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, 2002

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

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


                  C/O SOKOLOW, DUNAUD, MERCADIER & CARRERAS LLP
               770 LEXINGTON AVENUE, 6TH FLOOR, NEW YORK, NY 10021
          ------------------------------------------------------------
          (Address of principal executive offices, including zip code)

                    Issuer's telephone number: (212) 935-6000

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

                                      None.

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

                                  COMMON STOCK
                                -----------------
                                (Title of Class)
<PAGE>


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 in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. /X/

State issuer's revenues for its most recent fiscal year:

                    $0 (adjusted for discontinued operations)

As of March 31, 2003, there were 4,982,699 shares (not including treasury
shares) of the Company's common stock outstanding. Based on the closing sales
price of the Company's common stock on March 31, 2003 of $0.025 per share, the
approximate aggregate market value of the Company's common stock held by
non-affiliates was approximately $125,000.

                       DOCUMENTS INCORPORATED BY REFERENCE

Certain exhibits are incorporated by reference to the Company'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/


                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

HISTORY

K2 Digital, Inc. (the "Company" or "K2") was founded in 1993 as a general
partnership and initially operated a traditional graphic design business. In
August 1994, the Company shifted its principal business to Web site design and
creation. Thereafter, the Company incorporated as a Delaware corporation. After
the Company's initial public offering on July 26, 1996, the Company began to
develop its business as a full-service digital professional services company.
The Company has historically provided consulting and development services
including analysis, planning, systems design, creative and implementation. In
November 2000, the Company changed its name from K2 Design, Inc. to K2 Digital,
Inc. As discussed below, the Company effectively ceased its operations in August
2001.

The Company's offices are located at c/o Sokolow Dunaud Mercadier & Carreras LLP
770 Lexington Avenue - 6th Floor, New York, New York 10021 and its telephone
number is (212) 935-6000.

DISCONTINUED OPERATIONS

DISPOSITION OF ASSETS

On May 15, 2001, the Company entered into a non-binding letter of intent with
SGI Graphics LLC, a Delaware limited liability company ("SGI") pursuant to which
SGI expressed its interest in purchasing shares of restricted common stock of
the Company that would have represented fifty-one percent (51%) of the issued
and outstanding capital stock of the Company on a fully diluted basis.
Concurrently with the execution of the letter of intent, the Company borrowed
$250,000 from an affiliate of SGI, for working capital purposes pursuant to a
promissory note secured by a first priority security interest in all of the
assets of the Company. The Company and SGI were ultimately not able to agree on
the definitive terms of the transaction and, in July 2001, the Company and SGI
terminated negotiations and the letter of intent.

On August 29, 2001, the Company sold certain of its fixed and intangible assets
to Integrated Information Systems, Inc., a Delaware corporation ("IIS"),
including certain of the Company's customer contracts, furniture, fixtures,
equipment and intellectual property, for an aggregate purchase price of
$444,000, of which $419,000 was paid in cash and $25,000 of capital lease
obligations were assumed by IIS. IIS also assumed certain deferred revenues and
customer deposits. The Company recognized an approximate $218,000 gain on the
transaction.


                                       2
<PAGE>

Under the terms of the purchase agreement governing the transaction (the
"Purchase Agreement"), IIS assumed the Company's office lease obligations, took
up occupancy in the Company's premises and made offers of employment to
substantially all of the remaining employees of the Company, which offers were
accepted.

In addition to the purchase price and as consideration of the Company's release
of certain employees from the non-competition restrictions contained in their
agreements with the Company, the Company received from IIS at closing a
recruitment and placement fee of $75,000. In addition, the Purchase Agreement
provided for the Company to receive from IIS an additional placement fee of
$7,500 per key employee and $2,500 per other employee that remained employed by
IIS through December 31, 2001. This additional contingent placement fee was to
be paid by IIS in cash in five monthly installments beginning August 31, 2001,
pro rated monthly for the number of employees retained. As of December 31, 2001,
$31,000 of these contingent fees had been paid to the Company and $36,500 due to
the Company remained unpaid by IIS (which was fully reserved for at December 31,
2001). In October 2002, the Company received approximately $9,000 from IIS as a
final payment pursuant to a June 2002 settlement agreement pertaining to the
unpaid balance.

Under the Purchase Agreement, the Company also received from IIS a cash fee of
$50,000 in return for entering into certain noncompetition provisions contained
in the Purchase Agreement, which provide that the Company will not, for a period
of five years, (i) engage in any business of substantially the same character as
the business engaged in by the Company prior to the transaction, (ii) solicit
for employment any employee of IIS (including former employees of the Company),
or (iii) solicit any client or customer of IIS (including any customer
transferred to IIS under the Purchase Agreement) to do business with the
Company.

Accordingly, the aggregate cash consideration delivered to the Company at
closing was $544,000, of which approximately $258,000 was paid directly to K2
Holdings LLC, an affiliate of SGI, the Company's principal secured creditor, in
order to release SGI's security interest in the assets of the Company.

Subsequent to the sale of assets to IIS, the Company effectively ceased
operations and has been in the process of liquidating assets, collecting
accounts receivable and paying creditors. The Company does not have any ongoing
business operations or any remaining revenue sources beyond those few remaining
receivables not purchased by IIS and not yet collected by the Company.
Accordingly, the Company's remaining operations will be limited to either a
business combination with an existing business (such as one described below) or
the winding up of the Company's remaining business and operations, subject, in
either case, to the approval of the stockholders of the Company. The proceeds
from the sale of assets plus the additional payment due from IIS (collection of
which is uncertain), together with assets not sold to IIS may not be sufficient
to repay substantially all remaining liabilities of the Company.

AGREEMENT AND PLAN OF MERGER

On January 15, 2002, K2 and FutureXmedia, Inc., f/k/a First Step Distribution
Network, Inc. ("FX") entered into an Agreement and Plan of Merger (the "Merger
Agreement") by and among FX and its shareholders (the "FX Shareholders") and
First Step Acquisition Corp., a Delaware corporation and wholly-owned subsidiary
of K2 ("Merger Sub"). Under the terms of the Merger Agreement, as amended, K2
will acquire FX by means of a triangular merger ("the Merger"), pursuant to
which the Merger Sub will merge with and into FX in a tax free reorganization
within the meaning of Section 368 of the Internal Revenue Code of 1986, as
amended.

As a condition to the Merger, K2 is required to implement a 5.1 to 1 reverse
split (the "Reverse Stock Split") of the common stock, par value $.01 per share,
of K2 ("K2 Common Stock). Thereby reducing its outstanding shares of K2 Common
Stock from 4,982,699 shares to approximately 977,000 shares. In the Reverse
Stock Split, fractional shares will be rounded up to the nearest whole share.
The implementation of the Reverse Stock Split is subject to the approval of the
stockholders of K2. The Board of Directors of K2 has approved the Reverse Stock
Split and will submit the Reverse Stock Split to the stockholders of K2 for
their approval.

FX's Shareholders will exchange their respective shares of common stock, no par
value per share, of FX (the "FX Common Stock") for shares of K2 Common Stock.
Each share of FX's Common Stock will be converted into the right to receive
approximately one share of K2 Common Stock. The conversion ratio is after giving
effect to the Reverse Stock Split. Pursuant to the Merger Agreement, the
aggregate number of shares of K2 Common Stock issuable to FX's Shareholders by
virtue of the Merger as of the date of the Merger Agreement will equal
approximately ninety percent (90%) of the issued and outstanding K2 Common
Stock.

After the effective date of the Merger, the Merger Sub will cease its separate
legal existence and FX will continue as the surviving corporation.

Upon consummation of the transactions contemplated by the Merger Agreement and
the Reverse Stock Split, K2's current stockholders will own an aggregate of
approximately 977,000 shares of K2 Common Stock or approximately 10% of the
outstanding voting securities of K2, and FX Shareholders will own an aggregate
of approximately 8,760,000 shares of K2 Common Stock or approximately 90% of the
outstanding voting securities of K2. K2 Common Stock does not have preemptive
rights and there is no cumulative voting. Each share of K2 Common Stock is
entitled to one vote.


                                       3
<PAGE>

FX is an Electronic Games Media company, which was formed on December 24, 2001
through the merger with First Step Consulting LLC. The principal business of FX
is to bring new electronic game products to market through the use of innovative
new technologies and channels. Examples include sales of subscription based
electronic game services, sponsorship and hosting of regional, national, and
international electronic game competitions, with multiple categories of
participants, such as amateur status, collegiate status, professional status and
Olympic status. FX is a consumer Internet entertainment company that aggregates
rights to successful console and PC CD-Rom video games and re-distributes them
via the Internet. FX's initial strategic focus is to create a lucrative
secondary distribution "window" for hit titles licensed from Activision, EA
Sports, THQ, Microsoft and other third party game developers/publishers. Just as
the cable and motion picture industries are developing a video-on-demand
infrastructure to deliver hit movies to home viewers, FX intends to provide a
convenient and cost-effective online channel for gamers to enjoy previously
published hit titles on a subscription or pay-per-view basis. Gamers will pay FX
a $9.95 per month subscription fee to rent games, or, at their option a fee of
approximately $19.95 to $29.95 to download and permanently own each title.

         Initial United States operations will focus on licensing and
distributing on-line 3D games, licensed directly from companies such as
Activision, EA Sports, Microsoft and other third party development vendors, as
well as, transactional interface software(s) and hardware solutions tied to the
personal computer original equipment manufacturer, personal computer peripheral,
wireless handheld, DirectTV and Internet portal channel sales. Licensing
discussions with Activision are already under way. FX intends to sell
subscription based entertainment and develop interactive game environments that
will offer the end user a great on-line or competitive TV game experience, at a
fraction of the retail price, while offering the subscriber a continuously
updated selection of 3D games, software products, interactive educational
programs and entertainment content. FX's securities never have been publicly
traded and FX never has paid any dividends. FX's offices are located at 100
North Crescent Drive, Suite 111 Beverly Hills, CA 90210 and the telephone number
is (310) 777-3177.

GOVERNMENT REGULATION

Having effectively ceased operations in August 2001, the Company is not
currently subject to direct regulation by any government agency, other than
regulations applicable to businesses generally. 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. Any imposition of liability from the
Company's prior operations could have a material adverse effect on the Company.

EMPLOYEES

As a result of the transaction entered into with IIS in August 2001 and the fact
that the Company has effectively ceased operations, at December 31, 2002, the
Company had only one employee, Gary W. Brown, the Company's current President,
Chief Operating Officer, Chief Financial Officer and Secretary. Since August
2001, Mr. Brown's employment with the Company has been limited to structuring
and negotiating the transactions contemplated by the Merger Agreement and the
Reverse Stock Split, as well as liquidating assets, collecting accounts
receivable and paying creditors. Since December 31, 2001, Mr. Brown has received
no salary, compensation or benefits.

ITEM 2. DESCRIPTION OF PROPERTY

Under the terms of the Purchase Agreement, IIS occupied the Company's premises
and assumed the Company's office lease obligations. Pursuant to an arrangement
with IIS and the landlord for its premises at 30 Broad Street, New York, New
York, until May 2002 the Company occupied a small office space in the premises
occupied by IIS.

ITEM 3. LEGAL PROCEEDINGS

         In March 2002, a former supplier sued the Company for $12,619.06 in New
York city Civil Court. The complaint relates to certain disputed invoices for
media placement in 2001. The Company intends to vigorously defend this lawsuit
and has meritorious defenses to the claims. The Company is not a party to any
other 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
2002.

                                     PART II

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

The Company's common stock was delisted from the Nasdaq SmallCap Market
("NASDAQ") effective August 15, 2001 and currently trades in the
over-the-counter market under the symbol "KTWO.OB." Prior to its delisting, the
Company's common stock was traded on


                                       4

<PAGE>

NASDAQ under the symbol "KTWO." The following table sets forth, for the periods
indicated, the range of high and low price quotes of the Company's common stock
as reported by the over-the-counter bulletin board (for periods subsequent to
the delisting) and NASDAQ (for periods prior to the delisting) from the quarter
ended March 31, 2001 through December 31, 2002. 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, 2001                   $    1.06             $    0.28

June 30, 2001                    $    0.46             $    0.26

September 30, 2001               $    0.29             $    0.02

December 31, 2001                $    0.05             $    0.02

March 31, 2002                   $    0.06             $    0.03

June 30, 2002                    $    0.07             $    0.03

September 30, 2002               $    0.14             $    0.03

December 31, 2002                $    0.03             $    0.02

The approximate number of record holders of the Company's common stock at
December 31, 2002 was 26, not including beneficial owners whose shares are held
by banks, brokers and other nominees.

There were no repurchases by the Company of its common stock on the open market
or from any of its stockholders in fiscal year 2001 or 2002. At December 31,
2002, the Company held a total of 417,417 shares of treasury stock at a cost of
$819,296.

On December 11, 2000, the Company entered into a common stock purchase agreement
(the "Fusion Facility") with Fusion Capital Fund II, LLC ("Fusion Capital"), a
Chicago-based institutional investor. On January 26, 2001, the Company issued to
Fusion Capital, as a commitment fee for the Fusion Facility, 380,485 shares of
common stock, as well as warrants to purchase 297,162 shares of common stock at
an exercise price of $.01 per share, exercisable at any time over a five year
period. In May 2001, the Company issued 862,069 shares of common stock under the
Fusion Facility to an officer of the Company, in exchange for net proceeds of
$250,000. On August 14, 2001, Fusion Capital exercised a warrant to purchase an
additional 297,162 shares of the Company's common stock at an exercise price of
$.01 per share. After applying the net exercise provisions of the warrant, based
upon the closing sale price of the Company's common stock of $0.15 per share on
August 13, 2001, Fusion Capital received 277,351 shares of common stock upon
exercise of the warrant. The shares of common stock and warrants issued to
Fusion Capital were sold pursuant to the exemption from registration provided by
Section 4 (2) of the Securities Act of 1933, as amended, as an offering not
involving any public offering. Because the common stock and warrants were issued
to Fusion Capital as a commitment fee under the Fusion Facility, no proceeds
were received by the Company upon issuance of such common stock and warrants. On
March 4, 2003, the Fusion Facility was terminated.

The Company has not paid any dividends. The Company does not expect to pay cash
dividends on its common stock in the foreseeable future. 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 7.


                                       5
<PAGE>

OVERVIEW

Founded in 1993, the Company was a digital professional services company that,
until August 2001, historically provided consulting and development services,
including analysis, planning, systems design, creative and implementation. In
August 2001, the Company effectively ceased operations as described below.

SALE OF ASSETS AND DISCONTINUED OPERATIONS

On August 29, 2001, the Company sold certain fixed and intangible assets of the
Company to IIS, including certain of the Company's customer contracts,
furniture, fixtures, equipment and intellectual property, for an aggregate
purchase price of $444,000, of which $419,000 was paid in cash and $25,000 of
capital lease obligations were assumed by IIS. IIS also assumed certain deferred
revenues and customer deposits. The Company recognized an approximate $218,000
gain on the transaction.

Under the terms of the Purchase Agreement, IIS assumed the Company's office
lease obligations, took up occupancy in the Company's premises and made offers
of employment to substantially all of the remaining employees of the Company,
which offers have been accepted.

In addition to the purchase price and as consideration of the Company's release
of certain employees from the non-competition restrictions contained in their
agreements with the Company, the Company received from IIS at closing a
recruitment and placement fee of $75,000. In addition, the Purchase Agreement
provided for the Company to receive from IIS an additional placement fee of
$7,500 per key employee and $2,500 per other employee that remained employed by
IIS through December 31, 2001. This additional contingent placement fee was to
be paid by IIS in cash in five monthly installments beginning August 31, 2001,
pro rated monthly for the number of employees retained. As of December 31, 2001,
$31,000 of these contingent fees had been paid to the Company and $36,500 due to
the Company remained unpaid by IIS (which was fully reserved for at December 31,
2001). In October 2002, the Company received approximately $9,000 from IIS as a
final payment pursuant to a June 2002 settlement agreement pertaining to the
unpaid balance.

Under the Purchase Agreement, the Company also received from IIS a cash fee of
$50,000 in return for entering into certain noncompetition provisions contained
in the Purchase Agreement, which provide that the Company will not, for a period
of five years, (i) engage in any business of substantially the same character as
the business engaged in by the Company prior to the transaction, (ii) solicit
for employment any employee of IIS (including former employees of the Company),
or (iii) solicit any client or customer of IIS (including any customer
transferred to IIS under the Purchase Agreement) to do business with the
Company.

Accordingly, the aggregate cash consideration delivered to the Company at
closing was $544,000, of which approximately $258,000 was paid directly to K2
Holdings LLC, an affiliate of SGI, the Company's principal secured creditor, in
order to release SGI's security interest in the assets of the Company.

Subsequent to the sale of assets to IIS, the Company effectively ceased
operations and has been in the process of liquidating assets, collecting
accounts receivable and paying creditors. The Company does not have any ongoing
business operations or any remaining revenue sources beyond those few remaining
receivables not purchased by IIS and not yet collected by the Company.
Accordingly, the Company's remaining operations will be limited to either the
sale of the Company or the winding up of the Company's remaining business and
operations, subject, in either case, to the approval of the stockholders of the
Company. The proceeds from the sale of assets plus the additional payment due
from IIS (collection of the which is uncertain), together with assets not sold
to IIS may not be sufficient to repay substantially all remaining liabilities of
the Company. The Company has entered into negotiations with certain creditors to
settle specific obligations for amounts less than reflected in the financial
statements reported herein. If these negotiations are unsuccessful, there will
not be sufficient cash to repay all of the obligations of the Company.

Summary of results

As a result of the August 2001 sale of assets, operating results from
discontinued operations have been segregated from continuing operation and
reported as a separate line item on the consolidated financial statements.
Following is a summary of the Company's operations for the years ended December
31, 2002 and 2001:

                                                      2002          2001
                                                    --------     ----------
       Other income                                 $ 22,640     $       --
       General and administrative expenses           (83,544)       (570,459)
       Impairment of available-for-sale security          --      (1,412,747)
                                                    --------     -----------

                                       6
<PAGE>

       Loss from continuing operations              $(60,904)    $(1,983,206)
                                                    ---------    -----------
       Discontinued operations
           Loss from operations                           --      (3,374,238)
           Gain on disposal                               --         218,110
                                                    --------     -----------
       Loss from discontinued operations                  --      (3,156,128)
                                                    --------     -----------
       Net Loss                                     $(60,904)    $(5,139,334)


In 2002, other income represents cash received pursuant to the IIS settlement
(previously reserved for), tax refunds and other miscellaneous receipts. General
and administrative expenses primarily represent cash and non-cash compensation
to the Company's remaining officer, professional fees and ongoing ancillary
costs. Impairment of available-for-sale securities represents an
other-than-temporary decline in market value of the Company's investment in
110,000 shares of common stock of 24/7 Real Media, Inc., (formerly 24/7 Media,
Inc.)

See Note 3 of "Item 7 - Consolidated Financial Statements" for further detail of
discontinued operations for the year ended December 31, 2001. Since the Company
has ceased this operation, no further discussion has been presented in this
discussion and analysis.

CONTINUING OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES

Subsequent to the sale of assets to IIS, the Company effectively ceased
operations and has been in the process of liquidating assets, collecting
accounts receivable and paying creditors. The Company does not have any ongoing
business operations or revenue sources beyond those assets not purchased by IIS.
Accordingly, the Company's remaining operations will be limited to either a
business combination with an existing business or the winding up of the
Company's remaining business and operations, subject, in either case, to the
approval of the stockholders of the Company. The proceeds from the sale of
assets plus the additional contingent payments from IIS, together with assets
not sold to IIS may not be sufficient to repay substantially all of the
liabilities of the Company. These, among other matters, raise substantial doubt
about the Company's ability to continue as a going concern.

The Board of Directors of the Company has determined that, subject to
stockholder approval, the best course of action for the Company is to complete a
business combination with an existing business. On January 15, 2002, the Company
entered into the Merger Agreement described above. Under the terms of the Merger
Agreement, the Company intends to acquire FutureXmedia by means of a triangular
merger, pursuant to which a subsidiary of the Company will merge with and into
FutureXmedia in a tax free reorganization within the meaning of Section 368 of
the Internal Revenue Code of 1986, as amended.

As a condition to the Merger, the Company is required to implement the Reverse
Stock Split described above. The implementation of the Reverse Stock Split is
subject to the approval of the stockholders of the Company. The Board of
Directors of the Company has approved the Reverse Stock Split and will submit
the Reverse Stock Split to the stockholders of the Company for their approval.

In the event that the transactions contemplated by the Merger Agreement are not
consummated for any reason, the Company's remaining assets will not be
sufficient to meet its ongoing liabilities and the Company's remaining
operations will be wound up subject to the approval of the stockholders of the
Company. The anticipated closing date for the Merger has been postponed due to
delays in FutureXmedia's ability to secure the financing for the transaction
that is required pursuant to the terms and conditions of the Merger Agreement,
as well as delays in the preparation and finalization of the requisite financial
and other information about FutureXmedia that will be included in the Company's
information statement being prepared in connection with the solicitation of
stockholder approval for the Reverse Stock Split. The Company has been informed
by representatives of FutureXmedia that FutureXmedia has made significant
progress in securing the necessary financing and financial statements and that
FutureXmedia expects to be able to consummate the Merger during the second
quarter of 2003, subject to the requisite stockholder approval.

The Company's cash balance of $8,173 at December 31, 2002, increased by $2,793
or 52% compared to the $5,380 cash balance at December 31, 2001. This increase
is primarily due to payments received from IIS and tax refunds received by the
Company since it ceased operations as of August 1, 2001.

FACTORS AFFECTING OPERATING RESULTS AND MARKET PRICE OF STOCK

The Company has effectively discontinued its operations.


                                       7
<PAGE>

In August 2001, the Company sold certain fixed and intangible assets essential
to its business operations and entered into a purchase agreement containing
provisions restricting the Company's ability to continue to engage in the
business engaged in by the Company prior to the transaction. Accordingly, the
Company's remaining operations have been limited to liquidating assets,
collecting accounts receivable, paying creditors, and negotiating and
structuring the transactions contemplated by the Merger Agreement or the winding
up of the Company's remaining business and operations, subject, in either case,
to the approval of the stockholders of the Company.

The transactions contemplated by the Merger Agreement may never be consummated.

In the event that the transactions contemplated by the Merger Agreement are not
consummated for any reason, the Company's remaining assets will not be
sufficient to meet its ongoing liabilities and the Company's remaining
operations will be wound up subject to the approval of the stockholders of the
Company. The anticipated closing date for the Merger has been postponed due to
delays in FutureXmedia's ability to secure the financing for the transaction
that is required pursuant to the terms and conditions of the Merger Agreement,
as well as delays in the preparation and finalization of the requisite financial
and other information about FutureXmedia that will be included in the Company's
information statement being prepared in connection with the solicitation of
stockholder approval for the Reverse Stock Split. The Company has been informed
by representatives of FutureXmedia that FutureXmedia has made significant
progress in securing the necessary financing and financial statements and that
FutureXmedia expects to be able to consummate the Merger during the second
quarter of 2003, subject to the requisite stockholder approval. Although
FutureXmedia has assured the Company that FutureXmedia remains committed to the
consummation of the transaction, the transaction is subject to the satisfaction
of a number of conditions and there can be no assurance that the transaction
will be consummated.

The Company's stock has been delisted from the Nasdaq SmallCap Market

The Company's common stock was delisted from the Nasdaq SmallCap Market
effective August 15, 2001 and currently trades in the over-the-counter market.
On March 13, 2001, the Staff of the Nasdaq Stock Market notified the Company
that it had failed to demonstrate a closing bid price of at least $1.00 per
share for 30 consecutive trading days and was in violation of Nasdaq Marketplace
Rule 4310(c)(4). In accordance with applicable Nasdaq Marketplace rules, the
Company was provided a 90-day grace period, through June 11, 2001, during which
to regain compliance. On June 20, 2001, the Company requested a hearing, which
effectively stayed the delisting. However, after submission of materials in
support of the Company's position to the Panel, the Panel decided to delist the
Company's common stock from the Nasdaq SmallCap Market as of the open of
business on August 15, 2001. The delisting of the Company's common stock from
The Nasdaq SmallCap Market is likely to materially and adversely decrease the
already limited liquidity and market price of the common stock, and may increase
both volatility and the "spread" between bid and asked prices of the common
stock.


                                       8
<PAGE>

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                         K2 DIGITAL, INC. AND SUBSIDIARY
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



Independent Auditors' Reports                                                F-1

Consolidated Financial Statements

   Consolidated Balance Sheet                                                F-2
   December 31, 2002

   Consolidated Statements of Operations and Comprehensive Loss              F-3
   For the Years Ended December 31, 2002 and 2001

   Consolidated Statements of Stockholders' Equity (Deficit)                 F-4
   For the Years Ended December 31, 2002 and 2001

   Consolidated Statements of Cash Flows                                 F-5 - 6
   For the Years Ended December 31, 2002 and 2001

   Notes to Consolidated Financial Statements                           F-7 - 14

Schedule II - Valuation and Qualifying Accounts                             F-15


                                       9
<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of K2 Digital, Inc.

We have audited the accompanying consolidated balance sheet of K2 Digital, Inc.
and Subsidiary as of December 31, 2002, and the related consolidated statements
of operations and comprehensive loss, stockholders' equity (deficit) and cash
flows for the years ended December 31, 2002 and 2001. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of K2 Digital, Inc. and
Subsidiary as of December 31, 2002, and the results of their operations and
their cash flows for the years ended December 31, 2002 and 2001 in conformity
with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, during 2001, the Company sold fixed and
intangible assets essential to its business operation and effectively became a
"shell" company with no revenues and continuing general and administrative
expenses. Further, at December 31, 2002, the Company had significant cumulative
losses, a diminutive cash balance and working capital and stockholders'
deficits. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans regarding those matters are
also described in Note 1. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.

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 to
consolidated financial statements is presented for the purpose of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to our auditing
procedures applied in the audits 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.

                                    /s/  ROTHSTEIN, KASS & COMPANY, P.C.
                                  ----------------------------------------------
                                         ROTHSTEIN, KASS & COMPANY, P.C.

Roseland, New Jersey
April 10, 2003


                                      F-1
<PAGE>

                         K2 DIGITAL, INC. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEET
                                DECEMBER 31, 2002

                                     ASSETS

<TABLE>

<S>                                                                   <C>
CURRENT ASSETS:
     Cash                                                             $     8,173
     Investment in available-for-sale security                             25,300
                                                                      -----------
          Total current assets                                        $    33,473
                                                                      ===========

                      LIABILITIES & STOCKHOLDERS' DEFICIT

CURRENT LIABILITIES:
     Accounts payable                                                 $   138,468
     Accrued expenses and other current liabilities                        80,100
                                                                      -----------
          Total current liabilities                                       218,568
                                                                      ===========

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' DEFICIT
     Preferred Stock, $0.01 par value, authorized 1,000,000 shares;
          issued and outstanding nil shares
     Common Stock, $0.01 par value, authorized 25,000,000 shares;
          Issued 5,400,116 shares, outstanding 4,982,699 shares            54,001
     Treasury stock, 417,417 shares at cost                              (819,296)
     Additional paid-in-capital                                         8,317,910
     Accumulated deficit                                               (7,737,710)
                                                                      -----------
Total stockholders' deficit                                              (185,095)
                                                                      -----------
Total liabilities and stockholders' deficit                           $    33,473
                                                                      ===========
</TABLE>

        See the accompanying notes to consolidated financial statements.


                                      F-2
<PAGE>


                         K2 DIGITAL, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                             AND COMPREHENSIVE LOSS
                     YEARS ENDED DECEMBER 31, 2002 AND 2001

<TABLE>
<CAPTION>

                                                                     2002         2001
                                                                     ----         ----
<S>                                                            <C>            <C>
Revenues                                                       $        --    $        --
Other income                                                        22,640
General and administrative expenses                                (83,544)      (570,459)
Impairment of investment securities                                            (1,412,747)
                                                               --------------------------
Loss from continuing operations                                    (60,904)    (1,983,206)
                                                               --------------------------
Discontinued operations
   Loss from operations                                                        (3,374,238)
   Gain on disposal                                                               218,110
                                                               --------------------------
                                                                               (3,156,128)
                                                               --------------------------
Net loss                                                       $   (60,904)   $(5,139,334)
                                                               --------------------------
Net loss per common share-
     basic and diluted
   Loss from continuing operations                             $     (0.01)   $     (0.45)
   Loss from discontinued operations                                                (0.71)
                                                               --------------------------
   Net loss                                                    $     (0.01)   $     (1.16)
                                                               --------------------------
Weighted average common shares outstanding -
     basic and diluted                                           4,979,959      4,440,836
                                                               --------------------------
Comprehensive loss:

Net loss                                                       $   (60,904)   $(5,139,334)
Unrealized loss on available-for-sale security                                    (36,043)
Reclassification adjustment in light of other-than-temporary
decline in value in available-for-sale security                                 1,412,747
                                                               --------------------------
Comprehensive loss                                             $   (60,904)   $(3,762,630)
                                                               ==========================
</TABLE>

        See the accompanying notes to consolidated financial statements.


                                      F-3
<PAGE>

                         K2 DIGITAL, INC. AND SUBSIDIARY
            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                     YEARS ENDED DECEMBER 31, 2002 AND 2001

<TABLE>
<CAPTION>
                                                                                                ACCUMULATED
                                                                                                   OTHER
                                               COMMON STOCK        TREASURY      ADDITIONAL    COMPREHENSIVE       DEFERRED
                                            SHARES       AMOUNT      STOCK     PAID-IN CAPITAL  INCOME (LOSS)     COMPENSATION
                                            ------       ------      -----     ---------------  -------------     ------------
<S>                                       <C>           <C>        <C>                <C>            <C>               <C>
Balances, January 1, 2001                 3,880,211     $38,801    $(819,296)     $7,582,243     $(1,376,704)      $(322,351)

Issuance of common stock and warrants
as commitment fee to Fusion Capital         380,485       3,805                      714,562

Issuance of common stock to Fusion
Capital                                     862,069       8,621                       (8,621)

Cashless exercise of warrants by
Fusion Capital                              277,351       2,774                       (2,774)

Write-off of deferred issuance costs


Amortization of deferred compensation                                                                                249,996

Unrealized loss on available -for-sale
security
                                                                                                     (36,043)

Reclassification adjustment in light
of other-than-temporary decline in
value available-for-sale security                                                                  1,412,747

Issuance of options for consulting
services                                                                              28,000

Net loss
                                          ----------------------------------------------------------------------------------
Balances, December 31, 2001               5,400,116      54,001     (819,296)      8,313,410                         (72,355)

Amortization of deferred compensation                                                                                 72,355


Issuance of options for consulting
services                                                                               4,500

Net loss
                                          ----------------------------------------------------------------------------------
Balances, December 31, 2002               5,400,116     $54,001    $(819,296)     $8,317,910     $        --       $      --
                                          ==================================================================================
</TABLE>

<TABLE>

                                                                             STOCKHOLDERS
                                              DEFERRED        ACCUMULATED      EQUITY
                                           ISSUANCE COSTS       DEFICIT       (DEFICIT)
                                           --------------       -------        -------
<S>                                          <C>                <C>
Balances, January 1, 2001                    $      --        $(2,537,472)   $2,565,221

Issuance of common stock and warrants
as commitment fee to Fusion Capital           (718,367)

Issuance of common stock to Fusion
Capital                                        250,000                          250,000

Cashless exercise of warrants by
Fusion Capital

Write-off of deferred issuance costs                                            468,367
                                               468,367

Amortization of deferred compensation                                           249,996

Unrealized loss on available -for-sale
security                                                                        (36,043)


Reclassification adjustment in light
of other-than-temporary decline in
value available-for-sale security                                             1,412,747

Issuance of options for consulting
services                                                                         28,000

Net loss
                                                               (5,139,334)   (5,139,334)
                                            ------------------------------------------
Balances, December 31, 2001                                    (7,676,806)     (201,046)

Amortization of deferred compensation                                            72,355


Issuance of options for consulting
services                                                                          4,500

Net loss                                                      $   (60,904)    $ (60,904)
                                            -------------------------------------------
Balances, December 31, 2002                  $     --         $(7,737,710)    $(185,095)
                                            ===========================================
</TABLE>

          See accompanying notes to consolidated financial statements.


                                      F-4
<PAGE>

                         K2 DIGITAL, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                     YEARS ENDED DECEMBER 31, 2002 AND 2001

<TABLE>
<CAPTION>
                                                                   2002          2001
                                                                   ----          ----
<S>                                                           <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                      $   (60,904)   $(5,139,334)
Adjustments to reconcile net loss to net cash provided by
    (used in) operating activities:
    Impairment of investment in available-for-sale security                    1,412,747
    Non-cash consulting and compensation expense                   76,855        277,996
    Write-off of deferred issuance and financing costs                           722,861
    Gain on disposal of discontinued operations                                 (218,110)
    Depreciation and amortization                                                210,640
    Increase (decrease) in cash attributable to changes in
     operating  assets and liabilities:
    Accounts receivable, net                                       68,807      1,601,342
    Prepaid expenses and other current assets                                     40,825
    Unbilled revenue                                                             482,773
    Accounts payable                                              (67,259)      (572,134)

    Accrued expenses and other current liabilities                (14,706)      (639,264)
    Deferred revenue and customer advances                                      (129,954)
    Deferred rent                                                                121,926
    Restricted cash                                                              250,000
                                                              --------------------------
Net cash provided by (used in) operating activities                 2,793     (1,577,686)
                                                              --------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from disposal of discontinued operations                            528,500
Gross proceeds from sale of available-for-sale securities                         94,127
Purchase of equipment                                                             (8,074)
                                                              --------------------------
Net cash provided by investing activities                                        614,553
                                                              --------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable                                                      250,000
Principal payments on notes payable                                             (250,000)
Principal payments on capital lease obligations                                  (17,093)
Proceeds from the issuance of common stock                                       250,000
                                                              --------------------------
Net cash provided by financing activities                                        232,907
                                                              --------------------------
Net increase (decrease) in cash                                     2,793       (730,226)

CASH, beginning of year                                             5,380        735,606
                                                              --------------------------
CASH, end of year                                             $     8,173    $     5,380
                                                              ==========================
</TABLE>

        See the accompanying notes to consolidated financial statements.


                                      F-5
<PAGE>

                         K2 DIGITAL, INC. AND SUBSIDIARY
                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                     YEARS ENDED DECEMBER 31, 2002 AND 2001
<TABLE>
<CAPTION>
                                                                   2002          2001
                                                                   ----          ----
<S>                                                           <C>            <C>
Supplemental disclosure of cash flow information:
   Approximate cash paid during the year for interest         $       --        $ 10,000
                                                              ==========================
Supplemental disclosure of noncash investing and
 financing activities:

   Common stock and warrants issued for financing costs       $       --        $718,367
                                                              ==========================
</TABLE>

          See accompanying notes to consolidated financial statements.


                                      F-6
<PAGE>


                         K2 DIGITAL, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Prior business and going concern consideration

Through August 2001, K2 Digital, Inc. (together with its wholly-owned
subsidiary, the "Company" or "K2") was a strategic digital services company that
provided consulting and development services including analysis, planning,
systems design and implementation. In August 2001, the Company completed the
sale of fixed and intangible assets essential to its business operations to
Integrated Information Systems, Inc. ("IIS") (see Note 3).

The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed above and in Note 3,
the Company sold fixed and intangible assets essential to its business
operations to IIS and effectively became a "shell" company with no revenues and
continuing general and administrative expenses. Further, at December 31, 2002,
the Company has cumulative losses of approximately $7.7 million, a diminutive
cash balance and working capital and stockholders' deficits of approximately
$185,000. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.

Management's plan includes a proposed business combination with Future X Media,
Inc ("FX") (formerly First Step Distribution Network, Inc.) in a reverse merger
transaction. FX's business strategy is to bring new electronic gaming products
to market through the use of innovative technologies and channels. If the
transaction is consummated, it is anticipated that the shareholders of FX will
thereby acquire substantially all of the issued and outstanding voting common
stock of the Company. The proposed transaction is subject to various conditions
including, but not limited to, a 5.1 to 1 reverse stock split of the Company's
common stock and completion of a shareholder's meeting. If the Company is
unsuccessful in completing the preceding transaction, management's alternative
plan may include a further search for a similar business combination or
strategic alliance. There can be no assurances that the transaction described
above or management's alternative plan will be realized.

2. Summary of significant accounting policies

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of K2
Digital, Inc. and its wholly owned subsidiary. All significant intercompany
balances and transactions have been eliminated in consolidation.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair values of the Company's assets and liabilities that qualify as
financial instruments under SFAS No. 107, "Disclosure about Fair Value of
Financial Instruments," approximate their carrying amounts presented in the
consolidated balance sheet at December 31, 2002.

USE OF ESTIMATES

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


                                      F-7
<PAGE>

                         K2 DIGITAL INC, AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


2. Summary of significant accounting policies (continued)

REVENUE RECOGNITION (OF DISCONTINUED OPERATIONS)

Revenues were recognized on the percentage of completion method (which was not
materially different from the amount that would have been reported as revenues
under the completed contract method for 2001) based upon the ratio of costs
incurred to total estimated costs. Unbilled revenues represented costs incurred
and anticipated profits earned on projects in progress in excess of amounts
billed. Deferred revenues and customer advances represented amounts billed in
excess of costs incurred and estimated profit earned. Such billings generally
occurred at the beginning of contract periods, and were in accordance with
contract provisions. Provisions for any estimated losses on uncompleted
contracts were made in the period in which such losses were determinable. A
portion of the Company's revenues were generated on a fixed fee for service
basis, when the service was provided and when there were no material Company
obligations.

INVESTMENT IN AVAILABLE-FOR-SALE SECURITIES

The Company has evaluated its investment policies consistent with Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," and determined that its investment
in 110,000 shares of the publicly-traded common stock of 24/7 Real Media, Inc.
(formerly 24/7 Media, Inc.) should be classified as available-for-sale.
Available-for-sale securities are carried at fair value (based upon published
closing prices), with the unrealized gains and losses reported in stockholders'
equity (deficit) under the caption accumulated other comprehensive income
(loss). Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in
operations.

During the year ended December 31, 2001, the Company recorded an approximate
$1.4 million loss due to an other-than-temporary decline in the fair value of
its investment in the common stock of 24/7 Real Media, Inc.

At December 31, 2002, the Company had no gross unrealized holding gain (loss)
from the available-for-sale security since the market price of the underlying
security has remained constant, at $0.23 per share, since the recognition of the
other-than-temporary loss recorded during the year ended December 31, 2001.
Accordingly, for the year ended December 31, 2002, the change in unrealized
holding gain (loss) from available-for-sale security was zero.

FIXED ASSETS (OF DISCONTINUED OPERATIONS)

Fixed assets were stated at cost less accumulated depreciation and amortization.
The Company provided for depreciation and amortization using the straight-line
method over the following estimated useful lives:

                                            Estimated
                     Assets               Useful Lives
                     ------               ------------

                 Computer and equipment      3 Years
                 Furniture and fixtures      5 Years
                 Leasehold improvements   Term of lease


INCOME TAXES

The Company complies with SFAS No. 109, "Accounting for Income Taxes", which
requires an asset and liability approach to financial accounting and reporting
for income taxes. Deferred income tax assets and liabilities are computed for
differences between the financial statement and tax bases of assets and
liabilities that will result in future taxable or deductible amounts, based on
enacted tax laws and rates to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amount expected to be realized.


                                      F-8
<PAGE>


                         K2 DIGITAL, INC. AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

2. Summary of significant accounting policies (continued)

NET LOSS PER COMMON SHARE

The Company complies with SFAS No. 128, "Earnings Per Share", which requires
dual presentation of basic and diluted earnings per share. Basic earnings (loss)
per share excluded dilution and is computed by dividing net income (loss)
available to common stockholders by the weighted average common shares
outstanding for the year. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted to common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. Since the effect of
outstanding options is antidilutive, they have been excluded from the Company's
computation of net loss per common share. Therefore, basic and diluted loss per
common share for the years ended December 31, 2002 and 2001 were the same.

STOCK-BASED COMPENSATION

The Company follows SFAS No. 123 "Accounting for Stock-Based Compensation." The
provisions of SFAS No. 123 allow companies to either expense the estimated fair
value of stock options or to continue to follow the intrinsic value method set
forth in Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees" but disclose the pro forma effect on net income
(loss) had the fair value of the options been expensed. The Company has elected
to continue to apply APB Opinion No. 25 in accounting for its stock option
incentive plans.

NEW ACCOUNTING PRONOUNCEMENTS

During 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No.146, "Accounting for Cost Associated with Exit or Disposal Activities" and
No.148, "Accounting for Stock-Based Compensation - Transition and Disclosure".

SFAS No.146, which is not effective until the year ending December 31, 2003,
addresses financial accounting and reporting for costs associated with exit or
disposal activities. The Company does not believe that SFAS No.146 will have
significant impact on its consolidated financial position, results of operations
or cash flows.

SFAS No.148 amends SFAS No.123 to provide alternative methods of transition for
a voluntary change to fair value method of accounting for stock-based
compensation. In addition, SFAS No.148 amends the disclosure requirements of
SFAS No.123 to require more prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
Company's management currently does not plan to transition to the fair value
method of accounting for employee stock options. Accordingly, the Company's
management does not believe that portion of SFAS No.148 will impact the Company.
However, the Company has provided the required disclosures (see preceding
significant accounting policy and Note 6).

3. Sale of assets and discontinued operations

BACKGROUND

On August 29, 2001, the Company sold fixed and intangible assets essential to
its business operations to IIS including certain of the Company's customer
contracts, furniture, fixtures, equipment and intellectual property, for an
aggregate purchase price of $444,000, of which $419,000 was paid in cash and
$25,000 of capital lease obligations were assumed by IIS. IIS also assumed
certain deferred revenues and customer deposits. The Company recognized an
approximate $218,000 gain on the transaction.

Under the terms of the purchase agreement governing the transaction (the
"Purchase Agreement"), IIS assumed the Company's office lease obligations, took
up occupancy in the Company's premises and made offers of employment to
substantially all of the remaining employees of the Company, which offers have
been accepted.


                                      F-9
<PAGE>


                         K2 DIGITAL, INC. AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. Sale of assets and discontinued operations (continued)

In addition to the purchase price and as consideration of the Company's release
of certain employees from the non-competition restrictions contained in their
agreements with the Company, the Company received from IIS at closing a
recruitment and placement fee of $75,000. In addition, the Purchase Agreement
provided for the Company to receive from IIS and additional placement fee of
$7,500 per key employee and $2,500 per other employee that remained employed by
IIS through December 31, 2001. This additional contingent placement fee was to
be paid by IIS in cash in five monthly installments beginning August 31, 2001,
pro rated monthly for the number of employees retained. As of December 31, 2001,
$31,000 of these contingent fees had been paid to the Company and $36,500 due to
the Company remained unpaid by IIS (which was fully reserved for at December 31,
2001). In October 2002, the Company received approximately $9,000 from IIS as a
final payment pursuant to a June 2002 settlement agreement pertaining to the
unpaid balance.

Under the Purchase Agreement, the Company also received from IIS a cash fee of
$50,000 in return for entering into certain non-competition provisions contained
in the Purchase Agreement, which provide that the Company will not, for a period
of five years (i) engage in any business of substantially the same character as
the business engaged in by the Company prior to the transaction, (ii) solicit
for employment any employee of IIS (including former employees of the Company),
or (iii) solicit any client or customer of IIS (including any customer
transferred to IIS under the Purchase Agreement) to do business with the
Company.

The aggregate cash consideration delivered to the Company at closing was
$544,000, of which approximately $258,000 was paid directly to K2 Holdings LLC,
an affiliate of SGI Graphics, LLC (collectively, "SGI") the Company's principal
secured creditor, in order to release SGI's security interest in the assets of
the Company.

DISCONTINUED OPERATIONS PRESENTATION

The operating results relating to the discontinued operations have been
segregated from continuing operations and reported as a separate line item in
the accompanying 2001 consolidated statement of operations.

The following table provides certain information related to the discontinued
operations for the year ended December 31, 2001:

        Revenues                                      $ 1,999,407
                                                      -----------
        Direct salaries and costs                       1,978,970
        Selling, general and administrative
         expenses                                       3,234,248
        Depreciation and amortization                     210,610
        Other income                                      (50,183)
                                                      ------------
                                                        5,373,645
                                                      -----------
                 Net Loss                             $(3,374,238)
                                                      ============


                                      F-10
<PAGE>

                         K2 DIGITAL, INC. AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. Commitments and contingencies

The Company had a two-year employment contract with an executive officer, which
expired March 31, 2002. The contract provided for an annual salary of $225,000
and a discretionary bonus in the form of stock options based upon individual and
Company performance. Such agreement also provided for 100,000 shares of
restricted Common Stock, which vest over two years, 50% on April 14, 2001 and
50% on April 14, 2002. The value of the stock at the grant date was $5.00 per
share. As a result of this transaction, the Company incurred $500,000 of
deferred compensation costs, which were amortized over the two-year vesting
period. The Company amortized approximately $72,000 and $250,000 of deferred
compensation in 2002 and 2001, respectively. As a result of the officer's duties
being diminished in light of the August 2001 transaction (see Notes 1 and 3) and
the deteriorated consolidated financial condition of the Company, the officer
agreed to take a reduced salary in the 4th quarter of 2001 and not to be paid in
cash under this agreement in 2002. However, the officer may be compensated for
the shortfall through additional stock options in the future.

Although management believes that it has adequately provided for all of its
known liabilities at December 31, 2002, the Company may be exposed to potential
contingencies related to its business activities that have been discontinued. At
the present time, the Company is not aware of any contingencies that would
require accrual or disclosure in the consolidated financial statements pursuant
to SFAS No.5.

In connection with its capital raising efforts, FX has commited to grant equity
interests and options in K2 to certain FX investors, if the reverse merger
transaction, as discussed in Note 1, is consummated. The equity interests and
options include (i) a convertible debt agreement whereby $100,000 of FX notes
would be convertible into 275,000 shares of K2's common stock (ii) a commitment
to issue 475,000 shares of K2's common stock and (iii) a commitment to issue
options to purchase an additional 255,000 shares of K2 common stock in prices
ranging from $0.01 to $1.00 per share.

5. Income taxes

The benefit for income taxes on the net loss for the years ended December 31,
2002 and 2001 differs from the amount computed by applying the Federal statutory
rate due to the following:

                                                   2002             2001
                                                   ----             ----

     Statutory Federal income tax rate            (34.0)%          (34.0)%

     State and local taxes, net                    (5.1)            (5.1)

     Valuation allowance and other                 39.1             39.1
                                                   ---------------------
     Effective income tax rate                       --%              --%
                                                   =====================


As of December 31, 2002, the Company had net operating loss carryforwards of
approximately $6.9 million for federal and state income tax purposes, which are
available to reduce future taxable income and will expire through 2022 if not
utilized. In addition, the impairment charge related to the investment in
available-for-sale securities of approximately $1.4 million is not deductible
until the securities are sold. The future tax benefits associated with the net
operating loss carryforwards and impairment charge were the primary components
of an estimated $3.3 million deferred tax asset at December 31, 2002. A
valuation allowance has been established for the entire amount of the deferred
tax asset since its realization is considered unlikely. Further, a change in the
ownership of a majority of the fair market value of the Company's common stock
(such as the change in ownership that would occur in the contemplated
transaction with FX) could significantly delay or limit the utilization of net
operating loss carryforwards.


                                      F-11
<PAGE>


                         K2 DIGITAL, INC. AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. 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 of up to 225,000 and 500,000 options under the 1996 Plan and 1997
Plan respectively. The number of options available under the 1997 Plan were
increased by an additional 400,000 and 800,000 options in 1999 and 2000,
respectively, to a total of 1,700,000 options. In January 2001, the Board of
Directors and stockholders approved an amendment to the 1997 Plan to increase
the aggregate number of shares reserved for future issuance of the Company's
common stock under the 1997 Plan from 1,700,000 shares to 3,000,000 shares. As
of December 31, 2001, there were 1,135,500 shares of common stock available for
grant under the Plans. 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 that 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, 2002, and 2001 is presented in the table
below:

                                         Shares       Range       Exercise Price
                                         ------       -----       --------------
Outstanding at December 31, 2000       1,595,250   $1.09 - $6.75     $ 2.96

Granted                                  175,000   $0.56 - $0.81     $ 0.73
Forfeited                               (815,000)  $1.09 - $5.81     $ 2.93
                                       ---------   -------------     ------
Outstanding at December 31, 2001         955,920   $0.56 - $6.75     $ 2.55
Granted                                   40,000     .05               0.05
Expired                                  (12,500)  $6.75               6.75
                                       ---------   -------------     ------
Outstanding at December 31, 2002         982,750   $0.05 - $5.81     $ 2.40
                                       =========   =============     ======
Shares exercisable at December 31, 2002  932,750

Shares exercisable at January 1, 2003    982,750

Included in options granted for the years ended December 31, 2002 and 2001 are
40,000 and 50,000 options, respectively, issued to consultants for services
rendered. The options issued to consultants are exercisable immediately at $0.05
(for 2002 grant) and $0.56 (for 2001 grant) and were valued at $4,500 and
$28,000 for the years ended December 31, 2002 and 2001, respectively, using a
Black-Scholes option pricing model or other valuation means.


                                      F-12
<PAGE>

                         K2 DIGITAL, INC. AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. Stock option plan (continued)

The Company accounts for the Plans under APB Opinion No. 25, "Accounting for
Stock Issued to Employees" under which no compensation cost is recognized for
stock options granted to employees 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
No. 123, the Company's net loss and basic and diluted net loss per common share
for the years ended December 31, 2002 and 2001 would have been the following pro
forma amounts (in thousands, except for per share data):

                                             2002      2001
                                             ----      ----

      Net loss, as reported                $   (61)   $(5,139)

      Stock-based employee compensation
      determined under the fair value
      based method, net of related taxes      (573)      (603)
                                           -------    -------
      Net loss, proforma                   $  (634)   $(5,742)
                                           =======    =======
      Net loss per common
        share, basic and diluted:
      As reported                          $ (0.01)   $ (1.16)
                                           =======    =======
      Proforma                             $ (0.13)   $ (1.29)
                                           =======    =======

The fair value of each option granted is estimated on the date of the grant
using the Black-Scholes option pricing model with following assumptions:
Risk-free interest rate of 4.5%; no expected dividend yields for options
granted; expected lives of 4 years and expected stock price volatility of
approximately 124%.

7. Fusion capital agreement

In December 2000, the Company entered into a common stock purchase agreement
(the "Fusion Facility") with Fusion Capital Fund II, LLC ("Fusion Capital")
pursuant to which Fusion Capital would purchase up to $12 million of the
Company's common stock in two tranches. Each $6 million tranche is to be
purchased over a period of up to twenty-four months, subject to a six-month
extension or earlier termination at the Company's discretion. The selling price
of the shares will be equal to the lesser of (1) $15.00 or (2) a price based
upon the future market price of the common stock without any fixed discount to
the market price. After all of the shares of the Company's common stock
purchasable under the first tranche of the common stock purchase agreement have
been purchased by Fusion Capital, the Company has the right to deliver to Fusion
Capital an irrevocable written notice stating that it elects to commence the
second tranche. The obligation of Fusion Capital to commence the second tranche
is subject only to customary conditions, all of which are outside the control of
Fusion Capital. In early 2001, the Company issued to Fusion Capital as a
commitment fee for the Fusion Facility, an aggregate of 677,647 shares of common
stock, 297,162 of these shares were issued in the form of warrants to purchase
shares of common stock at an exercise price of $.01 per share, exercisable at
any time over a five year period. The aggregate commitment fee (or deferred
issuance cost) of approximately $718,000, including warrants valued at
approximately $314,000 using a Black-Scholes option pricing model, was initially
recorded as a "contra account" in the stockholders' equity and was to be applied
over the course of the capital raising activity under the Fusion Facility.


                                      F-13
<PAGE>

                         K2 DIGITAL, INC. AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. Fusion capital agreement (continued)

In May 2001, the Company issued 862,069 shares of common stock under the Fusion
Facility to an officer of the Company in exchange for net proceeds of $250,000.
On August 14, 2001, Fusion Capital exercised warrants to purchase an additional
297,162 shares of the Company's common stock at an exercise price of $.01 per
share. After applying the net exercise provisions of the warrant, based upon the
closing sale price of the Company's common stock on the Nasdaq SmallCap Market
of $.15 per share on August 13, 2001, Fusion Capital received 277,351 shares of
common stock upon exercise of the warrant.

As a result of the sale of assets of the Company consummated in August 2001, the
Company is currently in default under the agreement. In addition, due to the
Company's current financial circumstances, the Company does not anticipate that,
even if the current defaults are cured, it will be able to make any further
issuances under the Fusion Facility. Accordingly, deferred issuance costs were
written-off fully during the year ended December 31, 2001 and included in the
accompanying 2001 consolidated statement of operations. On March 4, 2003, the
Fusion Facility was terminated.


                                      F-14
<PAGE>

                         K2 DIGITAL, INC. AND SUBSIDIARY
                                   SCHEDULE II
                        VALUATION AND QUALIFYING ACCOUNTS
                 FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001

Allowance for doubtful accounts, December 31, 2000            $ 100,000

Less: Charge-off of uncollectible accounts                      (50,000)

Add:  Provision to increase allowance for doubtful accounts      21,650
                                                              ---------
Allowance for doubtful accounts, December 31, 2001               71,650

Less: Charge-off of uncollectible accounts                      (71,650)
                                                              ---------
Allowance for doubtful accounts, December 31, 2002            $      --
                                                              =========


                                      F-15
<PAGE>

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

On April 10, 2002, the Board of Directors of the Company made a determination
not to engage Arthur Andersen LLP ("Andersen"), as its independent public
accountants and resolved to appoint Rothstein, Kass & Company, P.C.
("Rothstein") as its independent public accountants to audit its financial
statements for the fiscal year ended December 31, 2001.

During the two years ended December 31, 2001 and through April 10, 2002, there
were no disagreements with Andersen on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to Andersen's satisfaction, would have caused
Andersen to make reference to the subject matter of the disagreement in
connection with its reports.

Andersen added an explanatory paragraph to their audit opinion issued in
connection with the Company's financial statements for the fiscal year ended
December 31, 2000 which states that the Company's losses since inception and
dependence on outside financing raise substantial doubt about its ability to
continue as a going concern. The Company's financial statements for the fiscal
year ended December 31, 2000 did not include any adjustments that might result
from the outcome of that uncertainty. With the exception of the foregoing, the
audit reports of Andersen on the consolidated financial statements of the
Company as of and for each of the two fiscal years ended December 31, 2000 did
not contain any adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope or accounting principles.

None of the reportable events described under Item 304(a)(1)(iv) of Regulation
S-B occurred within the two years ended December 31, 2001 and through April 10,
2002.

The Company provided Andersen with a copy of the above disclosures. A letter
dated April 10, 2002, from Andersen stating its agreement with our statements is
listed under Item 13(a)(2) in Part IV as Exhibit 16.1 and is incorporated herein
by reference to the Company's Form 8-K filed with the Securities and Exchange
Commission on April 16, 2002.

During the two years ended December 31, 2001, and the subsequent interim period
through April 10, 2002, the Company did not consult with Rothstein regarding any
of the matters or events set forth in Item 304(a)(2)(i) and (ii) of Regulation
S-B.


                                       10
<PAGE>

                                    PART III

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

DIRECTORS OF THE COMPANY

Since December 31, 2000, three directors have tendered their resignations from
the Company's Board of Directors. P. Scott Munro resigned effective June 2001,
Lynn Fantom resigned effective November 6, 2001 and Dr. Steven N. Goldstein
resigned effective March 31, 2002. Set forth below are the current directors of
the Company.

Matthew G. de Ganon, age 40, is Chief Marketing Officer and Executive Vice
President of Corporate Development for Arcavista Corporation. Mr. de Ganon has
been a director and was an executive officer of the Company July 1995. Mr. de
Ganon resigned from his position as an executive officer of the Company
effective August 1, 2001. From that time until April 2002, Mr. de Ganon was
employed by Integrated Information Systems, Inc., which purchased certain assets
of the Company in August 2001. He was President of the Company from June 1996 to
November 1998 and was also the Chief Operating Officer of the Company from July
1995 to November 1997. For the two years prior to joining the Company, Mr. de
Ganon operated a business that created CD-ROM products and offered consulting
services regarding the use of electronic delivery to publishers of newsletters
and directories. Mr. de Ganon is co-author of the essay, "Overcoming Future
Shock on the Superhighway: Suggestions for Providers and Technocrats," published
and presented in the 1994 National Online Conference Proceedings. From August
1992 to July 1993, Mr. de Ganon was the Vice President of New Media of Superior
Computer Systems, Inc., a software developer. Mr. de Ganon's work focused on
UNIX-based 4GL accounting software customization for corporate clients. From May
1991 to July 1992, Mr. de Ganon was involved in casting administration for the
Motion Picture Group of Universal Studios, Inc. He was a franchised theatrical
agent with the Stone Manners Agency in Los Angeles, California from August 1987
to May 1991.

Douglas E. Cleek, age 40, is a Partner and Creative Director of Magnitude 9.6, a
digital services firm. Mr. Cleek, who co-founded the Company in 1993, has been a
director of the Company since it was reorganized as a corporation in January
1995. From January 1995 until August 2001, Mr. Cleek served as the Company's
Executive Vice President--Chief Creative Officer. From 1993 until 1995, Mr.
Cleek was a general partner of the Company. For more than five years prior to
that, Mr. Cleek was an art director/Designer for William Allen & Co. and its
successor, A.J. Bart & Sons, specializing in graphic promotional materials for
the hospitality industry.

Gary W. Brown, age 50, has been a director of the Company since February 2000
and joined the Company in April 2000 as Executive Vice President and Chief
Operating Officer. Since August 31, 2001, Mr. Brown has served as President,
Secretary, Chief Financial Officer and Chief Operating Officer of the Company.
Since November 14, 2001, Mr. Brown has served as Senior Vice President and
Managing Director of the Risk Management Division of Canadian Imperial Bank of
Commerce (CIBC World Markets). Prior to that, Mr. Brown was employed from July
1980 through June 1999 in various management roles with UBS AG, the successor
organization to Union Bank of Switzerland, including the role of New York Branch
Manager. There he served as Division Head for Structured Finance, one of UBS's
six operating divisions in the Americas prior to the merger of UBS with Swiss
Bank Corporation in 1998. Post-merger, Mr. Brown was designated Chief Credit
Officer-Americas for UBS's investment banking division, Warburg, Dillon Read,
where he was responsible for capital commitments of the firm. Mr. Brown held
various business development and risk management positions throughout his
19-year career at UBS. He also served as President of the New York Chapter of
Risk Management Association, the trade association for the financial services
risk management industry, and as an ex-officio member of the RMA National Board.
From 1991-1999, he has served on the Board of Directors of Sefar Americas, a
subsidiary of Sefar AG, a manufacturer of Swiss synthetic fabrics. Prior to
joining UBS in 1980, Mr. Brown was employed from June 1976 through June 1980
with The Chase Manhattan Bank, having served in various business development
functions. Mr. Brown received a Bachelor of Science degree in Business
Administration from Oral Roberts University in May 1976.

David R. Sklaver, age 50, has been a director of the Company since 1999. Since
October 2001, Mr. Sklaver has been President and Chief Executive Officer of
UPOC, Inc., a marketing company. From June 1997 to October 2001, Mr. Sklaver was
a General Partner and Chief Executive Officer of Artustry Partnership, a
strategic and creative marketing company, of which he was a founder. Since
October 1995, Mr. Sklaver has also served as President of Phase 2, Inc. From
1993 to 1995, Mr. Sklaver served as President of Wells Rich Greene DDB, an
advertising agency handling Fortune 500 clients. Prior to being promoted to
President, Mr. Sklaver served as Executive Vice President, Director of Client
Services of Wells Rich Greene from 1989 to 1993. From 1986 to 1988, Mr. Sklaver
was Executive Vice President, Account Group Head, at advertising agency BBD
Needham, New York. From 1984 to 1985, Mr. Sklaver was Managing Director of DDB's
Sydney office. From 1978 to 1984, he served in Account Management at DDB New
York. Prior to 1978, Mr. Sklaver held positions at Foote, Cone & Belding
Advertising and Standard Brands, both advertising agencies.

FILING REQUIREMENTS

The Company believes that all filing requirements under Section 16(a) of the
Securities Act of 1934, as amended, applicable to its officers, directors and
greater than 10% beneficial owners were complied with during the fiscal year
ended December 31, 2002.


                                       11
<PAGE>

ITEM 10. EXECUTIVE COMPENSATION

DIRECTOR FEES

Directors who are employees of the Company receive no additional compensation
for their service as directors. Directors not so employed are entitled to
receive $25,000 in compensation annually and are entitled to be reimbursed for
expenses incurred in connection with meeting attendance. In addition, each of
the Company's non-employee Directors are granted options to acquire 5,000 shares
of the Company's common stock upon their election or reelection to the Board.
Current Directors have not received any compensation for their services to the
Company since the year-ended December 31, 2001.

ADVISOR FEES

All non-employees serving as members of the Company's Board of Advisors receive
options to purchase up to 5,000 shares of the Company's common stock upon their
election to the Board of Advisors. There were two members of the Board of
Advisors for the year ending December 31,2001.

EXECUTIVE COMPENSATION

The following table sets forth, for the last three completed fiscal years, the
total annual compensation paid or accrued by the Company for services in all
capacities for the Chief Executive Officer, and those other executive officers
(the "Named Executives") who served in executive capacities during fiscal 2001
and had aggregate compensation in excess of $100,000. Except for Mr. Brown, each
of the Named Executives has resigned his or her position as an officer of the
Company, effective August 1, 2001.

<TABLE>
<CAPTION>
                                                                          Annual Compensation (1)    Long Term Compensation
                                                                          -----------------------   -------------------------
                                                                                                    Restricted         Option
              Name and Principal Position                         Year     Salary         Bonus     Stock Awards        Awards
              ---------------------------                         ----     ------         -----       ---------        ------

<S>                                                               <C>    <C>               <C>          <C>              <C>
  Matthew G. de Ganon, Chairman of the Board (2)                  2002       --             --           --               --
                                                                  2001    164,231           --           --               --
                                                                  2000    228,392           --           --               --
  Douglas E. Cleek, Executive Vice President - Chief
  Creative Officer (2)                                            2002       --             --           --               --
                                                                  2001    115,837           --           --               --
                                                                  2000    182,423           --           --               --
  Gary W. Brown, President, Chief Operating Officer, Chief
  Financial Officer and Secretary (4)                             2002       --             --           --               --
                                                                  2001    192,539           --           --             100,000
                                                                  2000    151,442           --       100,000 (5)        268,000

  Lynn Fantom, Chief Executive Officer (2)(3)                     2002       --             --           --               --
                                                                  2001    144,173           --           --             200,000
                                                                  2000    250,000           --           --               --
</TABLE>


(1)  The value of perquisites and other personal benefits does not exceed 10% of
     the officer's salary. The Company effectively ceased its operations in
     August 2001.
(2)  Resigned as an Officer of the Company effective August 1, 2001.
(3)  Resigned as a Director of the Company effective November 6, 2001.
(4)  Mr. Brown accepted compensation less than provided for in his employment
     agreement during 2001, and has received no salary, compensation or benefits
     since December 31, 2001.
(5)  50,000 shares vested on April 14, 2001 and the remaining 50,000 shares
     vested on April 14, 2002. Based on the closing price of the Company's
     common stock on April 14, 2000 of $5.00 per share, the fair market value of
     the restricted stock awards on the date of grant was $500,000.


                                       12
<PAGE>

EMPLOYMENT CONTRACTS FOR EXECUTIVE OFFICERS

Matthew G. de Ganon, Lynn Fantom and Douglas E. Cleek resigned from their
positions as officers of the Company effective August 1, 2001. In connection
with their resignations, Mr. de Gannon and Mr. Cleek executed releases,
releasing the Company from any further liability under their employment
agreements with the Company.

The employment contract between the Company and Lynn Fantom, as Chief Executive
Officer and President of the Company, terminated on December 31, 2000 and a new
employment contract between the Company and Ms. Fantom as Chief Executive Office
and President of the Company was entered into on February 13, 2001 and was
scheduled to terminate on December 31, 2002. Ms. Fantom resigned from her
position as Chief Executive Officer and President of the Company effective
August 1, 2001. Pursuant to her employment contract, Ms. Fantom is subject to a
non-compete restriction for twelve months after the termination of her
employment.

Gary W. Brown joined the Company as Executive Vice President and Chief Operating
Officer on April 14, 2000 and is currently the Company's President, Chief
Operating Officer, Chief Financial Officer and Secretary. Mr. Brown signed an
employment contract with the Company that expired on March 31, 2002. The
employment contract provided for an annual salary of $225,000 and a
discretionary annual bonus in the form of stock options up to a maximum of
100,000 shares of the Company's common stock per year. Upon joining the Company,
Mr. Brown also received 100,000 shares of restricted stock and options to
purchase up to 263,000 shares of the Company's common stock, all of which had
vested as of April 14, 2002. In the event of a change of control of the Company,
all of Mr. Brown's unvested stock options were to immediately vest pursuant to
his employment contract and if, within 180 days after a change of control, Mr.
Brown is dismissed from the Company for any reason other than "Cause" or if Mr.
Brown were to resign from the Company for "Good Reason" (as each term is defined
in his employment contract), Mr. Brown was to be entitled to a payment equal to
the greater of $225,000 or his base salary for the remainder of his employment
term. Pursuant to his employment contract, Mr. Brown is also subject to a
non-compete restriction for twelve months after the termination of his
employment.

OPTION GRANTS IN FISCAL 2001

The following table sets forth individual grants of stock options made under the
Company's 1996 Stock Incentive Plan (the "1996 Plan") and the 1997 Stock
Incentive Plan (the "1997 Plan") during the fiscal year ended December 31, 2001
for the Chief Executive Officer of the Company and each of the Named Executives.

<TABLE>
<CAPTION>
                                                   Percent of Total
                          Number of Securities    Options Granted to
                           Underlying Options     Employees in Fiscal      Exercise or Base
Name                            Granted                 Year(1)              Price ($/Sh)         Expiration Date
----                      --------------------    -------------------      ----------------       ---------------
<S>                          <C>                          <C>                   <C>                       <C>
Lynn Fantom                  200,000(2)(3)                67%                   $0.75             January 2, 2011

Matthew G. de Ganon                --                     --                      --                     --

Douglas E. Cleek                   --                     --                      --                     --

Gary W. Brown                  100,000(2)                 33%                   $0.75             January 2, 2011
</TABLE>



(1)  Calculated as a percentage of total options granted to all employees under
     both the 1996 Plan and the 1997 Plan.
(2)  Such options were granted under the 1997 Plan.
(3)  All unvested options granted to Ms. Fantom were cancelled upon her
     resignation from the Board of Directors effective November 6, 2001.

No stock options were granted under the 1996 Plan and 300,000 stock options were
granted under the 1997 Plan to all executive officers and directors as a group
during the fiscal year ended December 31, 2001. Such options are exercisable at
prices per share (reflecting the fair market value on the dates of grant) of
$0.75 under the 1997 Plan. None of such options were exercised during fiscal
2002.

OPTION GRANTS IN FISCAL 2002

No stock options were granted under the 1996 Plan or the 1997 Plan for the
year-ended December 31, 2002.


                                       13
<PAGE>

OPTION EXERCISES AND YEAR-END OPTION VALUE TABLE

The table set forth below shows the value of unexercised options under the 1996
Plan and the 1997 Plan held on December 31, 2002 by Ms. Fantom and each of the
Named Executives or Directors.


<TABLE>
<CAPTION>

                                                                                         Value of
                                                   Number of Securities            Unexercised In-the-Money
                       Shares                     Underlying Unexercised          Options held on December 31,
                      Acquired                 Options at December 31, 2002             2002 ($)(1)
                         on         Value      ----------------------------      -----------------------------
Name                  Exercise     Realized    Exercisable    Unexercisable      Exercisable    Unexercisable
-------------------------------------------------------------------------------------------------------------
<S>                     <C>         <C>       <C>                 <C>              <C>             <C>
Lynn Fantom              --          --        400,000(2)          --               --              --

Gary W. Brown            --          --        368,000(3)          --               --              --

</TABLE>


(1) Based on the closing price of the Company's common stock on December 31,
2002, the last day in fiscal 2002 on which the markets were open for business,
which was $0.025.

(2) Represents grants made under the 1997 Plan.

(3) Represents 346,000 options granted under the 1997 Plan and 22,000 options
granted under the 1996 Plan.


                                       14
<PAGE>

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

BENEFICIAL OWNERSHIP

The following table sets forth information, as of April 15, 2003 as to the
beneficial ownership of common stock (including shares which may be acquired
within 60 days pursuant to stock options) of each director of the Company, the
Chief Executive Officer of the Company, all directors and executive officers as
a group and persons known by the Company to beneficially own 5% or more of the
common stock. Except as set forth below, each of the listed persons has sole
voting and investment power with respect to the shares beneficially owned by
such person. Except as otherwise indicated, the address of each person included
in the table is c/o the Company, Sokolow, Dunaud, Mercadier & Carreras LLP, 770
Lexington Avenue - 6th Floor, New York, New York 10021.



                                                         Shares of Common Stock
Name of Owner                      Beneficially Owned     Percent of Class (1)
-------------                      ------------------     --------------------

Matthew G. de Ganon                    856,866(2)                 14.9

Douglas E. Cleek                       424,281(2)                  7.4

Lynn Fantom                            405,000(3)
7.0

Gary W. Brown                        1,348,069(4)                 23.4

David Sklaver                           15,000(5)                   *

All Directors and Executive          2,624,935(6)                 45.5
Officers as a group (6 persons)


*Less than one percent.

(1) Does not give effect to: (i) shares held in treasury and (ii) options held
by persons other than the persons named above.

(2) Messrs. de Ganon and Cleek resigned from their positions as officers of the
Company effective August 1, 2001. Pursuant to a 10-year voting agreement entered
into by Messrs. de Ganon, Cleek, David Centner (a former Chief Operating Officer
and Director of the Company) and Bradley Szollose (a former Secretary and
Director of the Company), effective July 26, 1996 (the "Voting Agreement"), the
voting control over 424,281 shares held by Mr. Cleek are vested in Mr. de Ganon.
Such shares subject to the Voting Agreement must be voted in favor of the
election of Mr. de Ganon. In addition, the Voting Agreement grants each party
thereto a right of first refusal as to the sale of the others' common stock.
Messrs. de Ganon, Cleek, Centner and Szollose each disclaim beneficial ownership
of those shares with respect to which they are not record owners.

(3) Ms. Fantom resigned from her position as an officer of the Company effective
August 1, 2001 and resigned as a director of the Company effective November 6,
2001. Ms. Fantom holds 400,000 shares underlying presently exercisable stock
options. Ms Fantom disclaims beneficial ownership of all such shares underlying
unexercised options.

(4) Includes 368,000 shares underlying presently exercisable stock options: (i)
136,500 shares underlying options which vested on April 14, 2001, (ii) 131,500
shares underlying options which vested on April 14, 2002, 50,000 shares
underlying options which vested on January 2, 2002 and 50,000 shares underlying
unvested stock options which vested on January 2, 2003; (iii) 50,000 shares of
restricted common stock which vested on April 14, 2001, and (iv) 50,000 shares
of restricted common stock which vested on April 14, 2002. Mr. Brown disclaims
beneficial ownership of all shares underlying unexercised and/or unvested
options.

(5) Includes 15,000 shares underlying presently exercisable stock options.

(6) Includes 733,000 shares underlying presently exercisable stock options and
50,000 shares underlying unvested stock options, all of which vest upon the
occurrence of certain change of control transactions. Note that 424,281 of the
2,624,935 shares are subject to the Voting Agreement described above and are
therefore listed as beneficially owned by both Mr. de Ganon and Mr. Cleek. These
shares are counted only once for purposes of the aggregate number of shares of
common stock beneficially owned by all directors and executive officers as a
group and Messrs. de Ganon and Cleek each disclaim beneficial ownership of those
shares with respect to which they are not record owners.



                                       15
<PAGE>




ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

CERTAIN RELATED TRANSACTIONS

On May 15, 2001, Mr. Brown acquired 862,069 shares of common stock of the
Company for an aggregate purchase price of $250,000. Mr. Brown purchased the
shares through the Fusion Facility described above. Mr. Brown acquired the
shares for personal investment purposes and to further demonstrate to a
potential investor in the Company his confidence in the Company and the
alignment of his interests, as an officer and director of the Company, with the
interests of the stockholders of the Company.


                                       16
<PAGE>


                                     PART IV


ITEM 13. Exhibit List and Reports on Form 8-K

(a) Documents filed as part of this report: Page

<TABLE>
<CAPTION>

<S>                                                                                                                        <C>
1. Independent Auditors' Report............................................................................................F-1 - 2

2. Consolidated Financial Statements

   Consolidated Balance Sheet - December 31, 2002.................................... .........................................F-3

   Consolidated Statements of Operations and Comprehensive Loss - For the years ended December 31, 2002 and 2001...............F-4

   Consolidated Statements of Stockholders' Equity (Deficit) - For the years ended December 31, 2002 and 2001..............F-6 - 7

   Consolidated Statements of Cash Flows - For the years ended December 31, 2002 and 2001..................................F-6 - 7

   Notes to Consolidated Financial Statements.............................................................................F-8 - 16

   Schedule II - Valuation and Qualifying Accounts............................................................................F-17
</TABLE>

3.  Exhibits

    3.1      Certificate of Incorporation of the Company*

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

    3.1(b)   Amendment to Certificate of Incorporation of the Company
             (incorporated by reference from the Registrant's Form 10-KSB
             for its fiscal year ended 12/31/00).

    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 (incorporated by reference from the
             Registrant's Form 10-KSB for its fiscal year ended 12/31/96).

    10.3     Amendment to 1997 Stock Option Plan (incorporated by
             reference from the Registrant's Form 10-KSB for its
             fiscal year ended 12/31/00).

    10.4     Consulting Agreement with Harvey Berlent*


                                       17
<PAGE>

10.5     Employment Agreement with Matthew G. de Ganon*

10.6     Extension of Employment Agreement with Matthew G. de Ganon
         dated November 2, 1998 (incorporated by reference from the
         Registrant's Form 10-KSB for its fiscal year ended 12/31/98).

10.7     Amendment to Employment Agreement of Matthew G. de Ganon dated
         April 14, 2000 (incorporated by reference from the
         Registrant's Form 10-QSB for the quarterly period ended
         03/31/00).

10.8     Employment Agreement with Douglas E. Cleek*

10.9     Extension of Employment Agreement with Douglas E. Cleek dated
         January 15, 1999 (incorporated by reference from the
         Registrant's Form 10-KSB for its fiscal year ended 12/31/98).

10.10    Employment Agreement with Gary W. Brown dated April 14, 2000
         (incorporated by reference from the Registrant's Form 10-QSB
         for the quarterly period ended 03/31/00).

10.11    Restricted Stock Agreement of Gary W. Brown (incorporated by
         reference from the Registrant's Form 10-QSB for the quarterly
         period ended 03/31/00).

10.12    Employment Agreement with Lynn Fantom dated February 13, 2001
         (incorporated by reference from the Registrant's Form 10-KSB
         for its fiscal year ended 12/31/00).

10.13    Agreement of Lease dated as of April 18, 1997, between
         30 Broad Associates, L.P., as landlord, and the Company, as
         tenant, relating to 30 Broad Street, New York, New York
         (incorporated by reference from the Registrant's Form 10-KSB
         for its fiscal year ended 12/31/00).

10.14    Amendment to Lease dated as of April 1, 1998, between 30 Broad
         Associates, L.P., as landlord, and the Company, as tenant,
         relating to 30 Broad Street, New York, New York (incorporated
         by reference from the Registrant's Form 10-KSB for its fiscal
         year ended 12/31/00).

10.15    Second Amendment to Lease dated as of July 10, 2000, between
         ASC-CSFB 30 Broad, LLC, as landlord, and the Company, as
         tenant, relating to 30 Broad Street, New York, New York
         (incorporated by reference from the Registrant's Form 10-QSB
         for the quarterly period ended 06/30/00).

10.16    Common Stock Purchase Agreement dated as of December 11, 2000
         between the Company and Fusion Capital Fund II, LLC
         (incorporated by reference from the Registrant's Current
         Report on Form 8-K filed 12/11/00).

10.17    Form of Registration Rights Agreement between the Company and
         Fusion Capital Fund II, LLC (incorporated by reference from
         the Registrant's Current Report on Form 8-K filed 12/11/00).

10.18    Master Transaction Agreement, dated as of August 20, 2001,
         between the Company and Integrated Information Systems, Inc.
         (incorporated by reference from the Registrant's Current
         Report on Form 8-K filed 8/30/01).


                                       18
<PAGE>

10.19    Agreement and Plan of Merger, dated as of January 15, 2002, by
         and among First Step Distribution Network, Inc. and its
         shareholders, First Step Acquisition Corp. and the Company
         (incorporated by reference from the Registrant's Current
         Report on Form 8-K filed 01/17/02).

10.20    Side Letter dated April 8, 2002, by and between the Company
         and First Step Distribution Network, Inc. (incorporated by
         reference from the Registrant's Annual Report on Form 10-KSB
         filed 04/16/02).

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

99.01**             Certification Pursuant to Section 906 of the Sarbanes-Oxley
                    Act of 2002.

16.1                Letter from Arthur Andersen LLP regarding change in
                    certifying accountant (incorporated by reference from the
                    Registrant's Current Report on Form 8-K filed 04/16/02).
21.1                Subsidiary List*

_______________________

*    Incorporated by reference from the Company's Registration Statement on Form
     SB-2, No. 333-4319.

**   Filed herewith.

(B) REPORTS ON FORM 8-K

The Company did not file any reports on Form 8-K during the last quarter of the
period covered by this report.

ITEM 14.  CONTROLS AND PROCEDURES

         The Chief Executive Officer and Chief Financial Officer of K2 Digital,
Inc. after conducting an evaluation, together with other members of management,
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures as of a date within 90 days of the filing of this
report, have concluded that K2 Digital, Inc.'s disclosure controls and
procedures were effective to ensure that information required to be disclosed by
K2 Digital, Inc. in its reports filed or submitted under the Securities Exchange
Act of 1934 (the "Exchange Act") is recorded, processed, summarized, and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission (the "SEC"). There were no significant
changes in K2 Digital, Inc.'s internal controls or in other factors that could
significantly affect these controls subsequent to that evaluation, and there
were no significant deficiencies or material weaknesses in such controls
requiring corrective actions.


                                       19
<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 DIGITAL, INC.

Dated: April 15, 2003





                         By: /s/  Gary W. Brown
                             ------------------------------------
                             Gary W. Brown, President


<TABLE>
<CAPTION>

          Signature                                      Title                                      Date
          ---------                                      -----                                      ----
<S>                              <C>                                                           <C>
/s/ Matthew G. de Ganon*         Chairman of the Board, Director                               April 15, 2003
------------------------------
Matthew G. de Ganon

/s/ Gary W. Brown*               President, Chief Operating Officer, Chief Financial           April 15, 2003
------------------------------   Officer (Principal Financial and Accounting Officer),
Gary W. Brown                    Secretary and Director

/s/ Douglas E. Cleek*            Director                                                      April 15, 2003
------------------------------
Douglas E. Cleek

/s/ David R. Sklaver*            Director                                                      April 15, 2003
------------------------------
David R. Sklaver
</TABLE>


*BY GARY W. BROWN, ATTORNEY-IN-FACT


                                       20
<PAGE>

                                K-2 DIGITAL, INC.

                                  CERTIFICATION

     I, Gary W. Brown, certify that:

1.   I have reviewed this annual report on Form 10-K SB of K-2 Digital, Inc.,;


2.   Based on my knowledge, this annual report does not contain any untrue
     statement of a material fact or omit to state a material fact necessary to
     make the statements made, in light of the circumstances under which such
     statements were made, not misleading with respect to the period covered by
     this annual report;
3.   Based on my knowledge, the financial statements, and other financial
     information included in this annual report, fairly present in all material
     respects the financial condition, results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report;
4.   The registrant's other certifying officers and I are responsible for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

     a)  designed such disclosure controls and procedures to ensure that
         material information relating to the registrant, including its
         consolidated subsidiaries, is made known to us by others within those
         entities, particularly during the period in which this annual report is
         being prepared;

     b)  evaluated the effectiveness of the registrant's disclosure controls and
         procedures as of a date within 90 days prior to the filing date of this
         annual report (the "Evaluation Date"); and

     c)  presented in this annual report our conclusions about the effectiveness
         of the disclosure controls and procedures based on our evaluation as of
         the Evaluation Date;

5.   The registrant's other certifying officer and I have disclosed, based on
     our most recent evaluation, to the registrant's auditors and the audit
     committee of registrant's board of directors (or persons performing the
     equivalent functions):

     a)  all significant deficiencies in the design or operation of internal
         controls which could adversely affect the registrant's ability to
         record, process, summarize and report financial data and have
         identified

     b)  for the registrant's auditors any material weaknesses in internal
         controls; and any fraud, whether or not material, that involves
         management or other employees who have a significant role in the
         registrant's internal controls; and

6.   The registrant's other certifying officer and I have indicated in this
     annual report whether or not there were significant changes in internal
     controls or in other factors that could significantly affect internal
     controls subsequent to the date of our most recent evaluation, including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.

Date:  April 14, 2003

/s/  Gary W. Brown
------------------------------------------
     Gary W. Brown
     Chief Executive Officer
     And Chief Financial Officer
     (Principal Executive Officer and Principal Financial Officer)


                                       21
<PAGE>

                                INDEX TO EXHIBITS


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

3.1                        Certificate of Incorporation of the Company*

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

3.1(b)                     Amendment to Certificate of Incorporation of the
                           Company (incorporated by reference from the
                           Registrant's Form 10-KSB for its fiscal year ended
                           12/31/00).

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 (incorporated by reference
                           from the Registrant's Form 10-KSB for its fiscal year
                           ended 12/31/96).

10.3                       Amendment to 1997 Stock Option Plan (incorporated by
                           reference from the Registrant's Form 10-KSB for its
                           fiscal year ended 12/31/00).

10.4                       Consulting Agreement with Harvey Berlent*

10.5                       Employment Agreement with Matthew G. de Ganon*

10.6                       Extension of Employment Agreement with Matthew G. de
                           Ganon dated November 2, 1998 (incorporated by
                           reference from the Registrant's Form 10-KSB for its
                           fiscal year ended 12/31/98).

10.7                       Amendment to Employment Agreement of Matthew G. de
                           Ganon dated April 14, 2000 (incorporated by reference
                           from the Registrant's Form 10-QSB for the quarterly
                           period ended 03/31/00).

10.8                       Employment Agreement with Douglas E. Cleek*

10.9                       Extension of Employment Agreement with Douglas E.
                           Cleek dated January 15, 1999 (incorporated by
                           reference from the Registrant's Form 10-KSB for its
                           fiscal year ended 12/31/98).

10.10                      Employment Agreement with Gary W. Brown dated April
                           14, 2000 (incorporated by reference from the
                           Registrant's Form 10-QSB for the quarterly period
                           ended 03/31/00).

10.11                      Restricted Stock Agreement of Gary W. Brown
                           (incorporated by reference from the Registrant's Form
                           10-QSB for the quarterly period ended 03/31/00).


                                       22
<PAGE>


10.12                      Employment Agreement with Lynn Fantom dated February
                           13, 2001 (incorporated by reference from the
                           Registrant's Form 10-KSB for its fiscal year ended
                           12/31/00).

10.13                      Agreement of Lease dated as of April 18, 1997,
                           between 30 Broad Associates, L.P., as landlord, and
                           the Company, as tenant, relating to 30 Broad Street,
                           New York, New York (incorporated by reference from
                           the Registrant's Form 10-KSB for its fiscal year
                           ended 12/31/00).

10.14                      Amendment to Lease dated as of April 1, 1998, between
                           30 Broad Associates, L.P., as landlord, and the
                           Company, as tenant, relating to 30 Broad Street, New
                           York, New York (incorporated by reference from the
                           Registrant's Form 10-KSB for its fiscal year ended
                           12/31/00).

10.15                      Second Amendment to Lease dated as of July 10, 2000,
                           between ASC-CSFB 30 Broad, LLC, as landlord, and the
                           Company, as tenant, relating to 30 Broad Street, New
                           York, New York (incorporated by reference from the
                           Registrant's Form 10-QSB for the quarterly period
                           ended 06/30/00).

10.16                      Common Stock Purchase Agreement dated as of December
                           11, 2000 between the Company and Fusion Capital Fund
                           II, LLC (incorporated by reference from the
                           Registrant's Current Report on Form 8-K filed
                           12/11/00).

10.17                      Form of Registration Rights Agreement between the
                           Company and Fusion Capital Fund II, LLC (incorporated
                           by reference from the Registrant's Current Report on
                           Form 8-K filed 12/11/00).

10.18                      Master Transaction Agreement, dated as of August 20,
                           2001, between the Company and Integrated Information
                           Systems, Inc. (incorporated by reference from the
                           Registrant's Current Report on Form 8-K filed
                           8/30/01).

10.19                      Agreement and Plan of Merger, dated as of January 15,
                           2002, by and among First Step Distribution Network,
                           Inc. and its shareholders, First Step Acquisition
                           Corp. and the Company (incorporated by reference from
                           the Registrant's Current Report on Form 8-K filed
                           01/17/02).

10.20                      Side Letter dated April 8, 2002, by and between the
                           Company and First Step Distribution Network, Inc.
                           (incorporated by reference from the Registrant's
                           Annual Report on Form 10-KSB filed 04/16/02).

16.1                       Letter from Arthur Andersen LLP regarding change in
                           certifying accountant (incorporated by reference from
                           the Registrant's Current Report on Form 8-K filed
                           04/16/02).

21.1                       Subsidiary List*

99.01**                    Certification Pursuant to Section 906 of the
                           Sarbanes-Oxley Act of 2002



*    Incorporated by reference from the Company's Registration Statement on Form
     SB-2, No. 333-4319.

**   Filed herewith.


                                       23