999, the Company acquired 100% of the outstanding stock of
Humboldt Industries, Inc. and Maplewood Industries, Inc., both of Hazleton,
Pennsylvania, for $4.6 million cash and 1,146,417 shares of the Company's common
stock valued at $4.6 million on the date of the acquisition. The acquisition was
accounted for as a purchase transaction and resulted in the recording of
approximately $8.3 million of goodwill. Goodwill is being amortized over a
five-year life. The acquisition was financed through a Bridge Loan in the amount
of $4.6 million. This bridge loan was extended in November 1999 and subsequently
repaid in February and May 2000 (see Note 9 for further description of the
Bridge Loan).


                                       38
<PAGE>   39

                       Pet Quarters, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements

                            June 30, 2000 (continued)


Wellstone Acquisition Corporation

On March 6, 2000, the Company acquired all of the outstanding stock of Wellstone
Acquisition Corporation ("Wellstone") in exchange for 130,208 shares of the
Company's common stock, valued at $557,453 ($4.28 per share) on the date of
acquisition. In addition, the Company paid professional and legal fees of
$225,000 in conjunction with this transaction.

The acquisition was made pursuant to rule 12g-3(a) of the General Rules and
Regulations of the Securities and Exchange Commission. This rule allows
nonreporting entities to acquire fully reporting entities and thereby become
fully reporting. The Company made this acquisition in order to become fully
reporting. It was subsequently determined that the Company could not utilize
rule 12g-3(a) to become fully reporting. The Company has not identified an
alternative use for Wellstone and has therefore expensed the entire cost of
$782,453 during the quarter ended March 31, 2000 as a component of general and
administrative expense.

WeRPets.com

On April 27, 2000 the Company acquired WeRPets.com, Inc. for 703,316 shares of
the Company's common stock, valued at $2,461,606 ($3.50 per share) on the date
of acquisition. The acquisition was accounted for as a purchase transaction and
resulted in the recording of approximately $2.5 million of goodwill. Goodwill is
being amortized over a three-year life.

Chartendure

On May 1, 2000 the Company acquired Chartendure, Ltd., a company organized under
the laws of the United Kingdom, for 400,000 shares of the Company's common
stock, valued at $725,000 ($1.81 per share) on the date of acquisition. The
acquisition was accounted for as a purchase transaction and resulted in the
recording of approximately $725,000 of goodwill. Goodwill is being amortized
over a two-year life.

Allpets.com

On May 30, 2000 the Company acquired AllPets.com, Inc. through the exchange of
3,652,785 shares of the Company's common stock and 1,105,250 stock options. The
stock and stock options exchanged were valued based on the closing price of
$1.875 on May 30, 2000, resulting in a purchase price of $8.6 million. The
acquisition was accounted for as a purchase transaction and resulted in the
recording of approximately $7.9 million of goodwill. Goodwill is being amortized
over a three-year life. In addition to the shares exchanged above, the Company
may be required to issue up to 1,189,479 additional shares of common stock if
contingencies related to the achievement of certain stock price appreciation
targets and listing of the Company's stock on the NASDAQ are achieved.


                                       39
<PAGE>   40

                       Pet Quarters, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements

                            June 30, 2000 (continued)



The operations of acquired companies have been consolidated with the operations
of the Company beginning August 1, 1999. Pro forma unaudited information, which
includes goodwill amortization and bridge loan interest expense, as if these
acquisitions occurred as of July 1, 1998, is as follows:

<TABLE>
<CAPTION>
                                Years ended June 30
                              2000             1999
                          -------------    -------------
<S>                       <C>              <C>
Sales                     $  14,989,098    $  15,143,999
Cost of sales               (10,293,722)     (10,556,113)
Operating expenses          (18,488,920)      (8,866,218)
Other expenses               (2,687,416)        (555,519)
                          -------------    -------------
Net loss                  $ (16,480,960)   $  (3,721,605)
                          =============    =============
</TABLE>

The above pro forma unaudited information does not purport to be indicative of
the results which actually would have occurred had the acquisition been made at
the beginning of the respective periods.

4. Land and Building Held for Sale

The Company entered into an agreement on April 14, 2000 to sell its facility in
Lonoke, Arkansas for net proceeds of $500,000. As a result of the decision to
sell the building, a write-down in the carrying value of the land and building
of $400,000 was recorded in general and administrative expenses as of June 30,
2000 (see Note 15).

5. Related Party Transactions

At June 30, 2000 and 1999, the Company had $140,000 and $225,000, respectively,
in notes payable to Ammonia Hold, Inc., a principal shareholder of the Company.
The notes are due on demand with an interest rate of 8%. The notes payable are
secured by property and inventory.

At June 30, 2000, the Company had $250,178 in notes payable to principal
shareholders of the Company. The notes are due on demand with an average
interest rate of 8%. The notes are secured by property and inventory. At June
30, 2000 the Company also had a note payable in the amount of $225,000 to a
trust for which a principal shareholder acts as trustee. The note is due on
demand and bears interest at 10% and is secured by property and inventory.

The former stockholders of Humboldt Industries lease a building to the Company.
Taxes, insurance and maintenance expenses related to the facility are paid by
the Company. Rent expense on the facility aggregated $220,000 for the year ended
June 30, 2000. Future minimum lease payments are $240,000 per year through July
31, 2004.

In November 1997, the Company issued 1,777,500 shares of its common stock, with
a fair value of $888,750, to acquire land and a building from Ammonia Hold,
Inc., a company owned by a


                                       40
<PAGE>   41


                       Pet Quarters, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements

                            June 30, 2000 (continued)


principal shareholder of the Company. As a part of the exchange an option to
repurchase the building for the original sales price was granted. This option
expired on June 8, 1999.

6. Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:

<TABLE>
<CAPTION>
                                                             June 30
                                                 2000          1999            1998
                                             -----------    -----------    -----------
<S>                                          <C>            <C>            <C>
Deferred tax assets:
   Amortization of stock compensation        $   150,576    $    15,234    $        --
   Net operating loss carryforward             4,055,311        626,852        130,345
                                             -----------    -----------    -----------
Total deferred tax asset                       4,205,887        642,086        130,345

Deferred tax liabilities
   Inventory reserve                            (204,000)            --             --
   Prepaid catalog costs                        (216,725)            --             --
                                             -----------    -----------    -----------
Total deferred tax liability                    (420,725)            --             --
                                             -----------    -----------    -----------
Net deferred tax asset                         3,785,162        642,086        130,345
Valuation allowance                           (3,785,162)      (642,086)      (130,345)
                                             -----------    -----------    -----------
                                             $        --    $        --    $        --
                                             ===========    ===========    ===========
</TABLE>

The use of the liability method of accounting for income taxes requires that
deferred tax assets be reduced by a valuation allowance if it is more likely
than not that some portion or all of the deferred tax assets will not be
realized. Whether a deferred tax asset will be realized depends upon sufficient
future taxable income and consideration of limitations on the ability to utilize
net operating loss carryforwards and other tax attributes.

Under limitations imposed by Internal Revenue Code Section 382, certain
potential changes in ownership of the Company may restrict future utilization of
net operating loss carryforwards. It is management's belief that a change in
ownership, which would trigger the Section 382 limitations, has not occurred.
However, a valuation allowance has been established for the entire net deferred
tax assets until such time as it is more likely than not that the deferred tax
assets will be realized.

At June 30, 2000, the Company has net operating loss carryforwards of
approximately $12.9 million for income tax purposes that expire in years 2013
through 2019.

No income taxes were paid in 2000, 1999 and 1998. The Company's effective tax
rate at June 30, 2000, 1999 and 1998, is 0%. The effective tax rate for the
years ended June 30, 2000, 1999


                                       41
<PAGE>   42


                       Pet Quarters, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements

                            June 30, 2000 (continued)


and 1998 is different than the statutory federal tax rate of 34% due to the
establishment of a valuation allowance relating to the deferred tax assets.

7. Stockholders' Equity

Stock Redemption

In June 1999, the Company retired 2,000,000 shares of common stock, which had
been held by a founding stockholder of the Company. These shares were
subsequently canceled. This transaction was completed in order to facilitate the
acquisition of Humboldt Industries. These shares were held by the founding
stockholder under a verbal understanding with other stockholders that the shares
would be retired and canceled upon the occurrence of certain future events
including a business combination or issuance of additional equity capital. The
shares were originally issued so that the founding stockholder would have voting
control. For purposes of calculating net loss per share, the 2,000,000 shares
were deemed to have been retired and canceled as of July 1, 1999.

Preferred Stock

The Company is authorized to issue 10,000,000 shares of preferred stock. On May
9, 2000 the Company designated 50,000 share of preferred stock as Series A
Convertible Preferred Stock ("Series A Stock"), the Company subsequently issued
34,642 shares of Series A Stock for total consideration of $3,464,200,
consisting of $2,055,700 in cash and $1,408,500 as payment on the Bridge Loan
(see Note 9). The acquisition of these bridge loan interests effectively retired
an equivalent amount of principal on the bridge loan. The Series A Stock has the
following terms, rights, and privileges:

      a) Dividends - The holders of the Series A Stock are not entitled to
         receive dividends from the Company.

      b) Liquidation - Upon any liquidation, dissolution, or winding up of the
         Company, whether voluntary or involuntary, the holders of the Series A
         Stock shall be entitled, before any distribution or payment is made
         upon any shares of any other class of stock of the Company, to be paid
         $100 per share (the purchase price of the Series A Stock).

      c) Redemption - Subject to certain conditions and one year after the
         initial date of issuance, the Series A Stock may be redeemed (all or
         none) at the Company's option upon the payment in cash of the sum of
         $100 per share.

      d) Conversion - At any time, holders of the Series A Stock may convert all
         or a portion of those shares into a number of shares of common stock,
         computed by multiplying the number of shares to be converted by $100
         and dividing the result by the conversion price. The conversion price
         is equal to $1.3816. The conversion price may be adjusted from time to
         time to account for any stock splits, stock dividends,
         recapitalizations, mergers, assets sales, or similar events.


                                       42
<PAGE>   43


                       Pet Quarters, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements

                            June 30, 2000 (continued)


A preferred stock deemed dividend in the amount of $3.4 million was recorded to
reflect the intrinsic value of the beneficial conversion feature available to
preferred shareholders and the fair value of the associated warrants at the date
of issuance.

Stock Purchase Warrants

On February 23, 2000 the Company issued warrants to purchase 169,200 shares of
common stock at an average purchase price of $4.52 in conjunction with the
private placement of approximately $3 million of common stock. The warrants are
immediately exercisable and will expire three years from the date of issuance.
These warrants were accounted for as a cost of capital and were recorded as
equity.

On March 15, 2000 the Company issued warrants to purchase 1,320,000 shares of
common stock at an average purchase price of $3.92 in conjunction with the $25
million Equity Line of Credit. The warrants are immediately exercisable and will
expire three years from the date of issuance. These warrants were accounted for
as a cost of capital and were recorded as equity.

On May 2, 2000 the Company issued warrants to purchase approximately 75,000
shares of common stock at an average purchase price of $2.07 in conjunction with
the $1 million Convertible Debenture. The warrants are immediately exercisable
and will expire three years from the date of issuance. The fair value of these
warrants was accounted for as a discount on the debt issued and is being
amortized as interest expense over the term of the agreement.

On May 8, 2000 the Company issued warrants to purchase 3,464 shares of Series A
Convertible Preferred Stock at an exercise price of $100 per share. The shares
may be converted into a maximum of 250,724 shares of common stock. The warrants
are immediately exerciseable and will expire three years from the date of
issuance. The fair value of these warrants was accounted for as a "Deemed
Dividend" in conjunction with the beneficial conversion feature.

8. Stock-Based Compensation

The Company granted 105,000 and 180,000 shares of restricted stock to certain
employees during the years ended June 30, 2000 and 1999, respectively. The
shares are restricted for one year following the date of grant and require that
the employee remain in continuous employment for a period of one year from the
date of grant. Compensation expense related to these grants is recognized
ratably over the one year vesting period.

Total compensation cost for stock awards issued to employees, net of
cancellations, was approximately $443,000 and $45,000 for the years ended June
30, 2000 and 1999, respectively.

In April 1999, the President of the Company granted, to an officer, an option to
purchase 225,000 shares at the fair market value at the date of grant of $1.125.
The grant was authorized by the President in connection with the employment of
this individual in April 1999.


                                       43
<PAGE>   44


                       Pet Quarters, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements

                            June 30, 2000 (continued)


On June 6, 2000, the Company's Board of Directors gave approval to the
establishment of a Management Incentive Plan under which up to 2.5 million
shares of the Company's common stock or common stock options can be granted to
key employees, consultants and directors at the fair value of date of grant. As
of June 30, 2000 the Company has granted 1,140,000 common stock options pursuant
to this plan.

The Company has exchanged common stock, or common stock options for a variety of
services. The Company records the cost associated with these transactions in
accordance with FASB Statement 123 "Accounting for Stock-Based Compensation".
For the years ended June 30, 2000 and 1999 the Company recognized approximately
$1,384,000 and $42,000 of expense for these services.

The following table summarizes the activity under the Company's Management
Incentive Plan and other employee options granted:

<TABLE>
<CAPTION>
                                                                                        Weighted Average
                                                       Shares                            Price Per Share
                                        ------------------------------------   ------------------------------------
                                           2000         1999         1998         2000         1999         1998
                                        ----------   ----------   ----------   ----------   ----------   ----------
<S>                                     <C>          <C>          <C>          <C>          <C>          <C>
Outstanding at beginning of year           225,000            0            0   $    1.125   $       --   $       --
Granted                                  1,340,000      225,000            0        1.879        1.125           --
Exercised                                        0            0            0           --           --           --
Canceled                                         0            0            0           --           --           --
                                        ----------   ----------   ----------
Outstanding at end of year               1,565,000      225,000            0           --           --           --
                                        ==========   ==========   ==========

Exercisable at end of year                 875,000      150,000            0
                                        ==========   ==========   ==========
</TABLE>

Pursuant to the provisions of SFAS No. 123 "Accounting for Stock-based
Compensation," the Company has elected to continue using the intrinsic-value
method of accounting for stock-based awards to employees. Accordingly, the
Company has not recognized compensation expense on the issuance of its stock
options and warrants.

Pursuant to SFAS No. 123, pro forma net earnings per share has been determined
as if the Company had accounted for its stock options and warrants under the
fair value method. The fair values of these options and warrants were estimated
at the date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions for the years ended 2000 and 1999,
respectively; risk-free interest rates of 6.0% and 6.0%; expected dividend
yields of 0% for each year presented; volatility factors of the expected market
price of the Company's Common Stock of 100 and 100; and a weighted-average life
of the options and warrants of seven years in 2000 and 1999. The
weighted-average fair value of the options and warrants granted in 2000 and 1999
was $0.96 and $1.43,respectively. There were no options granted during 1998.

For purpose of pro forma disclosures, the estimated fair value of stock options
and warrants is not material to the consolidated financial statements for the
years ending June 30, 2000, 1999 and 1998.

9. Bridge Loan

The Company borrowed $4.6 million from the Sun Valley Trust (the "Trust") on
July 30, 1999 to acquire Humboldt Industries (see Note 3). Both unaffiliated
individuals and entities and affiliated individuals contributed money to the
Trust. Individuals affiliated with the Company accounted for $1,023,000 of the
$4.6 million. The Company issued 153,334 shares of its common stock (valued at
$651,671, or $4.25 per share, the closing price on July 30, 1999) to the Trust
as an origination fee. The Company amortized the fair value of these shares over
the initial two month period of the loan.

The Bridge Loan was secured by all of the outstanding shares of stock of both
Humboldt and Maplewood. The original note was payable in full on October 1,
1999. The Company failed to make the required payment, and shortly thereafter,
the trustee attempted to foreclose on the collateral.


                                       44
<PAGE>   45


                       Pet Quarters, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements

                            June 30, 2000 (continued)


On November 10, 1999, the Company executed an extension of the Bridge Loan. In
addition, a five percent (5%) penalty of $230,000 was added to the outstanding
principal amount of the note, resulting in an outstanding principal balance of
$4,830,000. After negotiation, the Company issued to the Trust an additional
275,000 shares of common stock valued at $483,010 as a further origination fee.
Both the penalty and additional fee were expensed as a troubled debt
restructuring in accordance with FAS 15.

In connection with the Bridge Loan extension, the interest rate was reduced from
12.5% per annum to 10% per annum, and the maturity date was extended to May 10,
2000. In exchange, the Company agreed to make monthly partial interest payments
of $20,000 by the 10th day of each month commencing December 10, 1999. The
accrued but unpaid interest accumulated interest free until the Company raised
additional capital. The terms of the extension also required a partial principal
payment of $1,000,000 on February 10, 2000. On February 3, 2000, the Company
paid the $1,000,000 principal payment to the Trust.

In connection with the extension of the Bridge Loan, the Company was also
required to pay interest, attorney fees, and associated expenses of the trustee
in the amount of $204,723. These funds were borrowed from related parties
through the issuance of two convertible notes for $102,361 each. These notes
were convertible into common stock of the Company at a rate of $.50 of debt for
each share of common stock. On January 27, 2000 both of the notes were converted
into a total of 409,446 shares of common stock of the Company.

The conversion feature resulted in a beneficial conversion feature to the
holders of the notes of $626,452 computed as the closing price for the Company's
stock on November 10, 1999 ($2.03), less the conversion price for each share
($.50), multiplied by the number of shares obtained in the conversion (409,446).
This beneficial conversion feature was recorded by the Company as a component of
the troubled debt restructuring at the time of issuance.

On May 10, 2000, the Company paid the remaining principal balance and all
accrued interest on the Bridge Loan and received a release of the collateral
from the trustee.


                                       45
<PAGE>   46


                       Pet Quarters, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements

                            June 30, 2000 (continued)


10. Notes and Capital Leases Payable

<TABLE>
<CAPTION>
                                                                           June 30
                                                                       2000         1999
                                                                    ----------   ----------
<S>                                                                 <C>          <C>
Unsecured note payable to Pine Tree Management
   Corporation with variable interest of prime minus 1%
   (8.5% at June 30, 2000), interest payable quarterly
   beginning September 10, 1999 with $45,000 principal
   payment due September 15, 2000 and 2001.                         $   90,000   $       --
Capital lease payable to a leasing company due in monthly
   installments of $5,096 until May 2003 with no stated
   interest rate. The lease is guaranteed by a stockholder             153,147           --
Capital lease payable to a leasing company due in monthly
   installments of $3,332 until December 2004 with no stated
   interest rate. The lease is guaranteed by a stockholder             143,552           --
                                                                    ----------   ----------
                                                                       386,669           --
Less current portion                                                   125,763           --
                                                                    ----------   ----------
                                                                    $  260,936   $       --
                                                                    ==========   ==========
</TABLE>


Maturities of notes and capital leases are as follows:

<TABLE>
<S>                                                            <C>
2001                                                           $ 125,763
2002                                                             129,633
2003                                                              84,309
2004                                                              37,897
2005                                                               9,067
                                                               ---------
                                                               $ 386,669
                                                               =========
</TABLE>

Equipment leased under capital lease obligations is included in furniture and
equipment at June 30, 2000 and 1999. Amortization of the leased equipment is
included in depreciation expense.

The Company has a $250,000 line of credit agreement, which expires July 10,
2000. At June 30, 2000 there were no amounts outstanding under this agreement.
On July 10, 2000, the Company increased its line of credit agreement to
$950,000. The line of credit expires October 10, 2000.


                                       46
<PAGE>   47


                       Pet Quarters, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements

                            June 30, 2000 (continued)


11. Convertible Debenture

On May 5, 2000, the Company borrowed $1,000,000 pursuant to the terms of a 6%
convertible debenture. The convertible debenture requires the Company to make
quarterly interest payments, beginning August 5, 2000, and the full amount of
the loan is due and payable on November 5, 2000. The debenture is convertible,
at the option of holder, into a minimum of 666,666 shares of the Company's
common stock at a rate of $1.50 per share or 85% of the average price of the
lowest three days during the last twenty-two days prior to notice of the
conversion. The proceeds from the debenture were used to retire the Bridge Loan.
Non-cash interest expense in the amount of $290,000 was recorded at the date of
issuance due to the beneficial conversion feature included in this debenture.

In conjunction with this debenture, the Company issued stock purchase warrants
for the purchase of up to 75,172 shares of common stock at an average exercise
price of $2.07 per share. Accordingly, a portion of the aggregate lender
proceeds of $60,000 has been allocated to the warrants, based on their estimated
fair market values at issuance. The beneficial conversion feature and stock
purchase warrants have been accounted for as a debt discount on the convertible
debentures. The debt discount is being amortized over the term of the
convertible debenture and is recognized in the Statement of Operations as
additional interest expense as follows:

<TABLE>
<S>                                            <C>
Face amount of convertible debentures          $ 1,000,000
Value of beneficial conversion feature            (290,000)
Value of stock purchase warrants                   (60,000)
                                               -----------
                                                   650,000
Amortization of discount for beneficial
 conversion feature and stock purchase
 warrants                                          300,000
                                               -----------
                                               $   950,000
                                               ===========
</TABLE>


12.  Equity Line of Credit Agreement

On March 15, 2000, the Company entered into an equity line of credit agreement
with Splendid Rock Holdings, Ltd., whereby the Company may sell or "put", from
time to time, up to an aggregate of $25 million of common stock at a price equal
to 85% of the average market price of the common stock as defined by the Line of
Credit Agreement. The maximum dollar amount of shares that may be put is subject
to certain volume and timing restrictions.

The Company had issued no stock pursuant to this agreement as of June 30, 2000
(see Note 16).

In conjunction with this agreement the Company issued to Splendid Rock Holdings,
Inc. warrants to purchase up to 1,320,000 shares of common stock at an average
exercise price of $3.84. As currently structured, the Company will account for
the value of the warrants issued


                                       47
<PAGE>   48


                       Pet Quarters, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements

                            June 30, 2000 (continued)


($1,774,000) as a cost of the issuance of common stock and, accordingly, this is
not expected to impact future results of operations.

13. Segment Disclosures

Prior to the purchase of Humboldt Industries effective August 1, 1999, the
Company operated in one segment-internet sales of pet supplies. Beginning August
1, 1999, the Company began, through the purchase of Humboldt Industries, a
catalog segment. The following table presents information on the operating
segments for the years ended June 30, 2000, 1999 and 1998:

<TABLE>
<CAPTION>
                                            Years ended June 30
                                   2000            1999            1998
                               ------------    ------------    ------------
<S>                            <C>             <C>             <C>
Net sales:
   Internet                    $    650,759    $    262,470    $     43,835
   Catalog                       13,080,388              --              --
                               ------------    ------------    ------------
                               $ 13,731,147    $    262,470    $     43,835
                               ============    ============    ============
Loss from operations:
   Internet                    $ (6,676,943)   $ (1,058,270)   $   (833,172)
   Catalog                       (1,888,158)             --              --
                               ------------    ------------    ------------
                               $ (8,565,101)   $ (1,058,270)   $   (833,172)
                               ============    ============    ============
Other income (expense):
   Internet                    $ (2,752,986)   $      6,005    $     17,013
   Catalog                               --              --              --
                               ------------    ------------    ------------
                               $ (2,752,986)   $      6,005    $     17,013
                               ============    ============    ============
Assets:
   Internet                    $ 13,697,272    $  1,042,285    $  1,489,059
   Catalog                        8,149,680              --              --
                               ------------    ------------    ------------
                               $ 21,846,952    $  1,042,285    $  1,489,059
                               ============    ============    ============
</TABLE>

Although the Company sells the same product at the same price through the
internet and catalog segments, the manner of selling is different with the
internet segment having a potential for a much broader distribution with far
more customers than can be reached through the traditional catalog distribution.
Revenues by geographical location of customer is not practical to determine.

14. Fair Value of Financial Instruments

The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value.

- Cash and cash equivalents, accounts receivables, accounts payables, and notes
payable to related party - The carrying amount approximates fair value because
of the short maturity of these instruments.


                                       48
<PAGE>   49


                       Pet Quarters, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements

                            June 30, 2000 (continued)


- Long-term notes and capital leases payable - The estimated fair value was
determined based upon the present value of the expected cash flows considering
expected maturities and using interest rates currently available to the Company
for long-term borrowings with similar terms. At June 30, 2000, the estimated
fair value of long-term notes and capital leases payable approximates its
carrying value.

15. Earnings Per Share

The following table sets for the computation of basic and diluted earnings per
share ("EPS"):


<TABLE>
<CAPTION>
                                                            Year Ended June 30,
                                             -------------------------------------------------
                                                 2000                1999             1998
                                             -------------      -------------      -----------
<S>                                          <C>                <C>                <C>
Numerator:
     Net loss and numerator for basic
     and diluted loss per share              $ (14,718,087)     $  (1,052,265)     $  (816,179)
                                             =============      =============      ===========

Denominator:
     Denominator for basic earning per
     share - weighted-average shares            12,482,101         11,453,000        8,568,125

     Employee stock options                             --                 --               --
     Warrants                                           --                 --               --
     Contingent shares                                  --                 --               --
                                             -------------      -------------      -----------
     Dilutive potential common shares                   --                 --               --

     Denominator for diluted earnings
     per share - adjusted weighted-average
     shares and assumed conversions             12,482,101         11,453,000        8,568,125
                                             =============      =============      ===========

Basic loss per share                         $       (1.18)     $       (0.09)     $     (0.10)
                                             =============      =============      ===========

Diluted loss per share                       $       (1.18)     $       (0.09)     $     (0.10)
                                             =============      =============      ===========
</TABLE>

The effect of all potential common shares is anti-dilutive in the calculation
of diluted loss per share and therefore have been excluded from the calculation.

16. Subsequent Events (Unaudited)

On July 17, 2000, the Company borrowed $700,000 on its line of credit. The funds
were primarily used for working capital and the extinguishment of the capital
leases.

On September 1, 2000, the Company sold 750,000 shares of common stock to
Splendid Rock Holdings, Ltd. for a price of $.80 per share pursuant to the
equity line of credit agreement. These sales resulted in aggregate net proceeds
to the Company of approximately $562,500. A placement fee of $36,000 was paid in
connection with this draw down.

On September 1, 2000, the offer to sell the Lonoke, Arkansas facility expired.
The Company is pursuing other options concerning the sale of the facility (see
Note 4).


                                       49
<PAGE>   50
<TABLE>
<CAPTION>
         Exhibit No.                       Description
         -----------                       -----------
<S>                       <C>
             3.1          Articles of Incorporation, as amended, of Pet
                          Quarters, Inc.(1)
             3.2          Articles of Amendment of Pet Quarters, Inc., dated May
                          8, 2000, designating the Series A Convertible
                          Preferred Stock(2)
             3.3          Bylaws of Pet Quarters, Inc.(3)
             21.1         Subsidiaries of Registrant
             27.1         Financial Data Schedule
</TABLE>






----------

(1) Incorporated by reference from the Registrant's Form 10SB-12g, filed on
December 10, 1999.

(2) Incorporated by reference from the Registrant's Form 8-K, filed on March 7,
2000.

(3) Incorporated by reference from the Registrant's Form S-1 filed on June 8,
2000.





                                       50
<PAGE>   51


                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                       PET QUARTERS, INC.


September 27, 2000                     By: /s/ STEVE DEMPSEY
                                          --------------------------------------
                                          Steve Dempsey
                                          Chairman and Chief Executive Officer

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.



September 27, 2000                     By: /s/ STEVE DEMPSEY
                                          --------------------------------------
                                          Steve Dempsey
                                          Chairman and Chief Executive Officer


September 27, 2000                     By: /s/ GREGG ROLLINS
                                          --------------------------------------
                                          Gregg Rollins
                                          Chief Financial Officer


September 27, 2000                     By: /s/ NILOO HOWE
                                          --------------------------------------
                                          Niloo Howe
                                          President


September 27, 2000                     By: /s/ ROBERT M. BROWN III
                                          --------------------------------------
                                          Robert M. Brown III
                                          Director


September 27, 2000                     By: /s/ FRANK CREER
                                          --------------------------------------
                                          Frank Creer
                                          Director


September 27, 2000                     By: /s/ J. TOD FETHERLING
                                          --------------------------------------
                                          J. Tod Fetherling
                                          Director


September 27, 2000                     By: /s/ DINO MOSHOVA
                                          --------------------------------------
                                          Dino Moshova
                                          Director


September 27, 2000                     By: /s/ JERRY W. SHELTON
                                          --------------------------------------
                                          Jerry W. Shelton
                                          Director





                                       51
<PAGE>   52



                                INDEX OF EXHIBITS



<TABLE>
<CAPTION>
           EXHIBIT
           NUMBER                       DESCRIPTION
           -------                      -----------
<S>                       <C>
             3.1          Articles of Incorporation, as amended, of Pet
                          Quarters, Inc.(1)
             3.2          Articles of Amendment of Pet Quarters, Inc., dated May
                          8, 2000, designating the Series A Convertible
                          Preferred Stock(2)
             3.3          Bylaws of Pet Quarters, Inc.(3)
             21.1         Subsidiaries of Registrant
             27.1         Financial Data Schedule
</TABLE>






----------

(1) Incorporated by reference from the Registrant's Form 10SB-12g, filed on
December 10, 1999.

(2) Incorporated by reference from the Registrant's Form 8-K, filed on March 7,
2000.

(3) Incorporated by reference from the Registrant's Form S-1 filed on June 8,
2000.




                                       52