<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB


                /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 1999

                                       OR


          / / 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: 1-11873

                                 K2 DESIGN, INC.
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                                        <C>
                    Delaware                                             13-3886065
------------------------------------------------           ---------------------------------------
(State or other jurisdiction of incorporation or           (I.R.S. Employer Identification Number)
                 organization)
</TABLE>


                  30 Broad Street, 16th Fl., New York, NY 10004
          (Address of principal executive offices, including zip code)

                    Issuer's telephone number: (212) 301-8800

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

                                  Common Stock
                                (Title of Class)

                    Redeemable Common Stock Purchase Warrants
                                (Title of Class)

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

                                      None.

         Check whether the issuer: (1) 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____

         Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation SB contained is this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. Yes____ No X

         State issuer's revenues for its most recent fiscal year: $5,858,949.

         As of March 15, 2000, there were outstanding 3,353,034 shares (not
including treasury shares) of Common Stock (the "Common Stock") and Redeemable
Common Stock Purchase Warrants to purchase an aggregate of 1,000,000 shares of
Common Stock (the "Warrants"). Based on the closing sales price of the Common
Stock on March 15, 2000 of $7.25 per share, the approximate aggregate market
value of Common Stock held by non-affiliates was $24,309,497.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the Registrant's 2000 Definitive Proxy Statement, which
statement will be filed with the Securities and Exchange Commission not later
than 120 days after the end of the fiscal year covered by this Report, are
incorporated by reference in Part III hereof.

         Certain exhibits are incorporated by reference to the Registrant's
Registration Statement on Form SB-2 and the amendments thereto, as listed in
response to Item 13(a)(2).

Transitional Small Business Disclosure Format (check one):

                              Yes ___ No X
<PAGE>

The Business section and other parts of this Report contain forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Factors Affecting
Operating Results and Market Price of Stock" commencing on page 10.

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

General

         K2 Design, Inc. (the "Company" or "K2") is a professional services firm
specializing in business consulting, development and design related to digital
communications. Founded in 1993, the Company has expanded its core business
operations from primarily Web site design services to a wide range of
consulting, design, development and online marketing services, including
innovative technology-based design and Web simulcasting. The Company has
developed Web sites and online applications for companies, including American
Express Company, Bayer Corporation, Lexis-Nexis, MCI Worldcom Inc., NCR
Corporation, Oppenheimer Funds, Philips Lighting Company, and TD Waterhouse
Securities.

         The Company has developed a proprietary methodology called W3
Organizational Modeling that is based upon the Company's experience in
organizational behavior related to the Web. The Company uses this methodology as
a guide in developing online communications strategies for its clients. Recent
projects using this methodology have included the development of Web sites to
reposition corporate brands, applications to promote e-commerce and online
account management, extranets to communicate with dealers and distributors,
intranets to support human resources and other corporate communications, online
customer service tools to decrease dependence on more costly telecommunications
services, and Web sites to develop sales leads, including a customer transaction
history.

         The Company's principal offices are located at 30 Broad Street, New
York, New York 10004 and its telephone number is (212) 301-8800. The Company's
Web site is located at http://www.k2design.com. Information contained in, or
accessible through, the Company's Web site is not part of this report.

K2 SERVICES

         K2 partners with clients to focus on how new and emerging technologies
can help them build one-to-one relationships with customers, employees and
vendors. Through the strategic and technical expertise, media knowledge, and
creative talent of its team of employees, the Company assists its clients in
achieving a favorable return-on-investment from digital channels of e-commerce,
information, customer support, advertising and entertainment. These channels
include Web sites, transmission of broadband content, intranets, extranets,
online media, and wireless appliances.

         The Company currently provides its clients with a range of services,
including: qualitative and quantitative research, usability labs to test
graphical user interfaces, navigation, functionality and systems, positioning
studies for online branding, strategic planning, e-commerce planning, business
process reengineering, online media planning and buying, proprietary media
partnerships, marketing strategies, Web design, creative services for online
advertising (e.g., banners, rich media, interstitials), technical strategies,
requirements specifications and programming.

K2 STRENGTHS

Focus on Clients' Business Objectives

         The Company has made understanding its clients' business challenges the
primary focus that guides its service offerings. The Company typically works
with a client's management across a variety of business units and geographies to
determine how best to utilize digital channels to realize the client's business
goals. Once a client's business objectives are identified (e.g., increasing
customer loyalty and retention, increasing sales or accounts per customer,
reducing customer service costs or lowering employee turnover), the Company
typically provides research, consulting, strategic planning and design services
to the client to develop an innovative, technology-driven solution to the
identified objectives. The Company's services often involve in-depth consulting
and collaboration with multiple divisions within a client's corporate structure.
Although some projects are limited in scope and duration, the Company often
develops an ongoing relationship with the client as a result of the significant
funding invested by the client in the overall strategy, the multi-divisional
nature of the client and

                                       1
<PAGE>

the ongoing need for further adaptation as innovations in digital communications
continue to emerge.

Technological Expertise

         The Company believes the creative application of leading technologies
is crucial to the success of its business. The Company's technical programming
personnel are skilled in various computer operating systems, tools and
languages, including C/C++, Visual Basic, Relational Databases, Fortran, Unix,
Linux, Perl, PHP, Java, Real Audio and Video, Windows NT, Netscape server,
Apache server, Director, Enliven, Flash, Quicktime, Streaming Media, SMIL, XML,
and wireless (WAP), among others. These programmers are responsible for
providing complex computer programming for applications that can be integrated
into Web sites as well as periodically assessing new technologies in order to
identify and deploy, directly and through independent contractors, those that
are most promising for enhancing the Company's business and that of its clients.

Creative Expertise

         The Company believes that, in addition to the creative elements
required in traditional graphic design, superior interactive development
requires that the end product is easy-to-use, contains intuitive interfaces and
seamless integrated technologies and has an engaging look and feel. Management
believes that the Company's creative staff possesses a broad spectrum of
expertise to meet clients' creative needs. In order to maintain high levels of
creativity and quality, the Company both recruits senior talent and develops
entry-level staff through mentoring relationships and external training
programs.*

Media Planning and Buying

         The Company has determined through testing and ongoing results
monitoring that overall media planning is critical to the success of an online
advertising program. The K2 approach involves media research, planning,
negotiation of buys, results audits, and optimization of media plans based on
K2's analysis of those results. During 1998 and 1999, some of the Company's most
successful online marketing campaigns included proprietary initiatives developed
for individual clients. The development of strategic insights in these campaigns
required a significant investment of time and resources, including creative
brainstorming, which has become one of the Company's fee-based services. To
heighten competitiveness, the Company has also invested in both strategic
research and syndicated services for media decision support, which are accounted
for as a part of overhead.

Management Skills

         Competition for employees with Web-based skills is intense. In
addition, the Internet sector is widely recognized as fast-paced and
fast-changing. To address these challenges, the Company has recruited seasoned
senior managers with a track record for successfully managing in volatile
situations and high-growth industries. Further, in an effort to retain its
skilled employees, management has devoted significant time and resources to
employee communications, training and employee welfare programs.

K2 STRATEGY

Capitalize on Accomplishments and Market Opportunities

         The Company believes that the proliferation of the Internet will
continue to provide substantial opportunities to the Company and that
recognition of its success, as evidenced by recent industry awards and the
development of ongoing relationships with Fortune 500 clients, will continue to
enhance its marketing efforts.* The Company's management does not, however,
believe that the Company's primary business will always be limited to the
Internet.* The Company produces digital content which may be carried over a
variety of emerging technologies such as Vertical Blanking Interval (VBI),
digital satellite, wireless and broadband devises.* Although there is no
assurance that any of these technologies will achieve acceptance in the
marketplace, the Company believes its services could be utilized over these
channels as well.

--------
* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual future performance will meet
the Company's current expectations. Investors are strongly encouraged to review
the section entitled "Factors Affecting Operating Results and Market Price of
Stock" commencing on page 10, for a discussion of factors that could affect
future performance.

                                       2
<PAGE>

Leverage Development Efforts

         In the course of developing customized digital communications programs
for certain of its clients, the Company gains organizational consulting
expertise and technical know-how that can be applied in other efforts. The
Company believes that its experience has the potential to reduce future
development costs. Further, within the framework of its proprietary methodology,
W3 Organizational Modeling, the Company expects that it will be able to develop
service packages that build upon this expertise, offering increased value to the
Company's clients.* The Company may evolve its business model from one based on
generation of hourly fees to one that offers both fee-based consulting and
service packages with the potential for higher margins and faster
implementation.

Deploy Leading Technologies

         One of the Company's objectives is to apply both proven and emerging
technologies as they become available in order to maximize the effectiveness of
its digital planning and communications services. The Company has formed both
formal, exclusive and informal non-exclusive relationships with key technology
providers in an effort to gain access to, and influence the features of, the
Company's utilization of their technologies in areas such as domain management,
content management solutions, e-commerce and wireless applications.

Channel Marketing

         The Company will continue to focus on developing strategic
relationships with Channel Sources (defined below) that seek to augment their
businesses by making the Company's services available to their own customer
base. See "Marketing-Channel Sources."

MARKETING

General

         The Company markets its services directly and also seeks to form
strategic marketing relationships with third parties. Further, the Company's
growing reputation, through industry awards and relationships with Fortune 500
clients, has recently generated increased unsolicited interest in the Company's
services among companies seeking Web services providers. At December 31, 1999,
the Company had two employees dedicated to the management of such unsolicited
inquiries and the development of new business prospects. Additionally, three of
the Company's executive officers spend a portion of their time marketing the
Company's services. The Company also seeks to attract new clients through other
methods, including referrals from existing clients. The Company seeks to expand
its relationships across business units of client companies and deepen its
existing client relationships through a consultative approach that displays a
broad range of service offerings.

Channel Sources

         The Company's marketing efforts to date have focused in part on
developing strategic relationships with other companies, such as advertising
agencies, hardware and software companies and Internet service providers
("Channel Sources") that seek to augment their businesses by making available
interactive advertising and Web site design and creative services provided by
the Company and other third parties. The Company therefore targets advertising
agencies that do not offer Web site related services, providers of other
Internet services (e.g., access, connectivity and Web site hosting), consultants
and systems integrators, and other businesses whose clients are likely to
require the services that the Company provides.

CLIENTS

         K2's client relationships have ranged from Fortune 500 companies to
entrepreneurial Web related start-ups. In fiscal 1999, the Company's four
largest clients, varsitybooks.com, Inc. (approximately 21.8%), Standard & Poor's
Inc. (approximately 18.7%), MCI Worldcom Inc. (approximately 18.6%) and NCR
Corporation (approximately 17.0%), accounted for approximately 76.1% of total
revenue. In fiscal 1998, the Company's four largest clients, WavePhore, Inc.
(approximately 23.4%), Standard & Poor's Inc. (approximately 18.5%), Bell
Atlantic Corp. (approximately 6.0%) and Lexis-Nexis Group (approximately 5.8%),
accounted for approximately 53.7% of total revenue.

--------
* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual future performance will meet
the Company's current expectations. Investors are strongly encouraged to review
the section entitled "Factors Affecting Operating Results and Market Price of
Stock" commencing on page 10, for a discussion of factors that could affect
future performance.

                                       3
<PAGE>

         In the past, Web design businesses have tended to have project-oriented
engagements, with the completion of the project occurring over a 3 to 5 month
period. Although such assignments comprise an important part of K2's consulting
and creative business, our current business model, represented by W3
Organizational Modeling, involves a longer-term engagement with the client,
commencing with in-depth discovery and strategic planning that establishes a
foundation for ongoing relationships and ongoing revenue streams. K2's
consultative approach includes a dedicated effort to continue and cultivate
existing relationships with clients, many of which use online media placement as
a central part of their strategic activity. Such media activity is also
self-sustaining as long as performance benchmarks are achieved. For example,
Standard & Poor's Inc., which initially engaged the Company in 1997, accounted
for approximately 18.5% and 18.7% of revenue in 1998 and 1999, respectively, and
has continued to use K2's services in 2000. Significant media-driven client
relationships that have recently been terminated are varsitybooks.com, Inc. (in
the third quarter of 1999) and WavePhore, Inc. (in the third quarter of 1998).

TRADEMARKS

         The Company has applied to the U.S. Patent and Trademark Office for
several trademarks, all of which are currently in examination and have not yet
been published for opposition. There can be no assurance that any of these
trademarks will be granted. Trademarks for which the Company has applied include
K2(TM) and K2 Design(TM).

GOVERNMENT REGULATION

         The Company is not currently subject to direct regulation by any
government agency, other than regulations applicable to businesses generally,
and there are currently few laws or regulations directly applicable to Web site
service companies and marketing and communications firms. However, due to the
increasing media attention focused on the Internet, it is possible that a number
of laws and regulations may be adopted with respect to the Internet, covering
issues such as user privacy, pricing and characteristics and quality of products
and services. The adoption of any such laws or regulations may decrease the
growth of the Internet, which could in turn decrease the demand for the
Company's services and products and increase the Company's cost of doing
business or cause the Company to modify its operations, or otherwise have an
adverse effect on the Company's business, operating results or financial
condition. Moreover, the applicability to the Internet of existing laws
governing issues such as property ownership, libel and personal privacy is
uncertain. The Company cannot predict the impact, if any, that future regulation
or regulatory changes may have on its business. In addition, Web site developers
such as the Company face potential liability for the actions of clients and
others using their services, including liability for infringement of
intellectual property rights, rights of publicity, defamation, libel and
criminal activity under the laws of the U.S. and foreign jurisdictions. Although
the Company maintains $1 million of errors and omissions insurance, $1 million
of general liability insurance, and a $1 million umbrella policy, any imposition
of liability in excess of such policy limits or if not covered by such policies
could have a material adverse effect on the Company.

COMPETITION

         The markets for the Company's services are highly competitive and are
characterized by pressures to incorporate new technologies, accelerate
completion schedules and reduce prices. The Company expects competition for its
services to intensify in the future, especially as a result of consolidation
among service companies. The Company faces competition from a number of sources,
including potential clients that perform interactive marketing and
communications services and Web site development services in-house. Other
sources include management consulting firms, established Web services companies,
advertising agencies and integrated marketing companies with digital
communications departments, Internet-services and access providers and
information technology consulting and system integration firms who are expanding
their service offering. Many of the Company's competitors or potential
competitors have significantly greater financial, sales, marketing and other
resources than the Company. The Company's ability to retain relationships with
Channel Sources and its existing clients and generate new clients and
relationships with Channel Sources depends to a significant degree on the
quality of its services and its reputation, as compared with the quality of
services provided by, and the reputations of, the Company's competitors. The
Company also competes on the basis of creative reputation, price, reliability of
services and responsiveness. There can be no assurance that the Company will be
able to compete and its inability to do so would have a material adverse impact
on the Company's business, financial condition and operating results.

                                       4
<PAGE>

EMPLOYEES

         At December 31, 1999, the Company had 40 employees, of which 38 were
full-time employees. Full-time employees include 5 in strategic planning,
executive management and business development; 7 account directors, managers and
coordinators; 3 media planning/buying personnel; 12 creative and production
personnel; and 5 programmers, in addition to 6 administrative staff.

ITEM 2. DESCRIPTION OF PROPERTY

         The Company's offices occupy approximately 13,700 square feet of an
office building in New York City at an annual rent ranging, over the term of the
lease, from approximately $226,100 to $246,600 ($16.50 to $18.00 per square
foot) payable in equal monthly installments, plus the Company's allocable share
of certain real property taxes and building operating expenses in excess of
fixed levels as provided in the lease. The lease has a six-year term and expires
April 18, 2003. The Company believes that its current rental payment per square
foot is significantly below the average rental for comparable office space in
New York City. The Company's lease also grants to the Company a right of first
refusal to rent the two floors of the building that are contiguous with the
Company's offices in the event that the landlord of the building offers to rent
such space to an unaffiliated third party. In addition, the Company has the
right to extend the term of the existing lease for an additional five-year term
commencing on the day following the expiration of the initial term of the
existing lease. The Company also believes that the Company's current office
space can be reconfigured to make use of currently underutilized space.

         The Company no longer leases office space at 50 Broad Street, New York,
New York. The landlord of that building has exercised its option, pursuant to
the Company's lease, to cancel and terminate the lease as of October 31, 1999.

ITEM 3. LEGAL PROCEEDINGS

         The Company is not a party to any material pending legal proceedings as
of the date hereof.

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

         The Company did not submit any matters to a vote of its stockholders,
through the solicitation of proxies or otherwise, during the fourth quarter of
fiscal 1999.

                                       5
<PAGE>

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         The Company's Common Stock is traded on the NASDAQ SmallCap Market
("NASDAQ") under the symbol "KTWO." The following table sets forth, for the
periods indicated, the range of high and low bid prices of the Common Stock as
reported by NASDAQ from the quarter ended March 31, 1998, through December 31,
1999. These quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not necessarily represent actual transactions.

         Fiscal Quarter Ended           High                       Low
         --------------------           ----                       ---

         March 31, 1998                 $2 1/4                     $1 3/8

         June 30, 1998                  $6                         $1 7/8

         September 30, 1998             $4 9/16                    $1 1/2

         December 31, 1998              $5 13/16                   $1 1/16

         March 31, 1999                 $4 5/8                     $2 1/4

         June 30, 1999                  $5 3/4                     $2 1/2

         September 30, 1999             $3                         $1 7/16

         December 31, 1999              $10 11/16                  $2 1/2

         The approximate number of record holders of the Common Stock at
December 31, 1999 was 29, not including beneficial owners whose shares are held
by banks, brokers and other nominees.

         During 1999, the Company repurchased an aggregate of 171,167 shares of
its Common Stock on the open market and from four of its shareholders in a
separate transaction for a total cost of approximately $433,000. These shares
are reflected on the Company's books as treasury stock as of December 31, 1999.

         The Company has not paid any dividends. The Company does not expect to
pay cash dividends on its Common Stock in the foreseeable future as any earnings
are expected to be retained to finance the Company's operations. Declaration of
dividends in the future will remain within the discretion of the Company's Board
of Directors.

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

         The following presentation of management's discussion and analysis of
the Company's financial condition and results of operations should be read in
conjunction with the Company's Consolidated Financial Statements, the
accompanying notes thereto and other financial information appearing elsewhere
in this Report. This section and other parts of this Report contain
forward-looking statements that involve risks and uncertainties. The Company's
actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations-Factors
Affecting Operating Results and Market Price of Stock" commencing on page 10.

OVERVIEW

         The Company was founded in 1993 as a general partnership and initially
operated a traditional graphic design business. The Company was hired to design
a graphical user interface in March 1994 for Sierra Magazine Online, a
proprietary online service, and in August 1994 for NetMarket Inc., the first
company to perform a secure online transaction on the Internet, at which time
the Company shifted its principal business to Web site design and creation.
After the Company's initial public offering on July 26, 1996, the Company began
to develop its business as a full-service digital communications company,
largely in anticipation of demands from its clients for additional complementary
services. The Company now provides such services as strategic consulting, design
and development of Web sites, research, and online marketing.

                                       6
<PAGE>

RESULTS OF OPERATIONS

General

         Revenues are recognized on a percentage-of-completion basis. Provisions
for any estimated losses on incomplete projects are made in the period in which
such losses are determinable. A portion of the Company's revenues has been
generated on a fixed fee or cap fee basis, as well as on an hourly bill rate
basis.

         On June 1, 1998, the Company sold its CLIQNOW! Division to 24/7 Media,
Inc. and received both cash and common stock of 24/7 Media, Inc. At December 31,
1999, the Company owned 110,000 shares of common stock of 24/7 Media, Inc.,
valued on the Company's books at approximately $6.19 million, based on the
closing sales price of the common stock of 24/7 Media, Inc. on December 31, 1999
of $56 1/4 per share. As a result of management's decision to discontinue the
CLIQNOW! Division in May 1998 prior to the sale, the 1998 statement of
operations reflects the CLIQNOW! Division as a discontinued operation.
<TABLE>
<CAPTION>
                                                                                  Percentage of Revenues
                                                                                  Year Ended December 31,
                                                                                  ------------------------
                                                                                   1999              1998
                                                                                   ----              ----
<S>                                                                               <C>               <C>
Revenues                                                                          100.00%           100.00%

Operating expenses
             Direct salaries and costs                                             74.85%            75.51%
             Selling, general and administrative expenses                          50.75%            46.87%
             Depreciation                                                           6.42%             5.56%

                                                                                  ------            ------
                        Total operating expenses                                  132.02%           127.94%
                                                                                  ------            ------

                        Operating loss                                            (32.02)%          (27.94)%

Interest and other income, net                                                     45.51%             2.50%
                                                                                  ------            ------

Income (loss) before income tax provision and discontinued operations              13.49%           (25.44)%

Provision for income tax                                                            0.69%             0.61%


                                                                                  ------            ------
                        Income (loss) from continuing operations                   12.80%           (26.05)%

Loss from discontinued operations                                                   0.00%            (1.33)%

Gain from sale of discontinued operations                                           0.00%            46.64%
                                                                                   ------            ------
                        Net income                                                 12.80%            19.26%
                                                                                  ======            ======
</TABLE>

                                       7
<PAGE>

Revenues

         Gross revenues for the years ended December 31, 1999 and 1998 were
$5,859,000 and $6,420,000, respectively, or a decrease of $561,000 or 8.74% in
1999 as compared to 1998. Gross revenues include both fees paid to K2 for
services and pass-through media costs which are billed to K2 by media vendors
(for radio, newspaper, online media and other media placement costs) and then
reimbursed by clients. The decrease in revenues was due principally to a
decrease in media placement sales volume. Specifically, media placements totaled
$1,709,000 in 1999 and $2,596,000 in 1998, a decrease of $887,000 or 34.17%.
This reflects the evolution of the Company from an interactive agency and online
media buyer to a provider of fee-based professional services. In 1999, revenues
from continuing operations were primarily generated by professional services
rendered to clients for strategic planning, Web site development, research,
design and implementation, and media planning and buying. From 1998 to 1999
these services increased, generating net revenue of $3,009,000 for the year
ended December 31, 1999 versus $2,971,000 for the year ended December 31, 1998,
or a 1% increase. Net revenue represents gross revenue minus media cost of sales
and reimbursable expense pass-through billings. Net revenue in the first half of
1999 was lower relative to the second half of 1999, when net revenue increased
88.8% from the second to the third quarter of 1999 and 7.6% from the third to
the fourth quarter of 1999.

Direct Salaries and Costs

         Direct salaries and costs include all direct labor costs and other
direct costs related to project performance, such as media costs, independent
contractors, free lance labor, travel and meeting costs, printing, reproduction,
photography, research service costs, messengers, supplies and equipment costs
and bad debt expense. As a percentage of revenues, direct salaries and costs
decreased in 1999 as compared to 1998 from 75.51% to 74.85%. In absolute
dollars, the Company's direct salaries and costs for 1999 decreased to
$4,385,000 from $4,848,000 in 1998. In 1999, direct salaries and costs consisted
primarily of $1,806,000 of direct salary costs, $1,709,000 of media costs and
$361,000 paid to free lance artists and other independent contractors. The
remainder consisted of various direct costs mentioned above. In 1998, direct
salaries and costs consisted primarily of $2,596,000 of media costs, $1,735,000
of direct salary costs and $145,000 paid to free lance artists and other
independent contractors. The remainder consisted of various direct costs
mentioned above.

Selling, General and Administrative Expenses

         Selling, general and administrative expenses include all indirect labor
costs, professional fees, occupancy costs, telecommunications costs, recruitment
costs, public relations, marketing, advertising, entertainment, office expenses,
and insurance costs, among other things. As a percentage of revenues, selling,
general and administrative expenses increased in 1999 as compared to 1998 from
46.87% to 50.75%. In absolute dollars, the Company's selling, general and
administrative expenses for 1999 decreased to $2,974,000 from $3,009,000 in
1998. In 1999, selling, general and administrative expenses consisted primarily
of labor costs of $1,476,000, $462,000 of legal and professional fees, $325,000
of occupancy costs, $129,000 of recruitment costs, $128,000 of
telecommunications costs, $125,000 of public and investor relations costs, and
$66,000 of business insurance. The remainder consisted of various selling,
general and administrative costs mentioned above. In 1998, selling, general and
administrative expenses consisted primarily of labor of $1,511,000, $599,000 of
legal and professional fees, $303,000 of occupancy costs and $136,000 of
telecommunications costs, $63,000 of business insurance and $30,000 of public
relations. The remainder consisted of various selling, general and
administrative costs mentioned above.

Depreciation

         Depreciation expense was $376,000 and $357,000 for fiscal 1999 and
fiscal 1998, respectively, and related primarily to depreciation of equipment
and leasehold improvements. The depreciation expense in fiscal 1999 was
principally the result of depreciation of the Company's equipment and leasehold
improvements.

Interest and Other Income

         The Company's cash investments earned interest and other income net of
interest expense and other expenses of $2,667,000 for the year ended December
31, 1999. The Company incurred interest and other income net of interest expense
and other expenses of $161,000 for the year ended December 31, 1998. The
increase in interest and other income net of interest expense and other expenses
in 1999 is primarily due to the gain on the sale of shares of common stock of
24/7 Media, Inc. (symbol: TFSM) of $2,521,000 during that year.

                                       8
<PAGE>

Income (Loss) From Continuing Operations

         The Company reported income from continuing operations in 1999 of
$750,000 as compared to a loss from operations in 1998 of $(1,672,000). Included
in the 1999 income from continuing operations is the $2,521,000 gain on the sale
of 24/7 Media, Inc. stock. Had that amount not been included, there would have
been a loss from continuing operations in 1999 of $(1,771,000).

Selected Quarterly Operating Results (Unaudited)

         The following table presents unaudited quarterly financial information
for the period from January 1, 1998 to December 31, 1999. The information has
been derived from the Company's unaudited Consolidated Financial Statements. The
unaudited quarterly financial information has been prepared on the same basis as
the audited Consolidated Financial Statements and includes all adjustments,
including adjustments to remove discontinued operations from operating results
and normal recurring adjustments, that the Company considers necessary for a
fair presentation of such information when read in conjunction with the
Company's audited Consolidated Financial Statements and the accompanying notes
thereto appearing elsewhere in this Report. These results are not indicative of
results for any future period.
<TABLE>
<CAPTION>
                                          1998                                                       1999
                 -------------------------------------------------------    --------------------------------------------------------
                 March 31,      June 30,    September 30,   December 31,    March 31,      June 30,     September 30,   December 31,
                 ---------      --------    -------------   ------------    ---------      --------     -------------   ------------

<S>             <C>           <C>            <C>            <C>            <C>            <C>            <C>            <C>
Revenues        $ 2,140,382   $ 1,895,232    $ 1,901,265    $   483,088    $ 1,444,063    $   822,143    $ 1,705,708    $ 1,887,035
                -----------   -----------    -----------    -----------    -----------    -----------    -----------    -----------

Operating
Expenses:
Direct
salaries and
costs             1,465,601     1,202,492      1,448,140        731,539      1,412,891        718,456        989,361      1,264,524

Selling,
general and
administrative
expenses            534,220       686,894        655,281      1,132,369        632,544        719,197        836,467        785,499

Depreciation         89,008        88,271         86,539         93,061         96,010        103,795        101,595         75,011

Total
operating
expenses          2,088,829     1,977,657      2,189,960      1,956,969      2,141,445      1,541,448      1,927,423      2,125,034
                -----------   -----------    -----------    -----------    -----------    -----------    -----------    -----------

Operating
income (loss)   $    51,553   $   (82,425)   $  (288,695)   $(1,473,881)   $  (697,382)   $  (719,305)   $  (221,715)   $  (237,999)
                ===========   ===========    ===========    ===========    ===========    ===========    ===========    ===========
</TABLE>

         Quarterly revenues and operating results have fluctuated and will
fluctuate as a result of a variety of factors. These factors, some of which are
beyond the Company's control, include the timing of the completion, material
reduction or cancellation of major projects, the loss of a major client or the
termination of a relationship with a Channel Source, the level of media
purchased by a client through the Company, timing of the receipt of new
business, timing of the hiring or loss of personnel, changes in the pricing
strategies and business focus of the Company or its competitors, capital
expenditures, operating expenses and other costs relating to the expansion of
operations, general economic conditions and acceptance and use of the Internet.
The Company's quarterly operating margins may also fluctuate from period to
period depending on the relative mix of lower cost full time employees versus
higher cost independent contractors. Revenues and operating results are
difficult to forecast because of these fluctuations. The Company may be unable
to adjust spending in a timely manner to compensate for any unexpected revenue
shortfall, which event may have a material adverse effect on the Company's
operations for such period.

         The trading prices of the Common Stock and the Warrants are subject to
fluctuations in response to the announcement of new clients or Channel Sources,
quarterly variations in operating results, announcements of technological
innovations or new products or services by the Company or its competitors, as
well as other events or factors. In addition, the stock market has from time to
time experienced price and volume fluctuations which have particularly affected
the market price of technology-oriented and media companies, which often have
been unrelated to the operating performance of these companies. These broad
market fluctuations may adversely affect the market price of the Common Stock
and the Warrants.

                                       9
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

         The Company's currents assets increased by approximately $7,582,000, or
236%, from $3,217,000 at December 31, 1998 to $10,799,000 at December 31, 1999.
This increase in current assets was principally due to the Company's
reclassification of its investment in 24/7 Media Inc. stock from investment in
restricted securities to investment in securities available for sale, at market
value, as defined by SFAS 115. The restrictions on the sale of these securities
expired in 1999. The Company intends to sell its investment in the 24/7 Media,
Inc. stock during fiscal 2000. At December 31, 1999, the 110,000 shares still
held by the Company had a market value of $6,188,000. Other changes in current
assets included an increase in accounts receivable of approximately $656,000, or
244%, from $269,000 at December 31, 1998 to $925,000 at December 31, 1999.
Unbilled revenue increased by approximately $622,000, or 1,244%, from $50,000 at
December 31, 1998 to $672,000 at December 31, 1999. The Company's current
liabilities increased by approximately $1,171,000, or 60%, from $1,961,000 at
December 31, 1998 to $3,132,000 at December 31, 1999. This increase was
principally due to the $1,902,000 deferred tax liability relating to the
reclassification of the 24/7 Media, Inc. stock, from investment in restricted
securities to investment in securities for sale, at market value, as defined by
SFAS 115. Other changes included a decrease in accounts payable of approximately
$306,000, or 39% from $783,000 at December 31, 1998 to $477,000 at December 31,
1999, and a decrease in accrued expenses of approximately $452,000, or 45%, from
$999,000 at December 31, 1998 to $547,000 at December 31, 1999.

         The Company is dependent on its current assets of $10,799,000 (at
December 31, 1999), together with cash, if any, generated by operations, for
working capital in order to be competitive, to meet the increasing demands for
service, quality and pricing and for expansion of its business. While the
Company believes that its cash position together with cash expected to be
generated by operations will be sufficient to finance its operations for at
least one year, the Company may nevertheless require future substantial
alternative financing in order to satisfy its working capital needs, which may
be unavailable or prohibitively expensive since the Company's only assets
available to secure additional financing are accounts receivable and its
ownership of shares of common stock of 24/7 Media, Inc.* See "-- Factors
Affecting Operating Results and Market Price of Stock--Cash Flow Deficit; Need
for Additional Financing." Current liabilities increased by 59.8% to $3,133,000
at December 31, 1999 from $1,961,000 at December 31, 1998, due primarily to the
deferred tax liability relating to the restatement of investment securities
available for sale to market value. There were no deferred revenues at December
31, 1999 or December 31, 1998 as a result of no pre-billings on media campaigns.

         Cash used in the Company's operating activities of $(2,935,000) for the
year ended December 31, 1999 related primarily to increases in accounts
receivable and unbilled revenue and decreases in net income, accounts payable
and other accrued expenses, partially offset by an increase in non-cash
compensation expense.

         In 1999, the Company spent $142,000 on capital expenditures, consisting
of computer equipment, as well as furniture, fixtures and leasehold
improvements. The Company presently intends to make capital expenditures of
approximately $300,000 in 2000, consisting of equipment, furniture and fixtures
and leasehold improvements.

         The Company's cash position was further impacted in 1999 as a result of
the repurchase of 171,000 shares of the Company's common stock on the open
market as well as from four stockholders for an aggregate price of approximately
$433,000. In addition severance payments and related costs in the amount of
approximately $600,000 were made during 1999.

FACTORS AFFECTING OPERATING RESULTS AND MARKET PRICE OF STOCK

Ability to Hire Skilled Personnel in a Tight Labor Market

         Qualified personnel are in great demand throughout the e-commerce and
Internet services industry. The Company's success depends in large part upon its
ability to attract, train, motivate and retain highly skilled employees. The
Company's failure to attract and retain the highly-trained technical personnel
that are integral to the Company's services and support teams may limit the rate
at which the Company is able to grow its business.

--------
* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual future performance will meet
the Company's current expectations. Investors are strongly encouraged to review
the section entitled "Factors Affecting Operating Results and Market Price of
Stock" commencing on page 10, for a discussion of factors that could affect
future performance.

                                       10
<PAGE>

Competition

         The market for the Company's services is highly competitive. The
Company cannot be certain that it will maintain its competitive position against
current and potential competitors. The Company expects competition for its
services to intensify in the future. Many of the Company's potential competitors
may have significantly greater financial, marketing, sales, service, support and
other resources than the Company, thus enabling them to respond more quickly to
new or emerging technologies and to devote greater resources to the development,
promotion and sale of their services. There can be no assurance that the Company
will be able to compete and its inability to do so would have a material adverse
effect on the business, financial condition and results of operations of the
Company.

Cash Flow Deficit; Need for Additional Financing

         The Company's focus is on increasing the volume of all of its services.
As a result, the Company has hired and will continue to hire additional
personnel and has incurred and will continue to incur substantial expenses
related to administration, production, technical resources, marketing, customer
support and infrastructure in order to enhance and expand its operations. The
Company had an operating cash flow deficit of $(2,935,000) in fiscal 1999 and an
operating cash flow of $474,000 in fiscal 1998. The Company may require
substantial additional financing in order to satisfy its working capital needs,
which may be unavailable or prohibitively expensive since the Company's only
assets available to secure additional financing are accounts receivable and its
ownership of shares of common stock of 24/7 Media, Inc. Should such financing be
unavailable or prohibitively expensive when the Company requires it, the Company
would not be able to finance any expansion of its business and may not be able
to satisfy its working capital needs, either of which would have a material
adverse effect on the Company's business, operating results and financial
condition.

Recent Operating Income (Losses)

         The Company's revenues for the years ended December 31, 1999 and 1998
were $5,859,000 and $6,420,000, respectively, with income (loss) from continuing
operations of $750,000 and $(1,672,000), respectively, and a net income of
$750,000 in 1999 and $1,237,000 in 1998. The net income of $750,000 in fiscal
1999 included $2,521,000 in gains from the sale of 86,492 shares of the
Company's stock in 24/7 Media, Inc. There can be no assurance that the Company
will be profitable in the future or that revenue growth, if any, can be
sustained.

         The prospects of the Company must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in their early
stage of development, particularly companies in new and rapidly evolving markets
and especially those in Internet and other computer related markets. There can
be no assurance that the Company will be successful in addressing these risks.

Ability to Manage Growth

         Although the Company has not recently experienced substantial growth in
the number of the Company's employees, if the Company increases its personnel
significantly in the near future, there will be increased (i) responsibility for
both existing and new management personnel, (ii) strain on the Company's
existing management, administrative, operational, financial and technical
resources and (iii) increased demands on its management information systems and
controls. There can be no assurance that the Company will effectively develop
and implement systems, procedures or controls adequate to support the Company's
operations or that management will be able to achieve the rapid execution
necessary to fully exploit all opportunities for the Company's services. To
manage its business and any growth, the Company must continue to implement and
improve its operational and financial systems and continue to expand, train and
manage its employees. If the Company is unable to manage its business
effectively, the Company's business, operating results and financial condition
will be materially adversely affected.

Evolving Marketing Strategy

         The Company's marketing efforts have expanded as the range of services
which the Company offers has increased. In addition to developing strategic
relationships with other companies and Channel Sources that seek to augment
their businesses by directly or indirectly offering to their clients digital
planning and communications services provided by the Company and other third
parties, the Company also directly markets its core creative services as well as
the services of its media group.

         To try to avoid any conflict with a Channel Source, the Company does
not intend to offer services to clients referred by a particular Channel Source
that could be provided to those clients by that Channel Source. Since the
Company does not expect to offer its full range of services to these clients,
projects for them may be less profitable than full-service production
relationships with other clients. Should a Channel Source favor other providers
of similar services, fail to effectively market the Company's services as a
result of the Channel Source's competitive position or otherwise, or not utilize
the Company's

                                       11
<PAGE>

services to the extent anticipated by the Company, the Company may also be
adversely affected. The inability to recruit, manage or retain additional
Channel Sources, or their inability to market the Company's services effectively
or provide timely and cost-effective customer support and service, could
materially adversely affect the Company's business, operating results and
financial condition.

Project-Oriented Clients; Concentration of Revenues; Changes in Client Demands

         Since many of the Company's clients engage the Company on a single
project basis, clients from whom the Company generated substantial revenue in
one period have not necessarily been a substantial source of revenue in a
subsequent period. Additionally, costs are significantly higher with respect to
single projects as compared to servicing a client on a multiple project or
continuous basis. For example, during 1999, varsitybooks.com, Inc. and Standard
& Poor's Inc. accounted for approximately 21.8% and 18.7%, respectively, of
revenues. Also in 1999, varsitybooks.com, Inc. and one other large client
terminated their relationships with the Company; however, Standard & Poor's Inc.
continues to be an active and significant client of the Company. Due to the
Company's limited operating history and the developing nature of the Internet,
the Company generally cannot be sure whether its relationships with clients will
be on a project basis or on a longer term relationship basis. To the extent the
Company does not generate repeat or ongoing business from its clients, it will
incur the higher sales and marketing expenses associated with attracting new
clients as compared to those in attracting additional business from existing
clients.

         In addition, clients utilizing the services of a digital strategy and
communications firm such as the Company may choose to terminate that
relationship for a variety of reasons, some of which may be beyond the Company's
control, such as changes in the management structure of the client,
consolidation of service providers, changes in the service needs of the client,
and changes in the client's need for geographical representation. There can be
no assurance that the Company will be able to replace, on a timely basis or at
all, clients who have ceased to work with the Company for such reasons. The loss
of clients due to these reasons could have a material adverse effect on the
business, financial condition and results of operations of the Company.

Risk of System Failures

         The Company's success largely depends on the uninterrupted operation of
its computer and communications hardware systems. The Company's systems and
operations are vulnerable to damage or interruption from fire, flood, power
loss, telecommunications failure, break-ins, earthquake and similar events. The
Company presently has very limited redundant systems. The Company does not have
a formal disaster recovery plan and carries limited business interruption
insurance to compensate for any losses that may occur. The Company's servers are
also vulnerable to computer viruses, physical or electronic break-ins, and
similar disruptions, which could materially and adversely affect the Company.

Uncertain Adoption of Internet as a Medium of Commerce and Communications;
Dependence on Internet

         Demand and market acceptance for recently introduced services and
products like those offered by the Company are subject to a high level of
uncertainty. The use of the Internet in marketing and advertising and otherwise,
particularly by those individuals and enterprises that have historically relied
upon traditional means of marketing and advertising, generally requires the
acceptance of a new way of conducting business and exchanging information.
Enterprises that have already invested substantial resources in other means of
conducting business and exchanging information may be particularly reluctant or
slow to adopt a new strategy that may make their existing resources and
infrastructure less useful. There can be no assurance that the market for the
Company's services will develop and if it fails to develop, develops more slowly
than expected or becomes saturated with competitors, or if the Company's
services do not achieve market acceptance, the Company's business, operating
results and financial condition will be materially adversely affected.

         The Company's ability to derive revenues will also depend upon a robust
industry and the infrastructure for providing Internet access and carrying
Internet traffic. The Internet may not be accepted as a viable commercial
marketplace for a number of reasons, including potentially inadequate
development of the necessary network infrastructure or delayed development of
enabling technologies and performance improvements. To the extent that the
Internet continues to experience significant growth in the number of users, the
frequency of use or bandwidth requirements, there can be no assurance that the
infrastructure for the Internet will be able to support such demands. Concerns
about inadequate Internet infrastructure, security, reliability, accessibility,
privacy and the availability of cost-effective, high-speed service also may
inhibit growth in Internet usage. If the infrastructure necessary to support the
Internet's commercial viability is not developed, or if the Internet does not
become and remain a viable marketplace, the Company's business, operating
results and financial condition would be materially and adversely affected.

                                       12
<PAGE>

Risk of Changing Technology

         The services the Company offers, and the services and products the
Company expects to offer in the future, are impacted by rapidly changing
technology, evolving industry standards, emerging competition and frequent new
service, software and other product introductions. There can be no assurance
that the Company can successfully identify new business opportunities and
develop and bring new services or products to market in a timely and
cost-effective manner, or that services, products or technologies developed by
others will not render the Company's services or products noncompetitive or
obsolete. In addition, there can be no assurance that services, products or
enhancements introduced by the Company will achieve or sustain market acceptance
or be able to effectively address compatibility, inoperability or other issues
raised by technological changes or new industry standards. The Company's pursuit
of technological advances may also require the Company to seek assistance from
third parties.

Intellectual Property Rights; Risk of Infringement; Possible Litigation

         The Company believes that its success in its core business of
interactive advertising is not dependent upon patents, copyrights or trademarks
and the Company does not currently have any registered patents, copyrights or
trademarks, although applications for various trademarks have been made.
Consequently, the Company relies principally on a combination of common-law and
statutory law to protect its proprietary information and know-how. The Company
also utilizes technology owned by third parties. There can be no assurance that
licenses for any technology developed by third parties that might be required
for the Company's services would be available on reasonable terms, if at all.
See "Business--Trademarks."

         Although the Company does not believe that its services infringe the
proprietary rights of any third parties, there can be no assurance that third
parties will not assert claims based on these services against the Company in
the future or that any of those claims would not be successful. In addition,
many of the Company's competitors rely upon trade secret law. Litigation may be
necessary in the future to enforce the Company's intellectual property rights
and to protect its proprietary information, to determine the validity and scope
of the proprietary rights of others, or to defend against claims of infringement
or invalidity. Litigation of this nature, whether or not successful, could
result in substantial costs and diversions of resources, either of which could
have a material adverse effect on the Company's business, financial condition
and operating results. Furthermore, parties making claims against the Company
could secure a judgment awarding substantial damages, as well as injunctive or
other equitable relief which could directly or indirectly prohibit the Company
from providing certain services and products. A judgment of this nature could
have a material adverse effect on the Company's business, financial condition
and results of operations.

Conflicts of Interest; Restrictions

         The Company has been precluded and may be precluded in the future from
pursuing opportunities that require it to provide services to direct competitors
of existing clients or Channel Sources. In addition, the Company risks
alienating or straining relationships with clients and Channel Sources each time
the Company agrees to provide services to even indirect competitors of existing
clients or Channel Sources. Conflicts of interest may jeopardize the stability
of revenues generated from existing clients and Channel Sources and preclude
access to business prospects, either of which could have a material adverse
effect on the Company's business, financial condition and operating results.

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         See Item 13(a)(1) in Part IV.


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

         Not Applicable.

                                    PART III

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

         The information required for this item is incorporated by reference to
the Company's 2000 Definitive Proxy Statement which the Company will file with
the Securities and Exchange Commission no later than 120 days subsequent to
December 31, 1999.

                                       13
<PAGE>

ITEM 10. EXECUTIVE COMPENSATION

         The information required for this item is incorporated by reference to
the Company's 2000 Definitive Proxy Statement which the Company will file with
the Securities and Exchange Commission no later than 120 days subsequent to
December 31, 1999.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information required for this item is incorporated by reference to
the Company's 2000 Definitive Proxy Statement which the Company will file with
the Securities and Exchange Commission no later than 120 days subsequent to
December 31, 1999.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information required for this item is incorporated by reference to
the Company's 2000 Definitive Proxy Statement which the Company will file with
the Securities and Exchange Commission no later than 120 days subsequent to
December 31, 1999.

                                       14
<PAGE>

                                     PART IV

ITEM 13. EXHIBIT LIST AND REPORTS ON FORM 8-K

                                                                           Page

(a)         Documents filed as part of this report:

         1. Financial Statements and Schedule

            Report of Independent Public Accountants........................F-1

            Consolidated Balance Sheet - December 31, 1999..................F-2

            Consolidated Statements of Income - For the years ended
            December 31, 1999 and 1998......................................F-3

            Consolidated Statements of Comprehensive Income - For the years
            ended December 31, 1999 and 1998................................F-3

            Consolidated Statements of Changes in Stockholders' Equity -
            For the years ended December 31, 1999 and 1998..................F-4

            Consolidated Statements of Cash Flows - For the years ended
            December 31, 1999 and 1998......................................F-5

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

            Schedule II - Valuation and Qualifying Accounts.................F-12

         2. Exhibits

            3.1    Certificate of Incorporation of the Company*

            3.1(a) Amendment to Certificate of Incorporation of the Company*

            3.2    By-laws of the Company*

            3.2(b) Amendment to By-laws of the Company*

            4.1    Common Stock Certificate*

            4.2    Warrant Certificate*

            4.4    Warrant Agreement by and between Continental Stock Transfer &
                   Trust Company and the Company*

            4.5    Voting Agreement among Messrs. Centner, de Ganon, Cleek and
                   Szollose*

            10.1   1996 Stock Incentive Plan and Rules Relating thereto*

            10.2   1997 Stock Option Plan**

            10.3   Consulting Agreement with Harvey Berlent*

            10.4   Employment Agreement with Matthew G. de Ganon*

            10.5   Employment Agreement with Douglas E. Cleek*

                                       15
<PAGE>

            10.6   Agreement of Lease - 55 Broad Street, New York, New York*

            10.7   Employment Agreement with Lynn Fantom dated October 22,
                   1998***

            10.8   Extension of Employment Agreement with Matthew G. de Ganon
                   dated November 2, 1998***

            10.9   Extension of Employment Agreement with Douglas E. Cleek dated
                   January 15, 1999***

            10.10  Employment Agreement with Seth Bressman dated February 11,
                   1999***

            10.11  Lease Termination Agreement - Baltimore, Maryland***

            21.1   Subsidiary List*

            23.1   Consent of Arthur Andersen, Independent Accountants to the
                   Company

            27.1   Financial Data Schedule (EDGAR filing only)

*    Incorporated by reference from the Registrant's Registration Statement on
     Form SB-2, No. 333-4319.
**   Incorporated by reference from the Registrant's Form 10-KSB for its fiscal
     year ended 12/31/96.
***  Incorporated by reference from the Registrant's Form 10-KSB for its fiscal
     year ended 12/31/98.

         (b) The Company did not file any Current Reports on Form 8-K during the
last quarter of the period covered by this Report.

                                       16
<PAGE>

                                   SIGNATURES

         In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.


                                             K2 DESIGN, INC.

Dated: March 26, 2000                        By: /s/ Matthew G. de Ganon
                                                 -------------------------------
                                                 Matthew G. de Ganon, Chairman

                                POWER OF ATTORNEY

         Each of the undersigned hereby appoints Matthew G. de Ganon as his
attorney-in-fact to sign his or her name, in any and all capacities, to any
amendments to this Form 10-KSB and any other documents filed in connection
therewith to be filed with the Securities and Exchange Commission.

         In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
     Signature                           Title                                Date
     ---------                           -----                                ----
<S>                          <C>                                          <C>
/s/ Matthew G. de Ganon      Chairman of the Board                        March 26, 2000
------------------------
Matthew G. de Ganon

/s/ Lynn Fantom              Chief Executive Officer, President and       March 26, 2000
------------------------     Director
Lynn Fantom

/s/ Seth Bressman            Chief Financial Officer (Principal           March 26, 2000
------------------------     Financial and Accounting Officer)
Seth Bressman

/s/ Douglas E. Cleek         Executive Vice President and Director        March 26, 2000
------------------------
Douglas E. Cleek

/s/ P. Scott Munro           Director                                     March 26, 2000
------------------------
P. Scott Munro

/s/ Steven N. Goldstein      Director                                     March 26, 2000
------------------------
Steven N. Goldstein

/s/ David R. Sklaver         Director                                     March 26, 2000
------------------------
David R. Sklaver

/s/ Gary W. Brown            Director                                     March 26, 2000
------------------------
Gary W. Brown
</TABLE>

                                       17
<PAGE>

                                 K2 DESIGN, INC.
                                 AND SUBSIDIARY

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                           Page

Financial Statements of K2 Design, Inc. and Subsidiary

     Report of Independent Public Accountants.............................. F-1

     Consolidated Balance Sheet - December 31, 1999........................ F-2

     Consolidated Statements of Income - For the years
        ended December 31, 1999 and 1998................................... F-3

     Consolidated Statements of Comprehensive Income - For the years
        ended December 31, 1999 and 1998................................... F-3

     Consolidated Statements of Changes in Stockholders'
        Equity - For the years ended December 31, 1999 and 1998............ F-4

     Consolidated Statements of Cash Flows - For the years
       ended December 31, 1999 and 1998.................................... F-5

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

     Schedule II - Valuation and Qualifying Accounts....................... F-12
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To K2 Design, Inc:

We have audited the accompanying consolidated balance sheet of K2 Design, Inc.
(a Delaware corporation) and its subsidiary (a New York corporation) as of
December 31, 1999, and the related consolidated statements of income,
comprehensive income, changes in stockholders' equity and cash flows for the
years ended December 31, 1999 and 1998. 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 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 audits provide 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 K2 Design, Inc. and its
subsidiary as of December 31, 1999, and the results of their operations and
their cash flows for the years ended December 31, 1999 and 1998, in conformity
with generally accepted accounting principles.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for the purpose of complying with the
Securities and Exchange Commissions rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.


                                            ARTHUR ANDERSEN LLP


New York, New York
February 22, 2000

                                      F-1
<PAGE>

                         K2 DESIGN, INC. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEET
                                December 31, 1999
<TABLE>
<S>                                                                               <C>
                                     ASSETS

CURRENT ASSETS:
Cash & cash equivalents                                                           $  2,936,918
Accounts receivable, net of allowance for doubtful accounts of $100,000                925,564
Unbilled Revenue                                                                       672,590
Prepaid expenses and other current assets                                               75,995
Investment in securities available for sale, at market value                         6,187,500
                                                                                  ------------
          Total current assets                                                      10,798,567
FIXED ASSETS, net                                                                      588,054
RESTRICTED CASH                                                                        150,711
OTHER ASSETS                                                                             4,132
                                                                                  ------------
                    Total assets                                                  $ 11,541,464
                                                                                  ============

                       LIABILITIES & STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Current portion of capital lease obligations                                      $     28,712
Accounts payable                                                                       477,147
Accrued compensation & payroll taxes                                                   113,922
Accrued expenses                                                                       547,268
Customer advances                                                                       63,333
Deferred taxes - current                                                             1,902,130
                                                                                  ------------
          Total current liabilities                                                  3,132,512
LONG-TERM CAPITAL LEASE OBLIGATIONS                                                     41,256
                                                                                  ------------
          Total liabilities                                                          3,173,768

STOCKHOLERS' EQUITY:
Preferred stock, $0.01 par value, 1,000,000 shares authorized;
  0 shares issued and outstanding                                                            -
Common Stock, $0.01 par value 9,000,000 shares authorized;
  3,750,582 shares issued and 3,333,165 shares outstanding                              37,505
Treasury Stock, 417,417 shares at cost                                                (819,296)
Additional paid-in capital                                                           6,908,220
Accumulated other comprehensive income                                               2,853,196
Accumulated deficit                                                                   (611,929)
                                                                                  ------------
          Total stockholders' equity                                                 8,367,696
                                                                                  ------------
          Total liabilities & stockholders' equity                                $ 11,541,464
                                                                                  ============
</TABLE>

The accompanying notes are an integral part of this consolidated balance sheet.

                                      F-2
<PAGE>

                         K2 DESIGN, INC. AND SUBSIDIARY
                        CONSOLIDATED STATEMENTS OF INCOME
                 FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
                                                                                  1999                  1998
                                                                                  ----                  ----
<S>                                                                           <C>                   <C>
Revenues                                                                      $ 5,858,949           $ 6,419,967

Direct salaries and costs                                                       4,385,232             4,847,772

Selling, general and administrative expenses                                    2,973,707             3,008,764

Depreciation                                                                      376,411               356,879

Loss from continuing operations before interest & other income, net,
  income taxes and discontinued operations, net                                (1,876,401)           (1,793,448)

Gain on sale of securities, interest and other income, net                      2,666,600               160,777

Provision for income taxes                                                         40,542                39,143

Income (loss) from continuing operations                                          749,657            (1,671,814)

Loss from discontinued operations                                                       -               (85,309)

Gain on sale from discontinued operations, net of income taxes                          -             2,994,204
                                                                              -----------           -----------
Net income                                                                    $   749,657           $ 1,237,081
                                                                              ===========           ===========

Income (loss) per share from continuing operations -

Basic                                                                         $      0.22           $     (0.47)
                                                                              -----------           -----------
Diluted                                                                       $      0.21           $     (0.47)
                                                                              -----------           -----------

Loss per share from discontinued operations -

Basic                                                                         $         -           $     (0.02)
                                                                              -----------           -----------
Diluted                                                                       $         -           $     (0.02)
                                                                              -----------           -----------

Income per share from gain on sale of discontinued operations -

Basic                                                                         $         -           $      0.84
                                                                              -----------           -----------
Diluted                                                                       $         -           $      0.84
                                                                              -----------           -----------

Net income per share -

Basic                                                                         $      0.22           $      0.35
                                                                              ===========           ===========
Diluted                                                                       $      0.21           $      0.35
                                                                              ===========           ===========

Weighted average basic common shares outstanding                                3,442,946             3,553,861
                                                                              ===========           ===========

Weighted average diluted common shares outstanding                              3,643,837             3,553,861
                                                                              ===========           ===========


                         K2 DESIGN, INC. AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                 FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998


<CAPTION>
                                                                                  1999                  1998
                                                                                  ----                  ----
<S>                                                                           <C>                   <C>
Net Income                                                                    $   749,657           $ 1,237,081

Unrealized gains on investment securities, net of
  deferred taxes of $1,902,130                                                $ 2,853,196                     -
                                                                              -----------           -----------
Comprehensive Income                                                          $ 3,602,853           $ 1,237,081
                                                                              ===========           ===========
</TABLE>

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

                                      F-3
<PAGE>

                         K2 DESIGN, INC. AND SUBSIDIARY
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                 FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
                                                                        Accumulated
                                Number of                 Additional      Other                         Treasury
                                 Common         Par         Paid-in    Comprehensive    Accumulated       Stock
                                 Shares        Value        Capital       Income          Deficit         Amount        Total
                                ---------      -----     -----------   -------------    ------------   ----------    -----------
<S>                             <C>           <C>        <C>            <C>             <C>            <C>           <C>
BALANCE, January 1, 1998        3,680,671     $ 36,807   $ 6,348,940    $         -     $ (2,598,667)  $        -    $ 3,787,080

Repurchase of Treasury Stock            -            -             -              -                -     (386,781)      (386,781)


Net Income                              -            -             -              -        1,237,081            -      1,237,081

Compensation expense               12,146          121        80,023              -                -            -         80,144
                                ---------     --------   -----------    -----------     ------------   ----------    -----------

BALANCE, December 31, 1998      3,692,817       36,928     6,428,963              -       (1,361,586)    (386,781)     4,717,524

Repurchase of Treasury Stock            -            -                            -                -     (432,515)      (432,515)

Net Income                              -            -             -              -          749,657            -        749,657

Compensation expense and
  cashless exercise of stock
  options                          52,965          529       470,905              -                -            -        471,434

Proceeds from stock options
  exercised                         4,800           48         8,352              -                -            -          8,400

Change in fair value of
  securities available
  for sale                              -            -             -      2,853,196                -            -      2,853,196
                                ---------     --------   -----------    -----------     ------------   ----------    -----------
BALANCE, December 31, 1999      3,750,582     $ 37,505   $ 6,908,220    $ 2,853,196     $   (611,929)  $ (819,296)   $ 8,367,696
                                =========     ========   ===========    ===========     ============   ==========    ===========
</TABLE>

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

                                      F-4
<PAGE>

                         K2 DESIGN, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                 FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
                                                                                    1999                 1998
                                                                                    ----                 ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                             <C>                   <C>
Net Income                                                                      $   749,657           $ 1,237,081
Gain from sale of securities                                                     (2,521,083)                    -
Net gain from sale of discontinued operation                                              -            (2,994,204)
Adjustments to reconcile net income  to net cash provided by (used in)
  operating activities -
      Non-cash compensation expense                                                 471,434                80,144
      Depreciation                                                                  376,411               356,879
  Changes in operating assets and liabilities -
      Accounts receivable, net                                                     (656,391)            3,163,980
      Prepaid expenses and other current assets                                      (8,149)               37,893
      Unbilled revenue                                                             (622,138)              265,869
      Other assets                                                                    5,040                   901
      Accounts payable                                                             (306,069)           (1,127,163)
      Accrued compensation and payroll taxes                                         17,280               (64,107)
      Other accrued expenses                                                       (452,628)              138,396
      Deferred revenue and customer advances                                         12,045              (621,871)
                                                                                -----------           -----------
      Net cash (used in) provided by operating activities                        (2,934,591)              473,798
                                                                                -----------           -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
      Proceeds from sale of discontinued operation                                        -               782,459
      Gross proceeds from sale of investment securities                           3,647,209                     -
      Purchase of equipment                                                        (141,933)             (209,914)
                                                                                -----------           -----------
      Net cash provided by investing activities                                   3,505,276               572,545
                                                                                -----------           -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
      Principal payments on capital lease obligations                               (39,280)              (72,922)
      Options exercised for cash                                                      8,400                     -
      Purchase of common stock for treasury                                        (432,515)             (386,781)
                                                                                -----------           -----------
      Net cash used in financing activities                                        (463,395)             (459,703)
                                                                                -----------           -----------
      Net increase in cash and cash equivalents                                     107,290               586,640


CASH AND CASH EQUIVALENTS, beginning of year                                      2,829,628             2,242,988
                                                                                -----------           -----------
CASH AND CASH EQUIVALENTS, end of year                                          $ 2,936,918           $ 2,829,628
                                                                                ===========           ===========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid during the period for -
      Interest                                                                  $    12,156           $    28,575
      Income taxes                                                              $    54,343           $    25,609

  Non-cash investing activities -
      Assets acquired under capital lease obligations                           $    77,146           $         -
      Investment in restricted securities, at cost                              $         -           $ 2,558,300
</TABLE>

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

                                      F-5
<PAGE>

                         K2 DESIGN, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1999 AND 1998

1. ORGANIZATION AND BUSINESS

K2 Design, Inc. ("K2" or the "Company") commenced operations on March 1, 1993 as
a partnership. In January 1995 the Partnership contributed its capital into a
newly formed corporation and elected S Corporation status.

Effective January 1, 1996, the Company was reorganized as a Delaware Holding C
corporation having a wholly owned operating subsidiary incorporated in New York.
The reorganized corporation is authorized to issue 9,000,000 shares of common
stock, par value $.01 per share, and 1,000,000 shares of Preferred Stock, par
value $.01 per share.

K2 is a professional services firm specializing in business consulting,
development and design related to digital communications.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

Revenue Recognition

Revenues are recognized on the percentage of completion method based upon the
ratio of costs incurred to total estimated costs incurred and anticipated
profits earned on projects in progress in excess of amounts billed. Customer
advances represent amounts billed in excess of costs incurred and estimated
profit earned. Such billings generally occur at the beginning of contract
periods, and are in accordance with contract provisions. Provisions for any
estimated losses on uncompleted contracts are made in the period in which such
losses are determinable. A portion of the Company's revenues has been generated
on a fixed fee for service basis.

Cash and Cash Equivalents

The Company considers all short term investments having a maturity of three
months or less to be cash equivalents.

Investment in Securities Available for Sale

Investments in Securities Available for Sale are primarily equity securities. In
accordance with Statement of Financial Accounting Standards No. 115 "Investment
Securities" (SFAS No. 115), these securities are reflected at their fair market
value as of December 31, 1999 with a corresponding credit reflected in
accumulated other comprehensive income, net of deferred taxes.

Fixed Assets

Fixed assets are carried at cost and depreciated using the straight-line method
over their estimated useful lives. Leasehold improvements are amortized over the
shorter of their estimated useful lives or the term of the underlying lease.

Estimated useful lives by class of assets are as follows:

          Computers and equipment          3 years
          Furniture and fixtures           5 years
          Leasehold improvements           Life of lease

                                      F-6
<PAGE>

Accrued Expenses

Accrued expenses are comprised of the following as of December 31, 1999:

Accrued Media Planning and Ad Servicing             $ 288,990
Accrued Expenses - other                              258,278
                                                    ---------
                                                    $ 547,268
                                                    =========

Fair Value of Financial Instruments

The carrying amounts of the Company's cash and cash equivalents, accounts
receivable, and accounts payable approximate fair market value based upon the
relatively short-term nature of these financial instruments. The investment
securities available for sale are reflected at fair market value.

Concentration of Revenue

Financial instruments which potentially subject the Company to concentration of
credit risk consist principally of trade accounts receivable. The Company
performs ongoing credit evaluations of its clients' financial condition and
generally requires no collateral from its clients. Sales to the Company's two
largest clients constituted approximately 21.8% and 18.7% of revenue for the
year ended December 31, 1999. The Company had accounts receivable from these
clients amounting to $471,634 at December 31, 1999. Sales to the Company's two
largest clients for the year ended December 31, 1998 constituted approximately
23.4% and 18.5% of revenue.

Income Taxes

The Company provides Federal, State and City income tax in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS 109). Under SFAS 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.

Comprehensive Income

The Company has adopted the disclosure requirements prescribed by Statement of
Financial Accounting Standards No. 130, "Comprehensive Income." This statement
requires disclosure of the major components of comprehensive income. The change
in the fair value of the investment securities available for sale is the only
component of comprehensive income for the Company.

Net Income per Share of Common Stock

Statement of Financial Accounting Standards No. 128, "Earnings Per Share,"
establishes new standards for computing and presenting earnings per share (EPS).
The standard requires the presentation of basic EPS and diluted EPS. Basic EPS
is calculated by dividing income available to common shareholders by the
weighted average number of shares of common stock outstanding during the period.
Diluted EPS is calculated by dividing income available to common shareholders by
the weighted average number of common shares outstanding adjusted to reflect
potentially dilutive securities. Outstanding stock options of 200,891 and
810,200 as of December 31, 1999 and 1998, respectively, have been included in
the above calculations for the year ended December 31, 1999 and excluded for the
year ended December 31, 1998 as they are antidilutive for that year.

The following table reconciles the number of weighted average shares outstanding
for basic and diluted earnings per share:

                                                       1999             1998
                                                       ----             ----
Weighted average shares outstanding - basic          3,442,946        3,446,861

Incremental shares from assumed conversions
  of options                                           200,891                -
                                                     ---------        ---------

                                                     3,643,837        3,446,861
                                                     =========        =========

                                      F-7
<PAGE>

Stock-Based Compensation

Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" (SFAS 123), establishes financial accounting and reporting
standards for stock-based employee compensation plans. SFAS 123 encourages
entities to adopt a fair value based method of accounting for stock compensation
plans. However, SFAS 123 also permits entities to continue to measure
compensation costs under pre-existing accounting pronouncements with the
requirement that pro forma disclosures of net income and earnings per share be
included in the notes to the financial statements. The Company has elected to
adopt the disclosure requirements of SFAS 123 (see Note 7).

New Accounting Pronouncements

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Reporting on Segments") (SFAS 131).
SFAS 131 requires companies to disclose certain information related to the
various segments in which it operates. The Company believes that it operates in
one segment.

On January 1, 1999, the Company adopted Statement of Position ("SOP") No. 98-1,
"Accounting for Costs of Computer Software Developed or Obtained for Internal
Use," issued by the American Institute of Certified Public Accountants
("AICPA"). SP 98-1 provides guidance on accounting for the costs of computer
software developed or obtained for internal use software, dividing the
development into three stages: (1) the preliminary project stage, during which
conceptual formulation and evaluation of alternatives takes place, (2) the
application development stage, during which design, coding, installation and
testing takes place and (3) the operations stage during which training and
maintenance takes place. Costs incurred the application development stage are
capitalized; all other costs are expensed as incurred. The adoption of this
statement did not have a material effect on the consolidated financial
statements.

On January 1,1999, the Company adopted SOP No. 98-5, "Reporting on the Costs of
Start-Up Activities" issued by the AICPA. SOP 98-5 requires that certain
start-up expenditures and organization costs previously capitalized must now be
expensed. The adoption of this statement did not have a material effect on the
financial statements.

3. FIXED ASSETS

Fixed assets, at cost, including capital leases (see Note 4), summarized by
major categories at December 31, 1999, consist of the following:

          Computers and equipment                    $  703,766
          Furniture and fixtures                        298,047
          Leasehold improvements                        322,397
                                                     ----------
          Subtotal                                    1,324,210
          Less: Accumulated depreciation               (736,156)
                                                     ----------
          Fixed assets, net                          $  588,054
                                                     ==========

4. CAPITAL LEASE OBLIGATIONS

The Company is a lessee in non-cancelable leasing agreements for certain
computers and equipment. Included in fixed assets is $65,769 of computers and
equipment held under capital leases.

Future minimum lease payments for fixed assets under capital lease at December
31, 1999 are as follows:

          2000                                                         $ 32,828
          2001                                                           32,829
          2002                                                           14,048
          Total minimum lease payments                                   79,705
          Less-Imputed interest                                          (9,737)
                                                                       --------
          Total capital lease obligation                                 69,968
          Less: current portion                                         (28,712)
                                                                       --------
          Total long term portion of capital lease obligations         $ 41,256
                                                                       ========

                                      F-8
<PAGE>

5. COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company leases certain office space and automobiles for varying periods. At
December 31, 1999, approximate future minimum rental commitments under all
non-cancelable operating leases are as follows:

                     Fiscal Year:
                     ------------
                         2000                 $268,822
                         2001                 $268,822
                         2002                 $267,829
                         2003                 $ 76,017

Rent expense under the above leases amounted to $244,622 in 1999 and $225,893
in 1998.

Employment contracts

The Company has employment contracts with each of its executives. Two contracts
provide for minimum annual salaries of $183,600 in 2000 and $220,320 in 2001,
the year of expiration. Both contracts also include bonuses equal to 1.88% of
the Company's pre-tax profit. The Company also entered into a two-year
employment contract with an executive officer, expiring on December 31, 2000.
That contract provides for an annual salary of $250,000 and a bonus equal to 10%
of the Company's pre-tax profit not to exceed $75,000, provided that the
Company's pre-tax profits for fiscal 2000 are at least $500,000. The Company
also entered into a one year employment contract with an executive officer
expiring January 31, 2000, subject to automatic renewals, providing for an
annual salary of $125,000 and a bonus equal to $50,000 in the event of a Change
of Control Event (as defined in the contract).

6. INCOME TAXES

As described in Note 1, the Company previously elected "S" corporation status
under the provisions of the Internal Revenue Code.

The provision for income taxes on the net income (loss) for the years ended
December 31, 1999 and 1998 differs from the amount computed by applying the
Federal statutory rate due to the following:


                                                1999             1998
                                                ----             ----
Statutory Federal income tax rate               34.0%            34.0%

State and local taxes, net                       5.1              4.8

Valuation Allowance (utilization of NOL)       (34.0)           (31.4)
                                               -----            -----

Effective Tax Rate                               5.1%             7.4%
                                               -----            -----

7. STOCK OPTION PLAN

The Company has two stock plans, the 1996 Stock Option Plan (the "1996 Plan"),
and the 1997 Stock Incentive Plan (the "1997 Plan", and together with the 1996
Plan, the "Plans"). Pursuant to the Plans, designated employees, including
officers and directors of the Company and certain outside consultants, will be
entitled to receive nonqualified stock options and qualified stock incentive
compensation. The number of options available under the 1997 Plan were increased
by an additional 400,000 options, as the result of an approval and ratification
of an amendment voted on and approved at the 1999 annual meeting of
stockholders. As of December 31, 1999, there were 299,050 shares of common stock
available for grant under the Plans.

                                      F-9
<PAGE>

The 1996 Plan expires on January 1, 2006 and the 1997 Plan expires on June 12,
2007. Under the terms of the Plans, the minimum exercise price of options
granted cannot be less than 100% of the fair market value of the common stock of
the Company on the option grant date. Options granted under the Plan generally
expire ten years after the option grant date. For incentive stock options
granted to such persons who would be deemed to have in excess of a 10% ownership
interest in the Company, the option price shall not be less than 110% of such
fair market value for all options granted, and the options expire five years
after the option grant date.

A summary of the Plans at December 31, 1999 and 1998 is presented in the table
below:

                                                            Weighted Average
                                              Shares         Exercise Price
                                              ------         --------------

Outstanding at January 1, 1998               464,950            $2.10

Granted                                      474,500             1.54

Exercised                                    (56,750)             .71

Forfeited                                    (72,500)            1.75
                                            --------            -----

Outstanding at December 31, 1998             810,200             1.83

Granted                                      104,000             2.83

Exercised                                   (126,500)            1.89

Forfeited                                   (145,000)            2.29
                                            --------            -----

Outstanding at December 31, 1999             642,700            $1.87
                                            --------            -----

Shares exercisable at December 31, 1999      365,325            $1.88
                                            ========            =====

The Company accounts for the Plans under APB 25, under which no compensation
cost is recognized for stock options granted with an exercise price at or above
the prevailing market price on the date of the grant. Had compensation cost for
the Plans been determined consistent with the fair value approach required by
SFAS 123, the Company's net income and net income per common share would have
been the following pro forma amounts:

                                        1999                 1998
                                        ----                 ----
Net income:

As reported                           $ 749,657          $ 1,237,081
                                      =========          ===========

Pro forma                             $ 420,652          $   885,766
                                      =========          ===========

Net income per common share:

As reported - Basic                   $    0.22          $      0.35
                                      =========          ===========
              Diluted                 $    0.21          $      0.35
                                      =========          ===========

Pro forma - Basic                     $    0.12          $      0.25
                                      =========          ===========
            Diluted                   $    0.12          $      0.25
                                      =========          ===========

The fair value of each option granted is estimated on the date of the grant
using the Black-Scholes option pricing model with the following assumptions:
risk-free interest rates of 5.5% and 5.2% in 1999 and 1998, respectively; no
expected dividend yields for options granted; expected lives of 4 and 5 years in
1999 and 1998, respectively; and expected stock price volatility of 101% and
120% in 1999 and 1998, respectively. The weighted average fair value of options
granted during 1999 and 1998 was $2.29 and $1.22, respectively.

                                      F-10
<PAGE>

The effects of applying SFAS 123 in this pro forma disclosure may not be
indicative of future amounts because stock option grants are anticipated in
future years.

8. INVESTMENT IN SECURITIES

In May 1998, the Company discontinued the CLIQNOW! Division. Accordingly, this
business has been reflected as a discontinued operation for the years ended
December 31, 1998 and 1997. On June 1, 1998, the Company sold its CLIQNOW!
Division to 24/7 Media, Inc. ("TFSM") for gross proceeds of $4 million,
consisting of $1 million of cash and $3 million of TFSM Convertible Redeemable
Preferred Stock. The sale resulted in a net gain of approximately $2,994,000. On
August 13, 1998, TFSM's registration statement for its initial public offering
was declared effective by the Securities and Exchange Commission. As a result,
the Convertible Redeemable Preferred Stock of TFSM automatically converted on
that date into shares of common stock of TFSM, of which the Company retained
196,492 shares. These shares were carried at a cost of $2,558,300 (approximately
$13.02 per share) on the Company's consolidated balance sheet at December 31,
1998. During the quarter ended September 30, 1999, the shares of TFSM stock
became freely tradable. In the fourth quarter of 1999, the Company reclassified
the 110,000 shares still held by the Company as "investment in securities
available for sale," under the "cash and cash equivalents" section of the
balance sheet, as a result of the Company's ability and intent to sell such
shares in the near future. In accordance with SFAS No.115, the shares are stated
at fair market value on the December 31, 1999 consolidated balance sheet. The
offset to this increase is reflected as "other comprehensive income" in the
stockholders' equity section of the balance sheet, net of related deferred
taxes.

The following disclosures are presented in accordance with SFAS No. 115:

          Equity Securities:

          Aggregate fair value                                 $6,187,500
                                                               ==========

          Gross unrealized holding gain                        $4,755,326
                                                               ==========

          Proceeds from sales of equity securities             $3,647,209
                                                               ==========

          Gross realized gains on sales of securities          $2,521,083
                                                               ==========

The gain on the sale of the securities was determined on an average cost basis.

During 1999, the Company sold 86,492 shares of their investment in TFSM. The
sale resulted in a gain of $2,521,083 which is reflected in interest and other
income in the 1999 income statement.

                                      F-11
<PAGE>

                                   SCHEDULE II

                         K2 DESIGN, INC. AND SUBSIDIARY
                        VALUATION AND QUALIFYING ACCOUNTS

                 FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998

Allowance for doubtful accounts, January 1, 1998         $ 213,204

Less:  Decrease to allowance for doubtful accounts        (188,204)

Allowance for doubtful accounts, December 31, 1998       $  25,000

Add: Increase to allowance for doubtful accounts            75,000
                                                         ---------

Allowance for doubtful accounts, December 31, 1999       $ 100,000
                                                         =========

                                      F-12