<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, DC 20549
                                 UNITED STATES

                                  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 May 31, 2000

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:  0-22814

                                  INSYNQ, INC.
                 (Name of Small Business Issuer in Its Charter)

               DELAWARE                                   74-2964608
     (State or other jurisdiction of          (IRS Employer Identification No.)
      incorporation or organization)

        1101 BROADWAY PLAZA, TACOMA, WASHINGTON                  98402
       (Address of principal executive offices)               (Zip Code)

                                (253) 284-2000
             (Registrant's telephone number, including area code)

   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, PAR VALUE $.001 PER SHARE
                               (Title of Class)
<PAGE>

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes [X]       No__________

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of the 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 [ ].

The Registrant's revenue for its most recent fiscal year:  $235,808

The aggregate market value of the Registrant's common stock, $.001 par value,
held by non-affiliates as of September 7, 2000, based on the average bid and
asked price of the common stock as reported on September 7, 2000 on the OTC
Bulletin Board, was: $19,199,143.

As of September 7, 2000, there were 20,354,348 shares of the Registrant's common
stock.

DOCUMENTS INCORPORATED BY REFERENCE: Certain Exhibits under Part III below are
incorporated by reference herein.

<PAGE>

                                  INSYNQ, INC.

                                   FORM 10-K

                               TABLE OF CONTENTS
<TABLE>
<S>          <C>                                                              <C>
PART I......................................................................   1

 ITEM 1.     DESCRIPTION OF BUSINESS........................................   1

 ITEM 2.     DESCRIPTION OF PROPERTY........................................  30

 ITEM 3.     LEGAL PROCEEDINGS..............................................  31

 ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............  31

PART II.....................................................................  31

 ITEM 5.     MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.......  31

 ITEM 6.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
             AND RESULTS OF OPERATIONS......................................  40

 ITEM 7.     FINANCIAL STATEMENTS...........................................  42

 ITEM 8.     CHANGES IN AND DISAGREEMENTS WTH ACCOUNTANTS ON ACCOUNTING
             AND FINANCIAL DISCLOSURE.......................................  42

PART III....................................................................  42

 ITEM 9.     DIRECTORS, EXECUTIVE OFFICERS PROMOTERS AND CONTROL
             PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.....  42

 ITEM 10.    EXECUTIVE COMPENSATION ........................................  44

 ITEM 11.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
             MANAGEMENT.....................................................  51

 ITEM 12.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................  53

 ITEM 13.    EXHIBITS AND REPORTS ON FORM 8-K...............................  54
</TABLE>
<PAGE>

                                    PART I

ITEM 1. DESCRIPTION OF BUSINESS

     Except for historical information, the following description of our
business contains forward-looking statements based on current expectations that
involve risks and uncertainties. Our actual results could differ materially from
those set forth in these forward-looking statements as a result of a number of
factors, including those set forth in this Annual Report under the heading
"Additional Factors that may Affect Future Results." Unless specified otherwise,
as used herein, the terms "we," "us," or "our" refer to Insynq, Inc., a Delaware
corporation.

     General

     We are a provider of Internet appliances, managed software services
(through customer premises equipment ("CPE") and application hosting), Web
hosting services, and access to Internet marketing assistance and related
equipment and services. We offer these as an integrated whole, either sold
directly or on a fee or subscription basis.

     We target small and medium enterprises ("SME") and the high-end segment of
the small office and home office ("SOHO") market for the sale of hardware and
hosted software and access to Internet-related services.  We provide these
products and services by developing a customer subscriber base that adopts a
cost-effective, on-line solution to building and maintaining an information
technology ("IT") system through the adoption of "Web-based" computing as an
alternative to both local area networks and traditional client-server
implementations.  We concentrate on SME and SOHO customers and market ourselves
as an Internet utility ("Internet Utility") company that can cost-effectively
provide all of the computer software, hardware, connectivity, and Internet-
access needs for those markets.

     We currently have several independent software vendors ("ISV") on line
using our server-based computing services and anticipate signing various
agreements with additional organizations in the next few months. In addition, we
have recently completed initial training for existing ISVs, and we expect to
further increase our subscriber base through their respective sales channels.
Key ISV relationships currently in place include Remedy Corporation, Macola
Software, and Novell, Inc. ("Novell").

     We believe our core competency is providing products and services related
to server-based and hosted computing. We believe we have gained credibility in
the industry with strategic relationships with companies such as Hewlett-Packard
Company ("HP"), Citrix Systems, Inc. ("Citrix"), and Global Crossing Ltd
("Global Crossing").  We believe these companies have chosen to strategically
align with us in various capacities that combine the hardware, software, and
access required to build a successful delivery mechanism for our hosted
services.

     History

     One of our predecessor companies, Xcel Management, Inc., formerly known as
"Palace Casinos, Inc." ("Xcel"), was inactive from the end of 1995 until the
consummation of an asset

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purchase transaction with another of our predecessor companies, Insynq, Inc., a
Washington corporation ("Insynq-WA"). During the two-year period prior to the
transaction with Insynq-WA, Xcel and its then management worked to complete a
plan of reorganization confirmed in the United States Bankruptcy Court under
Chapter 11 of the federal bankruptcy laws, and undertook necessary steps to
position Xcel to seek a new business enterprise in which it could become
involved, either through a merger or reorganization, or an acquisition
transaction. These efforts resulted in the transaction with Insynq-WA, completed
in February 2000.

     Xcel was originally incorporated in the state of Utah on May 22, 1980,
under the name Ward's Gas & Oil, to engage in the oil and gas business. This
business was terminated after a few years of operations. From November 1992
until approximately the end of 1995, Xcel (then called "Palace Casinos, Inc."),
was engaged, through its then wholly-owned subsidiary, Maritime Group, Ltd. (the
"Subsidiary"), in the development of a dockside gaming facility in Biloxi,
Mississippi. In April 1994, the Subsidiary completed the development of the
Biloxi gaming facility, "Palace Casino," and commenced operations. On December
1, 1994, Xcel and its Subsidiary separately filed voluntary petitions for relief
under Chapter 11 of the federal bankruptcy laws. Although the original
bankruptcy petition was filed in the United States Bankruptcy Court for the
District of Utah, Central Division, the supervision of Xcel's Chapter 11
proceedings was transferred to the United States Bankruptcy Court for the
Southern District of Mississippi (the "Bankruptcy Court"). On September 22,
1995, Xcel, having been operating as a debtor-in-possession in connection with
the bankruptcy proceeding, entered into an asset purchase agreement ("Xcel Asset
Purchase Agreement") under the terms of which it agreed, subject to the approval
of the Bankruptcy Court, to sell substantially all of its Subsidiary's operating
assets. This transaction was approved by the Bankruptcy Court and completed in
the end of 1995, with all of the net proceeds of the transaction being
distributed to creditors. Following the completion of the sale of the
Subsidiary's Assets, Xcel had essentially no assets and liabilities and its
business operations essentially ceased, except for efforts to complete a plan of
reorganization, described below.

     In February 1999, Steve Rippon and Edward D. Bagley, Xcel's management at
the time, submitted to the Bankruptcy Court, as plan proponents, a plan of
reorganization (the "Plan"), which was confirmed by the Bankruptcy Court on June
16, 1999. Under the terms of the Plan: (a) all of Xcel's priority creditors were
paid a total of $5,000; (b) unsecured creditors, holding between $300,000 and
$500,000 in claims, were issued pro rata a total of 90,000 shares of post-
bankruptcy common stock in full satisfaction of such obligations; and (c) all of
the equity holders of Xcel common stock were issued, pro rata, a total of
approximately 90,000 shares of common stock in lieu of a total of 8,794,329
shares of preferred and common stock issued and outstanding, with the result
that .0102 shares of common stock were issued for each previously outstanding
share of common stock. Under the terms of the Plan, all of Xcel's outstanding
warrants and options expired. In connection with the Plan, Messrs. Rippon and
Bagley, creditors of the estate and the plan proponents, were elected as Xcel's
officers and directors, and were issued a total of 1,620,000 shares of common
stock (810,000 shares each) in consideration of their contributions of services
and approximately $20,000 in cash provided to pay for legal services and costs
incurred in the Plan confirmation process and related activities.

                                                                               2
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     Following the confirmation of the Plan in June 1999, Xcel completed the
Plan in accordance with its terms. Immediately following the confirmation of the
Plan, Xcel had a total of approximately 1,800,000 shares of common stock, par
value $0.001 per share, issued and outstanding. On December 3, 1999, the
Bankruptcy Court, after reviewing the efforts by the plan proponents, issued an
order closing the bankruptcy estate.

     Since the completion of the Plan, Xcel undertook efforts to complete
updated financial statements, to prepare and file updated periodic reports with
the Securities and Exchange Commission, and to undertake actions to enable Xcel
to seek a business opportunity for acquisition or involvement by Xcel.  These
efforts resulted in the asset purchase transaction with Insynq-WA.

     On January 26, 2000, Xcel entered into an asset purchase agreement ("Asset
Purchase Agreement") with Insynq-WA. Insynq-WA was, since September 1998,
engaged in providing hardware, software, computer Internet and related
connectivity services and products to the SME and SOHO markets. On or about that
same time, Insynq-WA engaged in a 1.41056 to 1 stock split. The terms of the
Asset Purchase Agreement were substantially completed on February 18, 2000.
Under the terms of the Asset Purchase Agreement, Xcel acquired substantially all
of the assets of Insynq-WA and assumed substantially all of the obligations of
Insynq-WA, in exchange for the issuance by Xcel of a total of 7,604,050 shares
of restricted common stock of Xcel to the Insynq-WA shareholders pro rata in a
liquidating distribution. As a result of the transaction, Xcel had a total of
approximately 9,404,050 shares issued and outstanding, of which the former
Insynq-WA shareholders held 7,604,050 shares, or approximately 80.9%. In
connection with the Asset Purchase Agreement, Insynq-WA obtained approval of the
sale of its assets by its shareholders at a duly called and convened
shareholders' meeting.

     As a result of the Asset Purchase Agreement, Xcel acquired essentially all
of the assets, tangible and intangible, of Insynq-WA and became engaged in
Insynq-WA's business. These assets included computer hardware and software,
related equipment, furniture and fixtures, proprietary technology developed by
Insynq-WA, all contractual rights including capitalized lease equipment and
other leasehold rights, trade names and trademarks and all client lists and
marketing data and materials, cash and cash equivalents, accounts receivable,
inventory, work-in-progress and related assets. Xcel also assumed essentially
all of the obligations and liabilities of Insynq-WA, including capital lease
obligations on equipment, accounts payable, accrued payroll and other business
taxes, notes payable, and other liabilities. In addition to such liabilities,
Xcel agreed to assume all other contractual obligations of Insynq-WA. In that
regard, Xcel has entered into employment contracts with certain individuals who
were executives or key employees of Insynq-WA on substantially the same terms as
the terms of employment between Insynq-WA and such individuals.

     Prior to September 1998, the business which ultimately became Insynq-WA's
business was under development as a potential product/services line of
Interactive, a company wholly owned by M. Carroll Benton, our Secretary,
Treasurer and Chief Administrative Officer. In September 1998, Interactive
transferred to Charles Benton, husband of Ms. Benton and then a creditor of
Interactive Information Systems Corporation ("Interactive"), in satisfaction of
a debt obligation owed by Interactive to Charles Benton, all of Interactive's
right,

                                                                               3
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title and interest in and to (1) certain equipment and other tangible personal
property, and (2) the intellectual properties, computer software, trademarks,
copyrights, ideas, work-in-progress, and other tangible and intangible property
comprising the system known as the "Insynq Project" which later developed into
Insynq's IQ Delivery System. Mr. Benton contributed all of the Insynq Project
intellectual property assets to Insynq-WA in exchange for the initial shares of
common stock issued by Insynq-WA at the time of its formation. Mr. Benton also
sold the equipment and other tangible property to the newly-formed Insynq-WA, in
exchange for a note. Mr. Benton then sold all of his shares of Insynq-WA common
stock to M. Carroll Benton and John P. Gorst, our Chief Executive Officer,
Chairman of the Board and President. Insynq-WA continued the development of the
Insynq Project business until February 18, 2000, when all of that business was
acquired by Xcel under the terms of the Asset Purchase Agreement.

     Under the Asset Purchase Agreement, Xcel also agreed to assume all
equipment leases, leaseholder obligations covering office space utilized by
Insynq-WA, all consulting contracts, and all other contract obligations.
Finally, at the time of completion of the Insynq-WA asset acquisition, Insynq-WA
had outstanding to various shareholders a number of warrants and options which
entitled the holders to purchase shares of restricted common stock of Insynq-WA,
which warrants and options were converted into like warrants and options to
purchase shares of Xcel's common stock.

     On August 3, 2000, at a special meeting of shareholders, Xcel completed a
re-incorporation merger with its wholly owned subsidiary, Insynq, Inc.
("Insynq"), a Delaware corporation, pursuant to a Plan of Merger (the "Merger
Agreement") dated June 30, 2000. Pursuant to the Merger Agreement, each
shareholder of Xcel received two (2) shares of Insynq common stock for each one
(1) share of Xcel stock held on the date of the merger.

     Our Proprietary IQ Delivery System

     Our Internet Utility service and the IQ delivery system ("IQ Delivery
System") were originally developed by Interactive, a computer integration
company located in Tacoma, Washington. The IQ Delivery System was purchased by
Insynq-WA in September 1998, and was subsequently assumed by Xcel as part of the
Asset Purchase Agreement in February 2000. The complete IQ Delivery System
includes managed network and application services, and can span from a
customer's keyboard to the Insynq data center (the "Insynq Data Center").
Insynq's CPE includes a simplified, diskless workstation or "Thin Client," and
multi-function router, that we manage and maintain. The system can also include
Internet-access services provided by Global Crossing or another provider. The
final piece of the system is the Insynq Data Center, which is located at the
Tacoma Technology Center, and is managed by us. This facility, with redundant
power, bandwidth, and cooling, houses our HP server equipment and Cisco routers.
While we recommend that customers use the full IQ Delivery System, they are free
to choose which components they use.

     In the process of developing the IQ Delivery System, we believe we acquired
valuable technological expertise. We have created new methodologies and produced
proprietary hardware and software that we believe is essential to the
configuration and effective management

                                                                               4
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of Internet-based networks and outside deployment of shared software
applications. Some of our key employees are certified as Microsoft Systems
Engineers, Microsoft Certified Professionals, Certified Netware Administrators,
Certified Citrix Administrators, Certified Netware Engineers and Certified Cisco
Architects.

     To support Microsoft Corporation's ("Microsoft") Windows-based
applications, the IQ Delivery System uses proprietary Citrix Systems, Inc.
("Citrix"), independent computer architecture ("ICA") protocol to increase end-
user performance and reduce a customer's total cost of owning and maintaining
computer hardware and software. Our technology requires a simple appliance at
the client site that allows us to manage all hosted application processing
functions. The centrally managed servers also house customers' data, provide
storage and backup, file and directory security, and anti-virus protection.

     The IQ Delivery System receives and transmits information in the form of
images rather than data, requiring less bandwidth than traditional client-server
configurations. Customers may connect to the IQ Delivery System via a variety of
carriers and connectivity technologies, including public access over the
Internet or encryption, through private connections, or other available access
methods. Properly scaled and provisioned connections, whether public or private,
generally provide a quality end-user experience.

     A Thin Client is a type of simplified, diskless workstation. Internet
browser-based Thin Client devices, also called Internet appliances ("Internet
Appliances"), allow a user to interact with Internet content using only a
monitor, keyboard, and a mouse. The Internet Appliance actually does very little
since its functions are limited to sending user instructions to an outsourced
provider. Using the IQ Delivery System, an Internet Appliance communicates the
user's data-entry and retrieval commands to servers located at the Insynq Data
Center, where all computing functions are performed. This is the user option
recommended by us. Internet Appliances do not have disk or tape drives, which
generally increases customer productivity by restricting users' ability to
install extraneous software applications, such as computer games, or tamper with
a computer's operating system. This access device imposes a singleness of
purpose upon the operation, and improves manageability, simplicity, and
reliability.

     The traditional workstation, utilizing a central processing unit ("CPU")
and disk resources, constitutes the second type of customer configuration. These
customers may need to use fully equipped workstations for certain individual
seats that utilize non-Windows software applications or very specialized,
complex applications such as computer aided design ("CAD") programs. This is not
our recommended option because it does not free the customer from the technical
problems and service costs associated with maintaining this type of
configuration. Customers may choose to use existing workstations to connect to
the IQ Delivery System, and can be accomplished by using a Citrix ICA software
client and a standard network interface card ("NIC"). However, because this
machine uses an operating system that Insynq does not manage, the workstation
may be more susceptible to various failures.

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     Once connected to the IQ Delivery System, users can acquire any of the
following computer services.

     Virtual Office - We can establish a virtual office for a customer, allowing
professionals, employers, employees, clients, and customers to utilize a wide
variety of software applications and/or interact directly in a network
environment. This office is always open, irrespective of the time of day or the
user's location.

     Office Suite - Customers may select from one of three (3) Office Suites as
part of the virtual desktop subscription. Customers may also select from a wide
variety of fully supported Windows-based software. We serve some vertical
virtual markets and in many cases incorporate specialized software for these
customers. We regularly test new applications and make them available to our
customers. If a customer wishes to use Windows-based software that is not
already offered for use with our service, we may test, and subsequently
configure, load, and maintain compatible applications for an additional monthly
fee.

     Internet Connection - We may provide customers with connectivity to the
Internet at a discounted rate as part of our service.

     Web Site Hosting - For an additional fee, we may put the customer's
Internet Web site on an Insynq server and host the site for them. Further, we
can assist the customer in performing Web site changes and updates.

     Data Back-up and Storage - The IQ Delivery System provides daily automatic
backup of customer data on high-speed tape and logs the backups. Upon request, a
customer can receive their backup data and related backup logs. On average we
provide one (1) gigabyte of data storage with each business subscription. For
larger customers, we tailor storage requirements to the customers' needs and
price it accordingly.

     Security - Our IQ Delivery System generally raises the level of a
customer's computer security in several ways. First, our servers are located in
biometrically secured rooms, with keycard access. Second, customers utilizing
Thin Client technology additionally prevent unauthorized disk installation and
installation of extraneous software, both of which can introduce computer
corruptions and viruses. Third, access to customer data is restricted through
the use of secured application servers located at the Insynq Data Center, which
is protected by firewall filters and Internet protocol ("IP") based networking
rules. Last, customer data is rarely transmitted; transmissions between the
customer's site and the servers located in the Insynq Data Center generally
occur in the form of indecipherable, encrypted images.

     Redundancy - Our IQ Delivery System secures customer data on redundant disk
arrays with ready spare disk drives. We make a best effort to assure application
redundancy so that if one server fails, we can reroute customers to similar
servers, thereby minimizing customer downtime.

     Overview of Internet Industry

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     The Internet has emerged as a global medium, enabling millions of people
worldwide to share information, communicate, and conduct business
electronically. Internet growth is expected to be driven by the increasing
number of personal computers and Internet connectivity options that can be
installed in homes and offices, the decreasing cost of personal computers, the
introduction of Internet Appliances, improvements in network infrastructure, the
proliferation of Internet content and the increasing familiarity with and
acceptance of the Internet by businesses and consumers. As the number of users
has increased, the Internet has emerged as an effective means to market products
and services, helping to fuel its growth as a commercial medium.

     The Internet possesses a number of unique characteristics that
differentiate it from traditional reference points: a lack of geographic or
temporal limitations; a sense of spatial freedom realized through high powered
navigation tools; fast connectivity and the shedding of one's true identity and
the adoption of an online identity; real-time access to dynamic and interactive
content; and instantaneous communication with a single individual or with groups
of individuals, effecting a flattening and broadening of interpersonal
relationships in general. In a true sense, the term cyberspace reflects another
dimension, the new frontier of our time. As a result of these characteristics,
Internet usage is expected to continue to grow rapidly. The proliferation of
users, combined with the Internet's reach and its lower cost for transmitting
data, graphics, and voice communications has created a powerful new dimension to
the conduct of business.

     The commercial potential of the Internet has resulted in a proliferation of
Web sites through which a vast number of persons, businesses, and communities,
including media companies, news services, affinity groups and individuals seek
to inform, entertain, communicate and conduct business with Internet users
worldwide. New Internet businesses, such as E-Loan Inc., InsWeb Corporation, and
Microsoft's Expedia, have been established to offer goods and services in novel
ways using the Internet. Other popular Internet destination sites such as
FindLaw, ivillage and Xoom offer users the ability to engage and participate in
a virtual community with users of similar interests. At the same time, many
traditional media and publishing companies have transitioned their brand and
content onto the Internet, such as ABC.com, Disney.com, MSNBC.com, and Dow Jones
(The Wall Street Journal Interactive Edition). Hundreds of thousands of
corporations have established Web sites and corporate intranets and extranets to
communicate with employees, customers, and business partners over the Internet.

     This rapid growth in the number of Web sites and the wide array of content
associated with them has caused the emergence of the "portal," an integrated
online service through which users can access a wide range of information and
services without having to navigate through multiple sites. Leading Internet
service providers, such as America Online, Internet software and services
companies, such as Microsoft and Netscape Communications Corporation, and
Internet search engines and directories, such as those offered by Yahoo!, Inc.,
Lycos, Inc., Excite, Inc. and Infoseek Corp., have sought to capitalize on their
positions as the most frequently visited sites on the Internet by establishing
themselves as primary portals. These companies have regularly added to their
service offerings, aggregating third party content, such as stock quotes, news
and yellow pages, and incorporating links to and from other related sites, in
order to

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prolong their users' visits and promote repeat usage. In this environment,
popular destination and corporate sites have found it increasingly difficult to
compete for the attention of users and to preserve user loyalty. Many of these
sites have found it necessary to add to the amount of information and services
accessible through their sites, supplementing their more targeted or thematic
content with useful third-party content and services and effectively becoming
portals themselves.

     The popularity of the Internet has also resulted in the emergence of new
Internet access devices and the adaptation of traditional communications devices
for Internet access, including cellular phones, pagers, screen phones,
television set-top boxes, online kiosks, personal digital assistants and, most
recently, Internet appliances. In order to drive market acceptance of their
devices, these suppliers seek an integrated package of content and services that
is specifically designed to complement the display format and navigational
features of their devices.

     In order to differentiate their services and attract the attention of users
on the increasingly crowded Internet, existing and emerging Internet portals,
destination sites and suppliers of personal computers and other Internet access
devices all need to continually expand and enrich their offerings with value-
added content and services.  The objective of these companies is to effectively
increase the audience for their services in terms of both reach and frequency.
The greater the size of their audience, the greater the advertising and
electronic commerce opportunities afforded to them.

     The growth of the Internet represents a significant opportunity for
businesses to conduct commerce over the Internet. One factor in this projected
growth is the increasing variety of transactions that take place on the
Internet. Initially, companies focused on facilitating Internet transactions
between businesses. More recently, however, a number of companies have targeted
business-to-consumer transactions. These companies typically use the Internet to
offer standard products and services that can be easily described with graphics
and text and that do not necessarily require a physical presence for purchase,
such as software, books, music, videocassettes, home loans, airline tickets and
online banking and stock trading. The Internet allows these companies to develop
one-to-one relationships with customers worldwide without making significant
investments in traditional infrastructure such as retail outlets, distribution
networks, and sales personnel.

     As the Internet evolves into a mass medium, we believe there will be an
increasing need for outsourced business and syndication services to enable
existing and emerging Internet portals, destination sites and suppliers of
personal computers and other Internet access devices (collectively, "Internet
points-of-entry") to broaden their content offering and exploit the revenue
potential of their audience. In more traditional media such as television, radio
and print, syndicated content provided by the major television networks,
programming syndicators and wire services, such as Reuters and Associated Press,
has been widely used by local television stations, radio stations and newspapers
in order to augment their core programming with additional programming and, in
so doing, extend their audience reach and retention. The diverse Internet
points-of-entry similarly need a source of syndicated content that will increase
the convenience, relevancy and enjoyment of their users' experience, thereby
generating increasing dependence and/or repeat usage and making it less likely
that users will switch to another

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service. Such syndicated content must be delivered to these Internet points-of-
entry through a reliable, scalable infrastructure that can ensure high-quality
service. As a result, we believe there is an opportunity for a highly focused
company to provide business software, outsourced content services and Web
hosting to small and medium sized businesses.

     Our Strategic Plan

     We have targeted the following businesses as our primary markets: (1)
businesses with multiple office locations, (2) businesses with a highly mobile
workforce, and (3) high-growth and startup organizations.

     We believe we are different from our competitors because we fill the real
need of enterprises, also referred to as SME and SOHO users, who require
reliable information technology including propriety and off-the-shelf software,
hardware, and all related services at a cost-effective price. Our challenge is
to educate our target markets on the cost savings associated with hosted Web-
based computing as an alternative to traditional local area networks and client-
server implementations. We will position our product and service offerings as
the high-quality, value-added alternative to traditional computing models.

     We will promote, market and sell our services in order to achieve our goals
through two primary methods: via a direct sales force and through indirect
channels involving strategic relationships with Internet service providers
("ISP"), connectivity companies, ISVs, managed service providers, other
application service providers ("ASP"), and telephone and computer hardware and
software resellers. By focusing heavily on the education of our direct sales
force and reseller channels, we hope to penetrate a large part of the SME and
SOHO markets with a concise and planned approach; there is no assurance, of
course, that we will be successful in accomplishing our goal.

     While we believe that it is paramount that we remain focused on our plan,
we must have the ability inherent in small companies to adapt to changing market
conditions.

     In addition to internally generated growth, we intend to expand our
business through strategic acquisitions in the United States and possibly
abroad. We believe our acquisitions should allow us to accelerate our
penetration of key geographical markets, broaden our offerings of products and
services, and expand our technical staff and sales force.

     Consistent with our acquisition strategy and our need for additional
capital, on May 15, 2000, we entered into a financial advisory agreement with
Gerard Klauer Mattison & Co., Inc. ("GKM"), under the terms of which we and our
affiliates have engaged GKM, and GKM has agreed to serve, as our exclusive
financial advisor concerning certain "strategic transactions". Under the terms
of the agreement (the "GKM Agreement"), GKM has agreed to provide assistance to
us in identifying and contacting parties which my be interested in considering a
"strategic transaction," and, as our exclusive financial advisor, to assist us,
on a best efforts basis, in analyzing, structuring, negotiating and effecting
potential "strategic transactions" on terms and conditions satisfactory to us.
"Strategic transaction" is defined in the GKM Agreement as the private sale of
our securities pursuant to applicable exemptions from registration under the
Securities Act of 1933, as amended (not including sales of securities to vendors
in exchange for services or issues of securities to employees, consultants or
directors pursuant to a stock plan, stock purchase or benefit plan, and
exclusive of certain private financing efforts being undertaken by us at the
time of the GKM Agreement) (the "Private Placement"), the consummation of a
merger, acquisition, consolidation, sale or joint venture involving a majority
of our business or assets or any exchange or tender offer involving our
securities. Pursuant to the terms of the GKM Agreement, we have agreed to pay to
GKM a retainer fee of $50,000 and to compensate GKM based on a negotiated
percentage of the value of the strategic transactions that are consummated,
including the issuance of certain warrants for common stock. We and our
affiliates have also granted to GKM a first right of refusal, for a period of
eighteen (18) months from the first closing date of the Private Placement,
entitling GKM to act as co-lead managing underwriter in connection with the
public sale of securities, if any, by us or any affiliates. There can be no
assurance that any transactions contemplated by the GKM Agreement will be
initiated, entered into or completed.
                                                                               9
<PAGE>

     Our Sales and Marketing

     Our market research and test marketing efforts have resulted in our
targeting SME and SOHO markets. Although specific definitions for these market
segments vary somewhat, we view the SOHO market to represent small offices with
up to 10 employees, and the SME market to represent companies that employ
approximately 11-100 people. We will occasionally pursue larger opportunities.

     The report "Small Company Problems, Future Web-based Computing Solutions:
Demand for Application Services in the Small and SOHO Business Market" found
that the market has never been better for the ASP industry, particularly for
service providers targeting small companies. Customers' increased understanding
of technology, pressures to implement business strategies over the Internet, and
growing confidence in the Internet has set the stage for what we expect to be a
booming market.

     In relation to the SME market, Cahners In-Stat Group states the following:

  .      Small companies will spend more than $7 billion on application services
     by 2004, and the majority of the spending will likely be part of broadband
     connectivity;

  .      By 2004, Cahners In-Stat estimates more than 3 million small companies
     will use application services, likely subscribing to them through a carrier
     or broadband connectivity provider;

  .      In-Stat believes carriers will emerge as the most influential channel
     for ASPs targeting small companies, as these vendors will focus on re-
     positioning themselves as "business service providers," endeavoring to
     surround their customers with business solutions in addition to high-speed
     connectivity.

     We believe the SME market  is very dependant on reliable IT. Computers are
used for a range of functions including accounting, shipping, inventory,
internal and external communications, and personal productivity. Small
enterprises are typically not large enough, however, to have dedicated IT
departments like those found in larger businesses. This, coupled with
deficiencies in software automation and the associated networks to run them, has
impeded their efficiency and ability to compete with more technically enabled
competitors.

     As a result, many SME customers have become willing to outsource their IT
and software application hosting to ASPs. We believe this outsourcing decision
allows these companies to focus on their core competencies rather than the
nuisance and overhead associated with managing an IT infrastructure. The
outsourced IT services and pay-as-you-go application subscription that we
provide enables our customers to enjoy the most advanced computing capabilities
available, with higher reliability, and at a lower cost than these companies are
currently experiencing.

     Our target SOHO customer is as dependent on reliable information technology
as any other business. We believe our standard SOHO customer will be a multi-
user installation using desktop publishing, accounting, Internet, and
administration software as well as job specific software needs. We believe we
will be able to offer an attractive proposition to the service-oriented and
security-oriented buyers for a cost-effective price.
                                                                              10
<PAGE>

     We target professional firms including: graphic artists, writers,
consultants, accountants, lawyers, doctors and dentists. We also target
individuals who maintain home offices for part-time or personal use.

     We leverage existing relationships to dramatically accelerate market
penetration and reduce the cost of producing new sales. We are currently
pursuing a three-pronged distribution approach, with plans to pursue a fourth
channel as the market matures. The first three channels of distribution include:
telecommunication providers, independent software vendors, and direct sales. The
fourth channel is retail.

     We target telecommunication providers to tap new revenue streams through
their sales organizations. Second, we will develop sales through alternate
channels involving a variety of companies whose core competencies complement
ours. Several key information technology and carrier market drivers are
reshaping the direction of this segment. The channel sales department will
leverage these changes to develop a significant value proposition that can be
used by the carrier sales channels as an enhancement and differentiator for
their core product offerings.

     The ISV market is comprised of thousands of U.S. software companies. In
late 1999, our research revealed that a large percentage of traditional client-
server ISVs were in the early stages of determining how the Web-based model of
application delivery would fit in with their respective businesses. Many
prominent ISVs are seeing declines in revenue from Fortune 1000 companies as
this market saturates. A number of these ISVs conducted market research, which
subsequently identified a significant recurring revenue stream that promised not
to negatively impact their traditional revenue sources including client-server
software sales and installations.
                                                                              11
<PAGE>

     As a result, a growing number of ISVs are turning toward the SME market
for growth. We differentiate ourselves by offering a complete delivery system
and offer a unique strategic alliance approach that includes both joint
marketing and joint sales efforts.

     Competition

     We compete in a highly competitive market for computer services. The
principal competitive factors include technical innovation to meet dynamic
market needs, product performance and reliability, ease of installation and use,
customer service and support, marketing, and financial strength.

     There are several segments within the application-hosting industry.
Companies that are not currently focused on the SME or SOHO markets will not be
discussed in this document. We have identified the following competitors in the
SME and/or SOHO segments of the ASP market.

     Identified as a primary ASP competitor, FutureLink is backed by $35 million
in funding and is a public company. A viable contender for the ISV market,
FutureLink places higher emphasis on larger organizations with larger seat
counts.

                                                                              12
<PAGE>

     Breakaway Solutions is a pure ASP, providing sales and support for vertical
applications that include Vignette's e-marketing software, Silknet's eCRM,
OnDisplay's Centerstage product suite and Brio's Internet portal and analytic
tools.

     Originating in Norway, Telecomputing recently established a U.S.
headquarters in Fort Lauderdale, Florida.

     While being a viable contender for the mid-market, Telecomputing does not
appear to pose a present threat to us in the SME and SOHO markets, having a
higher emphasis on larger companies with larger seat counts.

     Corio, Inc. and U.S. Internetworking also compete in the ASP market,
although their primary focus is on the middle market, a segment that we are not
specifically targeting with our marketing efforts.


     Government Regulation

     There are currently few laws or regulations directly governing access to,
or commerce upon, the Internet. Due to the increasing popularity and use of the
Internet, it is possible that a number of laws and regulations may be adopted
with respect to the Internet, covering issues such as user privacy, pricing and
characteristics and quality of products and services.

     Such legislation could dampen the growth in the use of the Internet
generally and decrease the acceptance of the Internet as a communications and
commercial medium, and could, thereby, have a material adverse effect on our
business, results of operations and financial condition. Other nations,
including Germany, have taken actions to restrict the free flow of material
deemed to be objectionable on the Internet. In addition, several connectivity
carriers are seeking to have connectivity over the Internet regulated by the
Federal Communications Commission (the "FCC") in the same manner as other
connectivity services. For example, America's Carriers Connectivity Association
has filed a petition with the FCC for this purpose. In addition, because the
growing popularity and use of the Internet has burdened the existing
connectivity infrastructure and many areas with high Internet use have begun to
experience interruptions in phone service, local telephone carriers, such as
Pacific Bell, have petitioned the FCC to regulate ISPs and online service
providers ("OSP") in a manner similar to long distance telephone carriers and to
impose access fees on the ISPs and OSPs. If either of these petitions is
granted, or the relief sought therein is otherwise granted, the costs of
communicating on the Internet could increase substantially, potentially slowing
the growth in use of the Internet, which could in turn decrease the demand for
our products.

                                                                              13
<PAGE>

     Also it is possible that laws will be adopted or current laws interpreted
in a manner to impose liability on online service providers, such as us, for
linking to third party content providers and other Internet sites that include
materials that infringe copyrights or other rights of others. Such laws and
regulations if enacted could have an adverse effect on our business, operating
results and financial condition. Moreover, the applicability to the Internet
upon the existing laws governing issues such as property ownership, copyright
defamation, obscenity and personal privacy is uncertain, and we may be subject
to claims that our services violate such laws. Any such new legislation or
regulation or the application of existing laws and regulations to the Internet
could have a material adverse effect on our business, operating results and
financial condition.

     In addition, as our products and services are available over the Internet
in multiple states and foreign countries, such jurisdictions may claim that we
are required to qualify to do business as a foreign corporation in each such
state or foreign country. We are qualified to do business only in the states of
Washington and California, and our failure to qualify as a foreign corporation
in a jurisdiction where we are required to do so could subject us to taxes and
penalties and could result in the our inability to enforce contracts in such
jurisdictions. Any such new legislation or regulation, the application of laws
and regulations from jurisdictions whose laws do not currently apply to our
business, or the application of existing laws and regulations to the Internet
and other online services could have a material adverse effect on our business,
results of operations and financial condition.

     At present, we do not collect sales or other similar taxes in respect of
sales and shipments of our products through Internet purchases. However, various
states have sought to impose state sales tax collection obligations on out-of-
state direct marketing companies similar to us. A successful assertion by one or
more of these states that it should have collected or be collecting sales tax on
the sale of our products could result in additional costs and corresponding
price increases to its customers. The U.S. Congress has passed legislation
limiting for three years the ability of states to impose taxes on Internet-based
transactions. Failure to renew this legislation could result in the broad
imposition of state taxes on e-commerce.

     Customer Services

     Our Customer Support Service is comprised of Customer Service
Representatives, Customer Support Representatives (the Help Desk) and is further
supplemented by Senior Technical Support Representatives consisting of
Microsoft, Citrix, Novell and Cisco Certified Engineers and Insynq Server
Technicians. The Help Desk is available via toll-free telephone lines to offer
support for any aspect of the IQ Delivery System.

     Intellectual Property and Proprietary Rights

     We regard our service marks, trademarks, domain names, and similar
intellectual property as critical to our success. We have applied for federal
trademark or service mark registration of a number of names and terms, including
"Insynq," "Your Internet Utility Company," "Interlynq," and "Idesq." Our domain
names include, INSYNQ.com, ON-Q.net,

                                                                              14
<PAGE>

SIMPLENETWORKS.net, APPLICATIONVAULT.com, MESSAGEIQ.com, OURACCOUNTING.com,
OURBOOKEEPER.com, and RAPIDNETWORKS.com, all of which are now owned by the
Company. We have also applied for a patent covering our multi-platform network
application management and connectivity system: our InterLynQ and IdesQ CPE
solution.

     We rely on trademark, unfair competition and copyright law, trade secret
protection and contracts such as confidentiality and license agreements with our
employees, customers, partners, and others to protect our proprietary rights.
Despite precautions, it may be possible for competitors to obtain and/or use the
proprietary information without authorization, or to develop technologies
similar to our and independently create a similarly functioning infrastructure.
Furthermore, the protection of proprietary rights in Internet-related industries
is uncertain and still evolving. The laws of some foreign countries do not
protect proprietary rights to the same extent as do the laws of the United
States. Protection for proprietary rights in the United States or abroad may not
be adequate.

     We intend to continue to license certain technology from third parties such
as Citrix, Microsoft, and others, for our technologies that support business
systems. The market is evolving and we may need to license additional
technologies to remain competitive. We may not be able to license these
technologies on commercially reasonable terms or at all. In addition, we may
fail to successfully integrate licensed technology into our operations.

     Although we have not yet experienced infringement or misappropriation of
our intellectual property or similar proprietary rights, it may be anticipated
that infringements and misappropriations will occur as our business grows and
there is more brand loyalty attaching to our trade names and domain names. We
intend to police against infringement or misappropriation. However, we cannot
guarantee that we will be able to enforce our rights and enjoin the alleged
infringers from their use of confusingly similar trademarks, service marks,
telephone numbers, and domain names.

     In addition, third parties may assert infringement claims against us. We
cannot be certain that our technologies or trademarks do not infringe valid
patents, trademarks, copyrights, or other proprietary rights held by third
parties. We may be subject to legal proceedings and claims from time to time
relating to the intellectual property of others in the ordinary course of our
business. Intellectual property litigation is expensive and time-consuming and
could divert management resources away from running the business.

     Employees

     We currently have approximately 55 employees, including management and
clerical, approximately 18 technical people, and an additional 27 marketing and
sales personnel.

     Management

     Our board of directors ("Board of Directors") consists of John P. Gorst, M.
Carroll Benton and David D. Selmon, each of whom took this position upon or
shortly after the consummation of the Asset
                                                                              15
<PAGE>

Purchase on February 18, 2000, and continued in these positions after the re-
incorporation merger effected on August 3, 2000. John P. Gorst is our Chief
Executive Officer, President and Chairman of the Board, and M. Carroll Benton is
our Chief Administrative Officer, Secretary and Treasurer. In June 2000, we
appointed DJ Johnson as our Chief Financial Officer.

     Need For Additional Capital

     In order to execute our long-term and short-term strategic plans and to
continue our operations, we need to continue to raise funds through public or
private debt or equity financings. Consistent with this approach, we have
entered into various non-exclusive financial advisory agreements, including, but
not limited to, a non-exclusive financial consulting agreement with Union
Atlantic LC and Union Atlantic Capital LC to provide financial consulting
services to us in the form of: (i) evaluating our capital requirements for
funding growth and expansion of our operations; (ii) advising us as to
alternative modes and sources of financing; (iii) analyzing the impact of
business decisions, policies, and practices on the value of our business and
securities; and (iv) bringing to our attention possible business opportunities
and evaluating business opportunities generally, whether or not such
opportunities are oriented by United Atlantic or others. Pursuant to the terms
of the Union Atlantic agreement, we have agreed to pay to Union Atlantic a cash
fee equal to ten percent (10%) of the aggregate purchase price of the securities
purchased by or through any investor or intermediary identified to us by Union
Atlantic. In addition, upon the closing of each transaction contemplated in the
Union Atlantic agreement, we have agreed to issue to Union Atlantic through
escrow a warrant entitling Union Atlantic or its designees to purchase 50,000
shares per one million dollars ($1,000,000) raised, subject to adjustment of our
common stock. The warrant will be immediately exercisable for a four (4) year
period and shall have unlimited piggyback registration rights. There can be no
assurance that we will be able to raise additional capital through any such
financial advisory arrangements, including, but not limited to, Union Atlantic
or its affiliates. See "Description of Business -- Our Strategic Plans" and
"Recent Sales of Unregistered Securities" for additional descriptions of
financial advisory agreements we have entered into.

     Additional Factors That May Affect Future Results

     An investment in our stock involves a high degree of risk. The following
information discusses certain significant factors that make an investment in our
common stock risky or speculative. However, the risks and uncertainties
described below are not the only ones we face. Other risks, including those not
considered material, may impair our business. If any of the risks discussed
below actually occur, our business, financial condition, operating results or
cash flows could be materially adversely affected, which could cause the trading
price of our common stock to decline.

     Risks Particular to Insynq, Inc.

     We have historically operated at a loss, have experienced negative
     ------------------------------------------------------------------
operating cash flows, and anticipate that losses will continue.
---------------------------------------------------------------

     We have experienced net losses and negative cash flows since we began
implementing our current business plan. We expect that the ongoing
implementation of our current business plan will increase our net losses and our
negative cash flows for the foreseeable future as we continue to incur
significant operating expenses and make capital investments in our business. We
may never generate sufficient revenues to achieve profitability, and if we are
unable to make a profit, we may not be able to continue to operate our business.
Even if we do become profitable, we may not be able to sustain or increase
profitability on a quarterly or annual basis.

     Our limited operating history makes evaluating our business difficult.
     ----------------------------------------------------------------------

     Insynq-WA commenced operations in September 1998. Accordingly, we have only
a very limited operating history upon which you can evaluate our business and
prospects. We face the risks, expenses and difficulties frequently encountered
by early-stage companies in new and rapidly evolving markets, including on-line
companies which host hardware and software applications for other companies. Our
past financial results may not be representative of our future financial
results.

     Our quarterly results of operations fluctuate, which could result in a
     ----------------------------------------------------------------------
lower price for our common stock.
---------------------------------

     Our quarterly results may be affected by factors that may be beyond our
control, including, but not limited to, the following:

     .    Introduction of new products or pricing programs by our competitors;

                                                                              16
<PAGE>

     .    Changes in pricing for, and changes in the gross margins of, certain
          products, services, or lines of business as our business model
          continues to develop;
     .    Difficulty managing growth;
     .    Technical difficulties or systems downtime affecting our  services and
          products;
     .    Variations in spending patterns by companies;
     .    Other business interruptions; Increases in necessary operating
          expenses; Year 2000 problems with our technology or with the
          technology of third parties with whom we do business;
     .    The amount and timing of costs associated with the development and
          maintenance of new hardware and software products;
     .    Economic conditions specific to the Internet or to the hardware and
          software hosting business, as well as general economic conditions;
     .    Customer acceptance of our products and business model;
     .    Costs and risks associated with potential acquisitions;
     .    Inability to acquire or lack of availability of necessary hardware or
          software components, or difficulties in manufacturing; and
     .    Inability to frame additional bandwidth to adequately service customer
          growth.

     In addition, a substantial portion of our expenses, including most product
development and selling and marketing expenses, must be incurred in advance of
revenue generation. If our actual revenue does not meet our expectations, then
our operating profit, if any, may fall short of our expectations. Further, we
may change our pricing strategy for our products due to the rapidly evolving
market for hosting hardware and software applications, and this may affect our
quarterly results. Any one or more of these factors could affect our business,
financial condition, and results of operations, and this makes the prediction of
results of operations on a quarterly basis unreliable. As a result, period-to-
period comparisons of our historical results of operations may not be meaningful
and should not be relied on as an indication of our future performance. Also,
due to these and other factors, it is possible that our quarterly results of
operations may fall below the expectations of public market analysts and
investors. This could adversely affect the trading price of our common stock.

     We will require additional capital and/or vendor credit in the future,
     ----------------------------------------------------------------------
which may not be available to us.
---------------------------------

     In order to execute our short-term and long-term strategic plans, we need
to continue to raise funds through public or private debt or equity financing
and obtain credit from key vendors. If we raise additional funds by issuing
equity securities, our stockholders may suffer material dilution in their
holdings of our common stock. Also, adequate funds and credit may not be
available to us when we need them, or may not be available to us on favorable
terms. In this case, we may be not be able to obtain or maintain key vendor
products and services, develop or enhance our products or services, take
advantage of business opportunities, or respond to competitive pressures, any of
which could harm our business. If we are unable to raise additional capital or
maintain vendor credit, we will not be able to achieve the goals set forth in
our strategic plan and may be unable to continue to operate our business.

                                                                              17
<PAGE>

     Our future capital requirements and vendor relationships will depend upon
many factors, including the following:

     .  Costs to develop and maintain our on-line hosting of hardware and
        software;
     .  The rate at which we expand our operations;
     .  Our ability to timely pay key vendors and improve our credit rating;
     .  The extent to which we develop and upgrade our technology;
     .  The occurrence, timing, size and success of acquisitions; and
     .  The response of competitors to our service offerings.

     Future demand for ASP services is highly uncertain.
     ----------------------------------------------------

     The market for ASP services has only recently begun to develop and is
evolving rapidly. Future demand for these services is highly uncertain. We
believe that many of our potential customers are not fully aware of the benefits
of ASP services. We must educate potential customers regarding these benefits
and convince them of our ability to provide complete and reliable services. The
market for ASP services may never become viable or grow further. If the market
for our ASP services does not grow or grows more slowly than we currently
anticipate, our business, financial condition and operating results will be
materially adversely affected.

     Our internal accounting and financial controls have weaknesses due
     ------------------------------------------------------------------
primarily to the lack of qualified accounting and financial staff and resources
-------------------------------------------------------------------------------
prior to June 2000, and we are unable to determine to what extent these
-----------------------------------------------------------------------
weaknesses have had on our management systems and financial reporting.
----------------------------------------------------------------------

     From our inception through June 5, 2000, M. Carroll Benton was our
controller and principal accounting officer.  During this time period Ms. Benton
was also the owner and principal accounting officer of Interactive during which
time an undetermined number of related party transactions occurred between
Insynq and Interactive.

     When preparing for the audit of our consolidated financial statements for
the year ended May 31, 2000, our new Chief Financial Officer and our in-house
financial team reported to us conditions they believed to be material weaknesses
in our system of internal accounting and financial controls related to the
financial statement process and reconciliation and analysis of general ledger
account balances. In response to this, we hired additional subsidiary accounting
personnel. We have begun to identify measures to improve our system of internal
controls, implement more rigorous internal accounting policies, procedures and
controls, and conduct accounting systems training. Further, we have selected and
begun implementation of more robust and capable accounting systems. However,
these measures may not be successful in correcting the noted deficiencies and we
may experience similar or other deficiencies in the future as we continue to
expand our operations. If we are unable to establish and maintain effective
internal accounting and financial controls, we will not be able to timely and
accurately account for and monitor the operations of our business and we
therefore may not be able to properly execute our strategic plan, which could
have a material adverse affect on our business, results of operations and
financial condition.

                                                                              18
<PAGE>

     We rely on technology and channel alliances and ISVs to refer many of our
     -------------------------------------------------------------------------
clients to us.
--------------

     We rely on referrals from channel alliances for a portion of our business.
Companies with whom we have strategic alliances, including Remedy and Macola,
refer their customers to us because we can provide an array of services that
complement the products and services they offer. However, these companies may
stop or substantially reduce referring business to us or they may decide to
cooperate with our competitors and thereby adversely impact or eliminate the
amount of referrals made to us. If these third party referrals cease or
materially decrease, our sales will materially decline and our business, results
of operations, and financial condition will be materially adversely affected.

     If we are unable to obtain key software applications and hardware
     -----------------------------------------------------------------
components from certain vendors, we will be unable to deliver our services.
---------------------------------------------------------------------------

     We rely on third-party suppliers, including Microsoft, Citrix, and Cisco to
provide us with key software applications and hardware components for our
infrastructure. Certain components or applications are only available from
limited sources. If we are unable to obtain these products or other services,
including connectivity services, in a timely manner at an acceptable cost or at
all, may substantially inhibit our ability to deliver our services, and
consequently, our business, results from operations and financial condition will
be materially adversely affected.

     Some of our ASP service contracts guarantee certain service levels.
     -------------------------------------------------------------------

     Some of our ASP contracts contain service guarantees that obligate us to
provide our hosted applications at a guaranteed level of performance. To the
extent we fail to meet those service levels we may be obligated to provide our
customers certain services free of charge. If we continue to fail to meet these
service levels, our ASP customers have the right to cancel their contracts with
us. These credits or cancellations will cost us money, damage our reputation
with our customers and prospective customers, and could materially adversely
affect our business, results of operations and financial condition.

     Rapid growth in our business due to an increase in the number of customers
     --------------------------------------------------------------------------
purchasing our products and services could strain our operational and financial
-------------------------------------------------------------------------------
resources and cause us to lose customers and increase our operating expenses.
-----------------------------------------------------------------------------

     Any increase in the volume of users of our computer systems could strain
the capacity of our software or hardware, which could lead to slower response
times or system failures. Any future growth may require us, among other things,
to:

     .    Expand and upgrade our hardware and software systems;
     .    Expand and improve our operational and financial procedures, systems
          and controls;
     .    Improve our financial and management information systems;
     .    Expand, train and manage a larger workforce; and

                                                                              19
<PAGE>

     .    Improve the coordination among our product development, sales and
          marketing, financial, accounting and management personnel.

     We cannot assure you that our current level of personnel, systems, and
controls will be adequate to support future growth. Our inability to manage
growth effectively or to maintain the quality of our products and services could
cause us to lose customers and could materially increase our operating expenses.

     If we do not increase awareness of our products and services, our ability
     -------------------------------------------------------------------------
to reach new customers will be limited.
---------------------------------------

     Our future success will depend, in part, on our ability to increase
awareness of our products and services. To do so, we must succeed in our
marketing efforts, provide high-quality products and services, and increase
traffic to our Website. If our marketing efforts are unsuccessful, or if we
cannot increase our brand awareness, we may not be able to attract new customers
and increase our revenues.

     We depend heavily on our management team that has little experience working
     ---------------------------------------------------------------------------
together or managing a public company.
--------------------------------------

     Our success depends, to a significant extent, upon the efforts and
abilities of John P. Gorst, President, Chairman of the Board and Chief Executive
Officer, as well as on the efforts of other officers and senior management (the
"Executive Management Team"). Loss of the services of any or all of the
Executive Management Team could materially adversely affect our business,
results of operations and financial condition, and could cause us to fail to
successfully implement our business plan. Also, our Executive Management Team
has worked together for less than one year. The short period of time that they
have worked together, or their inability to work successfully together, may
adversely affect our ability to manage growth. Moreover, our Executive
Management Team has a limited amount of experience managing a public company.
Our Executive Management Team may not be able to manage future growth, if any,
or the demands of successfully operating a public company.

     There is intense competition for qualified technical professionals and
     ----------------------------------------------------------------------
sales and marketing personnel, and our failure to attract and retain these
--------------------------------------------------------------------------
people could affect our ability to respond to rapid technological change and to
-------------------------------------------------------------------------------
increase our revenues.
----------------------

     Our future success also depends upon our ability to attract and retain
qualified technical professionals and sales and marketing personnel. Competition
for talented personnel, particularly technical professionals, is intense. This
competition could increase the costs of hiring and retaining personnel. We may
not be able to attract, retain, and adequately motivate our personnel or to
integrate new personnel into our operations successfully.

     We may not be able to protect our patents, copyrights, trademarks and
     ---------------------------------------------------------------------
proprietary and/or non-proprietary technology, and we may infringe upon the
---------------------------------------------------------------------------
patents, copyrights, trademarks and proprietary rights of others.
-----------------------------------------------------------------

                                                                              20
<PAGE>

     Our services are highly dependent upon proprietary technology, including,
for example, our IQ Delivery System, which allows us to upgrade and manage the
customer's computing environment, both at the data center and customer level. In
addition, we rely on contracts, confidentiality agreements, and copyright,
patent, trademark, and trade-secrecy laws to protect our proprietary rights in
our technology. We have also obtained, or are pursuing, several trademark,
copyright, and patent registrations for our various product names. The
protective steps we have taken may not be adequate to deter misappropriation of
our proprietary information. In addition, some end-user license provisions
protecting against unauthorized use, copying, transfer and disclosure of a
licensed program may be unenforceable under the laws of certain jurisdictions
and foreign countries. In addition, the laws of some foreign countries do not
protect proprietary rights to the same extent as the laws of the United States.
Failure to adequately protect our intellectual property could harm our brand
name, devalue our proprietary content, and affect our ability to compete
effectively. Furthermore, defending our intellectual property rights could
result in the expenditure of significant financial and managerial resources,
which could materially adversely affect our business, results of operations and
financial condition. Also, it is possible that our competitors or others will
adopt product or service brands similar to ours, possibly leading to customer
confusion.

     We utilize open source services and code for some products. While we can
modify open source and charge for it, we must release certain changes back to
the open source community, which may include competitors. This could negatively
affect our ability to compete effectively, and have a material adverse affect on
our financial condition and results of operations.

     Some of our technology, including our proprietary code, performs functions
similar to technology available from third parties. Therefore, we could be
subject to claims that our technology infringes the proprietary rights of third
parties. Claims against us, even if without merit, could subject us to costly
litigation and could divert the time and attention of our technical and
management teams. A claim of infringement may require us, and our customers, to
obtain one or more licenses from third parties. We cannot assure you that we or
our customers will be able to obtain necessary licenses from third parties at a
reasonable cost or at all. Any failure to obtain a required license could have a
material adverse effect on our business, results of operations and financial
condition.

     Potential difficulties caused by Year 2000 problems, or future Year 2000-
     ------------------------------------------------------------------------
related problems, may decrease use of Internet services, may cause harm to our
------------------------------------------------------------------------------
reputation and may adversely affect our revenues and operating expenses.
------------------------------------------------------------------------

     The Year 2000 issue is caused by computer programs or systems that store or
process date-related information using only two (2) digits, instead of four (4)
digits, to designate the year. The Year 2000 issue causes a problem when a
computer program or system fails to properly differentiate between a year in the
1900s and a year in the 2000s. Such failure to make a proper distinction could
cause the programs or systems to yield improper results or even fail.

     Our business could be adversely affected if the systems on which we depend
to conduct our operations, or the systems of third parties on whom we depend,
are not, or do not remain, Year 2000 compliant. Our potential areas of exposure
include products purchased from third parties, computers, software, telephone
systems, and other equipment developed and used

                                                                              21
<PAGE>

internally. If any of our significant hardware or software systems is not, or
does not remain, Year 2000 compliant, our Web site could become unavailable, and
we would not be able to deliver products or services to our customers over the
Internet. In addition, improper results or failures caused by Year 2000 problems
could expose the Company to material liabilities. Any failure by us to address
our Year 2000 compliance issues successfully, or of our suppliers or other third
parties with whom we conduct business to address their Year 2000 issues
successfully, could cause harm to our reputation, result in the loss of
customers, and adversely affect our revenues and operating expenses.

     Disruptions to our data center, or to the offsite backup storage facilities
     ---------------------------------------------------------------------------
of third parties with whom we do business, could materially affect our business.
--------------------------------------------------------------------------------

     The continued and uninterrupted performance of our computer systems, and of
the backup storage facilities of third parties with whom we do business, is
critical to our success. Any system failure that causes interruptions in our
ability to deliver our products and services to our customers, including
failures that affect our customers' abilities to access our hosted hardware,
software, and stored data, could reduce customer satisfaction and, if sustained
or repeated, would reduce the attractiveness of our services or result in
material liabilities or costs.

     Our hardware and software hosting business strategy, including data backup
and storage, depends on the consistent performance of our data center and those
of third parties. We offer offsite back-up storage of data for all customers.
Our current data center, and those of third parties, is vulnerable to
interruption from fire, earthquake, flood, power loss, connectivity failures,
vandalism and other malicious acts, and other events beyond our control,
including natural disasters. If the data center is damaged in any way, a
customer whose data is stored there may lose some or all data, despite routine
backup procedures. Our operations are dependent on our ability to protect our
computer system, and customer systems, applications and data against damages,
including, but not limited to those from computer viruses, fire, earthquake,
flood, power loss, connectivity failures, vandalism and other malicious acts,
and other events beyond our control, including natural disasters. Damage to our
computer system, or to the systems, applications, or data of our customers,
could delay or prevent delivery of our products and result in the loss of our
customers or in material liabilities. In addition, a failure of our
telecommunication providers to provide the data communications capacity in the
time frame required by us for any reason could cause interruptions in the
delivery of our products. Substantially all of our computer and communications
hardware is located at a single facility, and the loss of this hardware or the
data it contains would cause severe business interruptions. In the event that we
experience significant disruptions that affect our data center, we could lose
customers or fail to attract new customers, and our business, results of
operations and financial condition would be materially adversely affected.

     We could experience breaches of security when transmitting data to or from
     --------------------------------------------------------------------------
our customers, including the use of third-party vendor security technologies and
--------------------------------------------------------------------------------
methodologies.
--------------

     Our business depends upon our ability to securely transmit confidential
information between our data center, third-party backup locations, and the
servers of our customers,

                                                                              22
<PAGE>

including the use of third-party vendor security technologies and methodologies.
Despite our physical design and setup, and the implementation of a variety of
security measures, there exists the risk that certain unauthorized access,
computer viruses, accidental or intentional disturbances could occur. We may
need to devote substantial capital and personnel resources to protect against
the threat of unauthorized penetration of our delivery system or to remedy any
problems that such penetration might cause. The occurrence of any of these
events could cause us to lose customers, cause harm to our reputation, and
expose us to material liability, all of which could have a material adverse
effect on our financial condition and results of operations.

     We depend on licensed software applications.
     --------------------------------------------

     We depend on contracts with third-party software manufacturers to allow
their software applications to be hosted or run at our data center and provided
to our customers. We have entered into non-exclusive agreements with third-party
companies, including, but not limited to, Microsoft and Citrix that allow us to
host some of their software applications at our data center or re-license their
software applications to our customers. Under most of these agreements, the
software manufacturer can terminate its relationship with us for any reason by
giving us as little as 30 days notice. In these instances, the software
manufacturer is not liable to us, or to our customers, for any damages resulting
from termination. If our relationships with these software manufacturers are
terminated, or if these or other software manufacturers do not allow our
customers to obtain a license to operate the software application on our data
centers, our business, operating results and financial condition could be
materially adversely affected.

     The hardware and software we use is complex and may contain defects.
     --------------------------------------------------------------------

     Our service offerings depend on complex hardware and software that may
contain defects, particularly when initially introduced or when new versions are
released. Although we test internal and third party software applications prior
to deployment, we may not discover software defects that could affect our new or
current services or enhancements until deployed. These defects could cause
service interruptions or the loss of data, which could damage our reputation,
increase our operating costs, impair our ability to generate or collect revenue,
delay market acceptance or divert our management and technical resources. Any
software modifications we perform as part of our integration services could
cause problems in application delivery. Also, because we offer an open-source
software solution to our customers, they are likely to hold us accountable for
any problems associated with their software, even if the manufacturer caused the
problem or defect. Typically, software manufacturers disclaim liability for any
damages suffered as a result of software defects and provide only limited
warranties. As a result, we may have no recourse against the providers of
defective software applications.

     We cannot predict the impact of recent actions and comments by the SEC.
     ------------------------------------------------------------------------

     The Financial Accounting Standards Board ("FASB") has announced that it is
reviewing the current accounting rules associated with stock options.  The FASB
is concerned that current

                                                                              23
<PAGE>

practice, as outlined in Accounting Principles Board No. 25, does not accurately
reflect appropriate compensation expense under a variety of scenarios, including
the assumption of option plans from acquired companies. The changes proposed
could make it more difficult to attract and retain qualified personnel and could
unfavorably impact operating results

     Gross margins on certain products or lines of business may decline over
     -----------------------------------------------------------------------
time.
-----

     Gross margins may be adversely affected by increases in material or labor
costs, heightened price competition, changes in channels of distribution, or in
the mix of products sold. We have recently introduced several new products, and
we plan to release additional new products in the future. If warranty costs
associated with new products are greater than we have experienced historically,
gross margins may be adversely affected. Geographic mix, as well as the mix of
configurations within each product group may also impact our gross margins. We
continue to expand third party and indirect distribution channels, which
generally result in reduced gross margins. In addition, increasing third party
and indirect distribution channels generally results in greater difficulty in
forecasting the mix of our products, and to a certain degree, the timing of our
orders.

     We also expect that our operating margins may decrease as we continue to
hire additional personnel and increase other operating expenses to support our
business. Because these expenses are relatively fixed in the short term, a
shortfall in revenue could lead to operating results that fall below
expectations.

     We are involved in, and may become involved in, legal proceedings with
     ----------------------------------------------------------------------
former employees, consultants, and other third parties that, if determined
--------------------------------------------------------------------------
against us, could require us or one or more of our executives, to issue or
--------------------------------------------------------------------------
transfer a significant amount of our shares of common stock and perhaps pay
---------------------------------------------------------------------------
damages. The issuance of a significant number of shares of our common stock,
----------------------------------------------------------------------------
especially if at a large discount to the then-current market price, will dilute
-------------------------------------------------------------------------------
our stockholders, and the payment of damages could materially adversely affect
------------------------------------------------------------------------------
our financial condition, results of operations, and therefore, our ability to
-----------------------------------------------------------------------------
achieve our business plan.
--------------------------

     We are party to a lawsuit in which the plaintiff, who is the widow of a
former principal and shareholder of Insynq-WA, seeks the rescission of an
agreement pursuant to which our Chief Executive Officer purchased 2,500,000
shares from her, a decision from the court that the agreement is unenforceable,
and damages in an unspecified amount.

     We are also in negotiations with our former President and Chief Operating
Officer regarding his demands for additional compensation under his employment
agreement. Certain of our Series A and Series B warrant holders have also
indicated that they might file suit against us if they do not receive
registration rights satisfactory to them for their shares underlying such
warrants.

     In the past, we have negotiated with third parties and entered into
contracts, in the normal course of our business, with advisors, consultants and
others based on business plans and strategies that we may no longer be pursuing.
We believe that such negotiations were terminated and that those contracts are
no longer effective. However, it is possible that the other parties to those
negotiations and contracts could claim that we did not fulfill our obligations.
If a court found that we are obligated under any of those contracts,
arrangements or otherwise, we could be liable for an undeterminable amount of
compensation or stock or both.

                                                                              24
<PAGE>

     Our stockholders may suffer material dilution if a material number of
options are awarded. If any such litigation occurs, it is likely to be expensive
for us. If such suits are determined against us, and a court awards a material
amount of cash damages, our business, results of operations and financial
condition will be materially adversely affected. In addition, any such
litigation could divert management's attention and resources.

     We plan to grow, in part, through mergers with and acquisitions of other
     ------------------------------------------------------------------------
companies. However, we may not be able to identify, acquire, and successfully
-----------------------------------------------------------------------------
integrate future acquisitions into our own operations, which could materially
-----------------------------------------------------------------------------
adversely affect our growth and our operating results.
-----------------------------------------------------

     Our business strategy contemplates that we will seek a number of
significant acquisitions within the next few years. While we have initiated
discussions with at least one acquisition target, there is no assurance that we
will complete any such acquisition or, if we do complete acquisitions, whether
we will successfully integrate these acquisitions into our business. In
addition, there is no assurance that if we acquire any businesses, we will
achieve anticipated revenue and earnings. Our failure to acquire suitable
companies or to successfully integrate any acquired companies into our
operations could have a material adverse effect upon our business, operating
results, and financial condition.

     Many of our installation, testing agreements, and consulting contracts have
     ---------------------------------------------------------------------------
fixed prices, which expose us to cost overruns.  If we are not able to control
------------------------------------------------------------------------------
cost overruns, our operating results could be materially adversely affected.
----------------------------------------------------------------------------

     We undertake certain projects on a fixed-price basis rather than billing on
a time-and-materials basis, or on a per employee or user basis. Projects with
cost overruns would cause our expenses to increase, and would materially
adversely affect our business, operating results, and financial condition.

     Many companies use names similar in sound or spelling to "Insynq."
     -----------------------------------------------------------------
Intellectual property infringement claims against us for the use of the name
----------------------------------------------------------------------------
"Insynq", or one similar in sound or spelling, even if without merit, could be
------------------------------------------------------------------------------
expensive to defend and divert management's attention from our business.  If a
------------------------------------------------------------------------------
claim to stop us from using our name is successful, we will have to either buy
------------------------------------------------------------------------------
the right to use our name, which may be expensive, or change our name, which may
--------------------------------------------------------------------------------
also be expensive.
-----------------

     We are aware that other companies have claimed use of names similar to
"Insynq" for products or services similar to our own. We are in the process of
investigating the rights, if any, others may have to the name. In addition, we
are attempting to register "Insynq" as a trademark in the United States, Europe,
and Canada. However, we may not be able to obtain proprietary rights to the use
of this name. We will incur expenses if called to defend our use of the "Insynq"
name. Any such litigation, even if without merit, may be time consuming and
expensive to defend. It also could divert management's attention and resources
and require us to enter into costly royalty or licensing agreements. In
addition, if any company in our industry is able to establish a use of the
"Insynq" name that is prior to our use, we could be liable for damages and could
be forced to stop using the name unless we are able to buy the right to use the
name. If we
                                                                              25
<PAGE>

are unable to buy the right to use our name after we lose an infringement claim,
we would have to change our name, which may require us to spend money to build
new brand recognition and incur other costs. Third parties may assert other
infringement claims against us. Any of these events could have a material
adverse effect on our business, financial condition, and results of operations.

     Others may seize the market opportunity we have identified because we may
     -------------------------------------------------------------------------
not efficiently execute our strategy.
------------------------------------

     If we fail to execute our strategy in a timely or effective manner, our
competitors may be able to seize the marketing opportunities we have identified.
Our business strategy is complex and requires that we successfully and
simultaneously complete many tasks. In order to be successful, we will need to:

     .    Negotiate effective strategic alliances and develop economically
          attractive service offerings;
     .    Attract and retain customers;
     .    Attract and retain highly skilled employees;
     .    Integrate acquired companies into our operations; and
     .    Evolve our business to gain advantages in an increasingly competitive
          environment.

     In addition, although some of our management team has worked together for
approximately one year, there can be no assurance that we will be able to
successfully execute all elements of our strategy.

     Our industry is characterized by rapidly changing technology with
     -----------------------------------------------------------------
continuous improvements in both computer hardware and software, and rapid
-------------------------------------------------------------------------
obsolescence of current systems.  If we do not respond effectively and on a
---------------------------------------------------------------------------
timely basis to rapid technological change in our industry, we will not be able
-------------------------------------------------------------------------------
to effectively sell our services and our sales will materially adversely
------------------------------------------------------------------------
decline.
-------

     We must continually buy new computer hardware and license new computer
software systems to effectively compete in our industry.  Our software delivery
methodologies must be able to support changes in the underlying software
applications that are delivered to our customers.  The rapid development of new
technologies increases the risk that current or new competitors could develop
products or services that would reduce the competitiveness of our products or
services.  We rely on software providers to produce software applications that
keep pace with our customers' demands.

     There is no assurance that we will successfully develop or adopt new
technologies, introduce new services or enhance our existing services on a
timely basis, or that new technologies, new services or enhancements we use or
develop will achieve market acceptance. If we fail to address these
developments, we will lose sales to our competitors, and our business, operating
results and financial condition will be materially adversely affected.

                                                                              26
<PAGE>

     Although our current operations include operating as a technology-focused
     -------------------------------------------------------------------------
company, our previous business activities included gaming, natural resource
---------------------------------------------------------------------------
mining, and exploration.  As a result, we may be exposed to unknown
-------------------------------------------------------------------
environmental and other liabilities that could require us to expand our
-----------------------------------------------------------------------
financial resources and materially adversely affect our financial condition.
---------------------------------------------------------------------------

     The assets of a predecessor company were acquired by a publicly-traded
company that was engaged, prior to August 1999, in gaming, and prior to 1993, in
natural resource exploration and development, including mining, and oil and gas.
We no longer own any mining, oil and gas, or gaming-related assets. The mining,
mineral processing, and oil and gas industries are subject to extensive
governmental regulations for the protection of the environment, including
regulations relating to air and water quality, site reclamation, solid and
hazardous waste handling and disposal and the promotion of occupational safety.
We could be held responsible for any liabilities relating to our previous
involvement in gaming, mining or oil and gas exploration and development, which
liabilities would result in our spending our cash resources and could have a
material adverse effect on our business, financial condition and results of
operations.


     Reliability Of Market Data
     --------------------------

     Market data used within this report was obtained from internal sources and
from industry publications. Such industry publications typically contain a
statement to the effect that the information contained therein was obtained from
sources considered to be reliable, but that the completeness and accuracy of
such information is not guaranteed. While we believe that the market data
presented herein is reliable, we have not independently verified such data.
Similarly, market data supplied by internal sources, which we believe to be
reliable has not been verified by independent sources.

     Third Party Reports and Press Releases
     --------------------------------------

     We do not make financial forecasts or projections, nor do we endorse the
financial forecasts or projections of third parties or comment on the accuracy
of third party reports. We do not participate in the preparation of the reports
or the estimates given by analysts. Analysts who issue financial reports are not
privy to non-public financial information. Any purchase of our securities based
on financial estimates provided by analysts or third parties is done entirely at
the risk of the purchaser.

     We periodically issue press releases to update stockholders on new
developments relating to Insynq and our business.  These releases may contain
certain statements of a forward-looking nature relating to future events or our
future financial performance within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, and which are intended to be covered by the safe harbors created
thereby.

     Readers are cautioned that such statements are only predictions, and that
actual events or results may materially differ with those statements.  In
evaluating such statements, readers should specifically review the various risk
factors described herein, among others we identify in documents we file with the
SEC, which could cause actual results to differ materially from those indicated
by such forward-looking statements.

     Risks Related to Our Industry

     The failure of the Internet to grow or remain a viable commercial medium
     ------------------------------------------------------------------------
could harm our growth.
----------------------

     Our success depends in large part on the maintenance of the Internet
infrastructure as a reliable network backbone that provides adequate speed, data
capacity, and security. Our success also depends on the timely development of
products, such as high-speed modems, that enable reliable Internet access and
services. The Internet may continue to experience significant growth in the
number of users, frequency of use and amount of data transmitted. The Internet
infrastructure may not be able to support the demands placed on it and the
performance or reliability of the Internet may be adversely affected by this
continued growth. In addition, the Internet could lose its commercial viability
if the number of people who use the Internet does not continue to grow. A number
of factors, including unreliable service, unavailability of cost-effective,
high-speed access to the Internet or concerns about security, could impede this
growth. The infrastructure or complementary products and services necessary to
maintain the Internet, as a viable commercial medium may not be developed, and,
as a result, the Internet may not continue to be a viable commercial medium for
us.

                                                                              27
<PAGE>

     If the government adopts regulations that charge Internet access fees or
     ------------------------------------------------------------------------
impose taxes on subscriptions to our Web-based products, our operating expenses
-------------------------------------------------------------------------------
will increase.
-------------

     Currently there are few laws or regulations that specifically regulate
communications or commerce on the Internet. However, laws and regulations may be
adopted that address issues such as pricing and the characteristics of products
and services. In addition, several connectivity companies have petitioned the
Federal Communications Commission to regulate Internet and on-line service
providers in a manner similar to long-distance telephone carriers and to impose
access fees on them. This regulation, if imposed, could increase the cost of
transmitting data over the Internet. Moreover, it may take years to determine
the extent to which existing laws relating to issues such as intellectual
property ownership and infringement, libel, obscenity and personal privacy are
applicable to the Internet. Finally, state tax laws and regulations relating to
the provision of products and services over the Internet are still developing. A
few states have tried to impose taxes on products and services provided over the
Internet. If additional states try to do so, our operating costs may increase
and we may not be able to increase the price that we charge for our products to
cover these costs. Any new laws or regulations or new interpretations of
existing laws and regulations relating to the Internet could decrease the growth
in the use of the Internet, decrease the demand for traffic on our Website,
increase our operating expenses, or otherwise adversely affect our business.

     Our industry is rapidly changing.
     ---------------------------------

     Our industry is characterized by rapidly changing technology with
continuous improvements in both computer hardware and software. If we do not
respond effectively and on a timely basis to rapid technological change in our
industry, we will not be able to effectively sell our services and our sales
will materially decline. We must continually purchase new computer hardware and
license new computer software systems to effectively compete in our industry. In
addition, our software delivery methodologies must be able to support changes in
the software applications that are delivered to our customers. The rapid
development of new technologies increases the risk that current or new
competitors could develop products or services that would reduce the
competitiveness of our products or services. And moreover, we rely on software
providers to produce software that keeps pace with our customers' demands.

     We may not successfully develop or adopt new technologies, introduce new
services or enhance our existing services on a timely basis; in addition, new
technologies, services, or enhancements we use may never achieve market
acceptance. If we fail to address these developments, we will lose sales to our
competitors and our business, operating results, and financial condition will be
materially adversely affected.

     Risks Related to our Common Stock

     Anti-takeover actions and/or provisions could prevent or delay a change in
     --------------------------------------------------------------------------
control.
--------

     Provisions of our certificate of incorporation and bylaws and Delaware law
may make it more difficult for a third party to acquire us, even if so doing
would be beneficial to our stockholders. These include the following:

                                                                              28
<PAGE>

     .    Our Board of Directors is authorized to issue of up to 10,000,000
          shares of preferred stock and to fix the rights, preferences,
          privileges and restrictions of those shares without any further vote
          or action by the stockholders, which may be used by the Board to
          create voting impediments or otherwise delay or prevent a change in
          control or to modify the rights of holders of our common stock;

     .    Our Board of Directors is authorized to issue of up to 10,000,000
          shares of Class A common stock pursuant to which the holders of such
          stock are entitled to three (3) votes for each share held, on all
          matters submitted to stockholders, which voting power may be used by
          the holders of such stock to create voting impediments or otherwise
          delay or prevent a change in control or to modify the rights of
          holders of our common stock;

     .    A prohibition on cumulative voting in the election of directors, which
          would otherwise allow less than a majority of stockholders to elect
          directors;

     .    Our articles of incorporation provide that Section 203 of the Delaware
          General Corporation Law, an anti-takeover law, will not apply to us.
          In general, this statute prohibits a publicly held Delaware
          corporation from engaging in a business combination with an interested
          stockholder for a period of three years after the date of the
          transaction by which that person became an interested stockholder,
          unless the business combination is approved in a prescribed manner.
          For purposes of Section 203, a business combination includes a merger,
          asset sale of other transaction resulting in a financial benefit to
          the interested stockholder, and an interested stockholder is a person
          who, together with affiliates and associated, owns, or within three
          years prior, did own, 15% or more of our voting stock; and

     .    Limitations on who may call annual and special meetings of
          stockholders.

     Control by officers and directors could have an adverse effect on our
     ---------------------------------------------------------------------
stockholders.
-------------

     As of September 7, 2000, our directors, executive officers, and their
affiliates beneficially owned approximately 64.1% of our outstanding common
stock. John P. Gorst, our Chairman of the Board, Chief Executive Officer and
President, beneficially owns approximately 42.9% of our outstanding common stock
and M. Carroll Benton, our Chief Administrative Officer, Secretary and Treasurer
beneficially owns approximately 25.5% of our outstanding common stock. As a
result, these stockholders, acting together, have the ability to control
substantially all matters submitted to our stockholders for approval, including
the election and removal of directors and any merger, consolidation, takeover or
other business combination involving us, and to control our management and
affairs. This may discourage a potential acquirer from making a tender offer or
otherwise attempting to obtain control of us, which could materially adversely
affect the market price of our common stock.

                                                                              29
<PAGE>

     The volatility of our stock price could adversely affect our stockholders.
     --------------------------------------------------------------------------

     There currently is a public market for our common stock, but there is no
assurance that there will always be such a market. The trading price of our
common stock is highly volatile and could be subject to wide fluctuations in
response to factors such as:

  .  Actual or anticipated variations in quarterly operating results;
  .  Announcements of technological innovations;
  .  New sales methodologies, contracts, products or services by us or our
     competitors;
  .  Changes in financial estimates by securities analysts;
  .  Announcements of significant acquisitions, strategic partnerships,
     joint ventures or capital commitments;
  .  Additions or departures of key personnel;
  .  Sales of common stock; or
  .  Other general economic or stock market conditions, many of which are
     beyond our control.

     In addition, the stock market in general, and the market for Internet-
related and technology companies in particular, have experienced extreme price
and volume fluctuations that have often been unrelated or disproportionate to
the operating performance of such companies. The trading prices of many
technology companies' stock are at or near unprecendented levels. There can be
no assurance that these trading prices and price-to-earnings predictions will be
sustained. These broad market and industry factors may materially adversely
affect the market price of our common stock, regardless of our operating
performance. Historically, following periods of volatility in the market price
of a company's securities, securities class action litigation has often been
instituted against that company. The institution of similar litigation against
us could result in substantial costs and a diversion of management's attention
and resources, which could have a material adverse effect on our business,
financial condition, and results of operations.

     You should not expect to receive dividends from us.
     ---------------------------------------------------

     We currently do not anticipate paying any cash dividends on our common
stock in the foreseeable future and we intend to retain our earnings, if any, to
finance the expansion of our business and for general corporate purposes.  Any
payment of future dividends will be at the discretion of our board of directors
and will depend upon, among other things, our earnings, financial condition,
capital requirements, level of indebtedness, contractual restrictions, and other
factors that our board of directors deems relevant.

ITEM 2.   DESCRIPTION OF PROPERTY

     Our headquarters are located in Tacoma, Washington, and consist of
approximately 18,000 square feet of office space under a ten-year lease expiring
January 2010.  Currently, we are unable to occupy a portion of this location
until the prior tenant vacates, which we expect to occur during the fall of
2000.  In addition, we lease space in the Tacoma Technology Center under an 18-
month lease expiring December 2000 with automatic renewal provisions. We have

                                                                              30
<PAGE>

recently leased approximately 4,200 square feet of office space under a 3-year
lease expiring August 2003 located in Roseville, California. We also lease
office space in Tacoma, WA, Newport Beach, CA, and Costa Mesa, CA, for our sales
personnel. We believe that these facilities are adequate for our current
operations.

ITEM 3.   LEGAL PROCEEDINGS

     As described under "ITEM 1. DESCRIPTION OF BUSINESS," in December 1994, our
predecessor, Xcel, and its then wholly owned subsidiary, filed voluntary
petitions under Chapter 11 of the Federal Bankruptcy Code. As a result of these
filings, all litigation against Xcel was stayed. In June 1999, Xcel's new
management submitted a Plan of reorganization that was confirmed by the
Bankruptcy Court. On December 3, 1999, the Bankruptcy Court issued an order
closing the bankruptcy estate. As a result of these proceedings, Xcel was not a
party to any material pending legal proceedings.

     On August 14, 2000, Kathleen McHenry ("McHenry"), the widow of a former
principal and shareholder of Insynq-WA, filed a lawsuit in the Superior Court of
Washington against us, Insynq-WA, Ms. Benton, and Mr. Gorst. In May 1999 Mr.
Gorst and Ms. McHenry entered into an agreement (the "McHenry Agreement")
whereby Ms. McHenry sold to Mr. Gorst 2,500,000 shares of Insynq-WA left to her
after her husband's death. The lawsuit alleges that both Mr. Gorst and Insynq-WA
did not perform under the McHenry Agreement, and seeks a rescission of that
agreement, a decision from the court that the agreement is unenforceable, and
damages in an unspecified amount. The parties are currently discussing a
resolution of this litigation. If these discussions break down, we intend to
vigorously defend this lawsuit.

      We are currently in negotiations with Donald L. Manzano, our former
President and Chief Operating Officer, regarding the termination of his
employment contract, and what, if any, additional compensation shall be awarded
him.

     Certain of our Series A and Series B warrantholders have indicated that
they may file suit against us if they do not receive registration rights
satisfactory to them for their shares underlying such warrants.

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

     None.

                                    PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     Market for Common Stock

     On August 4, 2000, our common stock began trading on the OTC Bulletin Board
under the symbol "ISNQ." From 1980 through August 3, 2000, our common stock
traded on the OTC Bulletin Board under the symbol "XCLL."

     The following table sets forth, for the periods indicated, the high and low
bid and ask prices for the common stock as reported on the OTC Bulletin Board.
The quotations reflect inter-dealer prices, without retail mark-up, markdown, or
commission and may not represent

                                                                              31
<PAGE>

actual transactions. These prices have not been adjusted to reflect the two-for-
one stock split affected by the re-incorporation merger on August 3, 2000:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
    FISCAL
    YEAR            QUARTER                                        BID                                     ASK
----------------------------------------------------------------------------------------------------------------------------
                                                         HIGH                 LOW                 HIGH                 LOW
----------------------------------------------------------------------------------------------------------------------------
<S>              <C>                                    <C>                 <C>                 <C>                  <C>
1999             1st Quarter*                           $ 0.02              $ 0.02              $ 0.16                $ 0.16
----------------------------------------------------------------------------------------------------------------------------
                 2nd Quarter*                             0.02                0.01                0.16                  0.16
----------------------------------------------------------------------------------------------------------------------------
                 3rd Quarter*                              +                   +                  0.10                  0.10
----------------------------------------------------------------------------------------------------------------------------
                 4th Quarter*                              +                   +                  0.10                  0.10
----------------------------------------------------------------------------------------------------------------------------
2000             1st Quarter                              0.02                 +                  0.10                  0.10
----------------------------------------------------------------------------------------------------------------------------
                 2nd Quarter                              0.08                0.02                0.24                  0.09
----------------------------------------------------------------------------------------------------------------------------
                 3rd Quarter                               N/A                 N/A                 N/A                   N/A
----------------------------------------------------------------------------------------------------------------------------
                 4th Quarter                             20.00                4.00               25.50                  4.12
----------------------------------------------------------------------------------------------------------------------------
</TABLE>

*    These bid prices give effect to the following: in connection with its plan
     of reorganization in its Chapter 11 bankruptcy proceeding, in July 1999,
     each of the holders of common stock of Xcel received, pro rata, a total of
     .0102 shares of common stock for each share then held.

+    Less than $0.01.

     Holders of Common Stock

     As of September 7, 2000, there were approximately 913 holders of record of
our common stock.

     Dividends

     We currently do not anticipate paying any cash dividends on our common
stock in the foreseeable future and we intend to retain our earnings, if any, to
finance the expansion of our business and for general corporate purposes. Any
payment of future dividends will be at the discretion of our Board of Directors
and will depend upon, among other things, our earnings, financial condition,
capital requirements, level of indebtedness, contractual restrictions, and other
factors that our Board of Directors deems relevant.

     Recent Sales of Unregistered Securities

     Since June 1, 1999, we have issued the following securities without
registration under the Securities Act of 1933, as amended (the "Act"). Where
applicable, each of the disclosures has been adjusted to account for the 1.41056
to 1 stock split of Insynq-WA, the 1 for 2 stock split of Xcel, and the
2 for 1 stock split of Insynq-Delaware effective on August 3, 2000.

1.   We assumed a business services contract dated November 18, 1999 with
     Consulting & Strategy International, LLC ("CSI"). Under the terms of the
     agreement, CSI has provided, and agreed to continue to provide, for the
     duration of the

                                                                              32
<PAGE>

     agreement, business consulting services to us. In consideration of such
     services, we granted to CSI options to purchase a total of 600,000 shares
     at a price of $1.00 per share, and warrants to purchase up to a total of
     2,000,000 shares, exercisable at any time after December 1, 2000 and before
     February 20, 2003, in increments of 500,000 shares, at exercise prices of
     $1.25, $1.50, $2.00 and $2.25. These warrants have a "cashless" exercise
     provision allowing CSI to exercise the warrants for a reduced number of
     shares pursuant to a formula set forth in the warrants. In addition, we
     agreed to pay to CSI a monthly retainer of $2,500, increasing to $5,000 per
     month after our common stock bid price in the OTC Bulletin Board exceeds
     $3.00 per share for five (5) consecutive business days; $7,500 per month at
     such time as our common stock bid price exceeds $4.00 per share for five
     consecutive business days; and $10,000 at such time as our stock bid price
     exceeds $5 per share for five consecutive business days, or until such time
     as we and any of our subsidiaries have obtained a funding commitment from
     any source for $4 million or more. We issued these securities under an
     exemption provided by Rule 506 of Regulation D under the Securities Act of
     1933, as amended (the "Act"). CSI represented that it was an "accredited
     investor" as defined in Rule 501 of Regulation D, was acquiring the
     securities as an investment and not with a view to distribution, and would
     not resell the securities unless they became registered or another
     exemption from registration was available. The securities we issued were
     properly legended to reflect these restrictions.

2.   We assumed an equipment financing arrangement dated June 1, 1999, with HP
     under which we granted to HP an option to purchase a total of 282,112
     shares of common stock at any time prior to June 1, 2002, at a price of
     $0.35 per share. HP was granted "piggyback" registration rights pursuant to
     a Registration Rights Agreement. We issued these securities under an
     exemption provided by Rule 506 of Regulation D under the Act. HP
     represented that it was an "accredited investor" as defined in Rule 501 of
     Regulation D, was acquiring the securities as an investment and not with a
     view to distribution, and would not resell the securities unless they
     became registered or another exemption from registration was available. The
     securities we issued were properly legended to reflect these restrictions.

3.   We assumed a financial public relations consulting agreement dated
     September 20, 1999, with One Click Investments, LLC ("One Click"), a
     Washington state limited liability company of which Eric Estoos is the
     principal.  Under the terms of the agreement with One Click, we agreed to
     engage One Click to provide various financial public relations services.
     We agreed to compensate One Click for its services at the rate of $8,000
     per month during the term of the agreement (through August 19, 2000, which
     is automatically renewable for six additional months unless terminated by
     either party in writing), to reimburse One Click for all reasonable
     expenses in connection with the agreement, and to pay One Click a fee of
     10% of all funding obtained by One Click for us, to the extent permitted by
     law. We also issued One Click 700,000 restricted shares of common stock and
     granted One Click warrants to purchase a total of 1,500,000 shares of
     common stock, exercisable at any time after December 31, 2000, and prior to
     December 31, 2003, in one-third increments of 500,000 shares, at exercise
     prices of $2.00, $4.00 and $7.50 per share. One Click has executed a voting
     proxy in favor of John Gorst, Chief Executive Officer, with respect to the
     restricted shares. We issued these securities under an exemption provided
     by Rule 506 of

                                                                              33
<PAGE>

     Regulation D under the Act. One Click represented that it was an
     "accredited investor" as defined in Rule 501 of Regulation D, was acquiring
     the securities as an investment and not with a view to distribution, and
     would not resell the securities unless they became registered or another
     exemption from registration was available. The securities we issued were
     properly legended to reflect these restrictions.

4.   We assumed a Consulting Agreement dated October 28, 1999, with Robert J.
     Torres ("Torres") and Lowell Cooper ("Cooper"). In consideration of
     consulting services rendered we granted options to each of Torres and
     Cooper, entitling them to purchase a total of 218,637 shares and 134,003
     shares, respectively, at any time prior to November 2, 2003, at an exercise
     price of $2.13 per share. We issued these securities under an exemption
     provided by Rule 506 of Regulation D under the Act. Each of Torres and
     Cooper represented that he was an "accredited investor" as defined in Rule
     501 of Regulation D, was acquiring the securities as an investment and not
     with a view to distribution, and would not resell the securities unless
     they became registered or another exemption from registration was
     available. The securities we issued were properly legended to reflect these
     restrictions.

5.   We assumed the obligations under a bridge financing with CSI, dated
     December 14, 1999, pursuant to which 1,300,000 common shares were issued to
     nine investors at a price of $0.50 per share. Each of the nine investors
     was granted "piggyback" registration rights pursuant to a Registration
     Rights Agreement. We issued these securities under an exemption provided by
     Rule 506 of Regulation D under the Act. Each investor represented that he
     was an "accredited investor" as defined in Rule 501 of Regulation D, was
     acquiring the securities as an investment and not with a view to
     distribution, and would not resell the securities unless they became
     registered or another exemption from registration was available. The
     securities we issued were properly legended to reflect these restrictions.

6.   In January of 2000, Insynq-WA completed a private offering of a total of
     1,311,820 shares of common stock at an offering price of approximately
     $0.71 per share. Each purchaser in the private offering was issued one
     Series A Warrant and one Series B Warrant for each share of common stock
     purchased by such purchaser. The Series A Warrants and Series B Warrants
     entitle the purchasers to purchase a share of common stock at any time on
     or before December 31, 2001, at a price of $1.77 and $2.84, respectively.
     We assumed the warrants in the Asset Purchase transaction. These investors
     have been granted piggyback registration rights. We have also requested
     that the investors execute a "lock up" agreement which will restrict these
     shares from being sold until after February 28, 2001 or for up to an
     additional three months if we are engaged in a pending transaction and we
     determine it is our best interest to extend the lock-up period; however,
     the investors are not required to sign such lock up agreement. Insynq-WA
     issued these securities under exemptions provided by Regulation D under the
     Act. Each accredited purchaser represented that he or she was an
     "accredited investor" as defined in Rule 501 of Regulation D, and no more
     than 35 unaccredited purchasers participated in the offering. Each investor
     represented that he or she was acquiring the securities as an investment
     and would not resell the securities unless they became

                                                                              34
<PAGE>

     registered or another exemption from registration was available. The
     securities we issued were properly legended to reflect these restrictions.

7.   In January 2000, Timothy Horan, as trustee on behalf of certain parties
     named below, advanced to Insynq-WA the sum of $150,000 to provide Insynq-WA
     with capital to secure the leased facility at 1101 Broadway Plaza, Tacoma,
     Washington. In consideration of this financing, and pursuant to an
     agreement, Mr. Horan, as trustee, was issued a total of 300,000 shares of
     restricted common stock, as follows: 150,000 shares to Timothy Horan;
     75,000 shares to Travin Partners, L.L.L.P. and 75,000 shares to
     International Fluid Dynamics, Inc. In connection with this transaction, Mr.
     Horan was granted demand registration rights entitling him to request the
     filing of a registration statement. We issued these securities under an
     exemption provided by Rule 506 of Regulation D under the Act. Each of these
     purchasers represented that he or she was an "accredited investor" as
     defined in Rule 501 of Regulation D, was acquiring the securities as an
     investment and would not resell the securities unless they became
     registered or another exemption from registration was available. The
     securities we issued were properly legended to reflect these restrictions.

8.   On February 20, 2000, we entered into a consulting agreement with Vijay
     Alimchandani ("VJ"), under the terms of which we engaged VJ to provide us
     with general consulting services, including strategic planning, the
     identification of possible strategic alliances with software vendors, the
     evaluation and development of cooperative alliances, and related
     activities. The agreement is for an initial term of twelve months, and is
     automatically renewable for successive one-year terms unless terminated by
     either party prior to the end of a term. We have agreed to reimburse VJ for
     all travel and entertainment and reasonable expenses related to his
     consulting services, and to pay VJ a consulting fee of $5,000 per month,
     increasing to $7,000 per month as such time as we have secured $2 million
     in equity financing, and to $10,000 per month at such time as we have
     secured an additional $10 million in equity financing. In addition, we
     granted options to VJ as follows: (a) 500,000 shares, exercisable at any
     time prior to February 21, 2005, at a price of $0.25 per share; and (b)
     400,000 shares, exercisable one year from the commencement date of the
     contract, for a period of five years, at an exercise price of $0.50 per
     share. We also agreed to grant to VJ (a) an additional option, entitling
     him to purchase a total of 180,000 shares for a five year period beginning
     at the end of 24 months from the date of the agreement, if such agreement
     is extended by us, at price of $0.75 per share; and (b) bonus options of
     between 50,000 to 100,000 shares, to be granted at the discretion of the
     Board of Directors based on the performance of VJ, at an exercise price of
     not more than $1.50 per share. We granted VJ "piggyback" registration
     rights in connection with the shares under options, pursuant to which we
     agreed to include such shares in a registration statement to register the
     initial 900,000 shares under the options described above. We issued these
     securities under an exemption provided by Rule 506 of Regulation D under
     the Act. VJ represented that he was an "accredited investor" as defined in
     Rule 501 of Regulation D, was acquiring the securities as an investment and
     not with a view to distribution, and would not resell the securities unless
     they became registered or another exemption from registration was
     available. The securities we issued were properly legended to reflect these
     restrictions.

                                                                              35
<PAGE>

9.   On or about April 6, 2000, we sold a total of 61,944 shares of common stock
     to two investors, The Perry Family Trust ("Perry") and John Anderson
     ("Anderson"), under the terms of which Perry and Anderson were granted a
     total of 61,944 warrants to purchase shares of common stock at an exercise
     price of $3.25 per share. In connection with this transaction, Perry was
     granted "piggyback" registration rights under a Registration Rights
     Agreement. We issued these securities under an exemption provided by Rule
     506 of Regulation D under the Act. Each of Perry and Anderson represented
     that he was an "accredited investor" as defined in Rule 501 of Regulation
     D, was acquiring the securities as an investment and not with a view to
     distribution, and would not resell the securities unless they became
     registered or another exemption from registration was available. The
     securities we issued were properly legended to reflect these restrictions.

10.  On or about April 26, 2000, we sold a total of 285,714 shares of common
     stock to Plazacorp Investors Limited, ("Plazacorp"), an Ontario
     corporation, at a price of $1.75 per share. In connection with this sale,
     Plazacorp was granted warrants to purchase an additional 571,428 shares of
     common stock, exercisable at any time for a five (5) year period, at a
     price of $2.75 per share with respect to 285,714 shares, and $3.75 per
     share with respect to the remaining 285,714 shares. In connection with this
     transaction, Plazacorp was granted registration rights under a Registration
     and Repurchase Agreement (the "Agreement") requiring us to file a
     registration statement by September 25, 2000 and to cause the registration
     statement to be effective on or before December 15, 2000. In the event we
     do not file a registration statement by September 25, 2000, or the
     registration statement is not declared effective by December 15, 2000,
     Plazacorp has the right, but not the obligation, to require us to
     repurchase the shares (but not shares issuable on exercise of the
     warrants), at a price of $2.50 per share. We issued these securities under
     an exemption provided by Rule 903 of Regulation S under the Act. We made no
     directed selling efforts of these securities within the United States.
     Plazacorp represented that it was not a U.S. person, was not acquiring the
     securities for the account or benefit of any U.S. person, and would not
     resell the securities in the U.S. for at least one year. The securities we
     issued were appropriately legended to reflect these restrictions and we
     have the right to refuse to register any transfer of these securities not
     made in accordance with Regulation S.

11.  On or about May 17, 2000, we sold a total of 125,000 shares of common stock
     at a price of $2.00 per share to the following investors: Raymond Betz -
     25,000 shares; Timothy Horan - 50,000 shares; and International Fluid
     Dynamics, Inc. ("IFD") - 50,000 shares. In connection with this
     transaction, the purchasers were granted warrants to purchase an equivalent
     number of additional shares (or a total of 125,000 shares), at any time on
     or before May 17, 2005, at an exercise price of $3.00 per share. In
     connection with this transaction, the purchasers were granted registration
     rights under a Registration and Repurchase Agreement (the "Agreement")
     requiring us to file a registration statement by September 25, 2000, and to
     cause the registration statement to be effective on or before December 15,
     2000. In the event we do not file a registration statement by September 25,
     2000, or the registration statement is not declared effective by December
     15, 2000, the purchasers have the right, but not the obligation, to require
     us to repurchase the shares

                                                                              36
<PAGE>

     (but not shares issuable on exercise of warrants), at a price of $2.86 per
     share. We issued these securities under an exemption provided by Rule 506
     of Regulation D under the Act. Each of Betz, Horan and IFD represented that
     he/it was an "accredited investor" as defined in Rule 501 of Regulation D,
     was acquiring the securities as an investment and not with a view to
     distribution, and would not resell the securities unless they became
     registered or another exemption from registration was available. The
     securities we issued were properly legended to reflect these restrictions.

12.  On May 26, 2000, we entered into a consulting agreement with MQ Holdings,
     Inc. ("MQI"), under the terms of which we agreed to issue a total of 40,000
     shares of restricted common stock to MQI for services to be rendered by MQI
     in assisting us in our corporate and securities filings, and other
     consulting services. Under the terms of the consulting agreement, we agreed
     to file an S-8 registration statement for the registration of the shares to
     be issued to MQI. We issued these securities under an exemption provided
     by Rule 506 of Regulation D under the Act. MQI represented that it was an
     "accredited investor" as defined in Rule 501 of Regulation D, was acquiring
     the securities as an investment and not with a view to distribution, and
     would not resell the securities unless they became registered or another
     exemption from registration was available. The securities we issued were
     properly legended to reflect these restrictions.

13.  On or about June 15, 2000, we entered into a non-exclusive financial
     advisory agreement with Sunstate Equity Trading, Inc. ("Sunstate"), a
     Florida corporation, which is a member of the NASD, under the terms of
     which we have engaged Sunstate, on a non-exclusive basis, to provide
     financial advisory services and advice. The agreement is for an initial
     term of one year, and may be extended for additional terms as agreed upon
     by the parties. In consideration of the services undertaken by Sunstate, we
     issued to Sunstate a total of 250,000 shares of restricted common stock,
     and agreed to reimburse Sunstate for all out-of-pocket expenses incurred in
     providing services under the agreement. We issued these securities under an
     exemption provided by Rule 506 of Regulation D under the Act. Sunstate
     represented that it was an "accredited investor" as defined in Rule 501 of
     Regulation D, was acquiring the securities as an investment and not with a
     view to distribution, and would not resell the securities unless they
     became registered or another exemption from registration was available. The
     securities we issued were properly legended to reflect these restrictions.

14.  On June 16, 2000, we entered into a private financing transaction with two
     investors, Travin Partners, L.L.L.P. ("TPL") and TCA Investments, Inc.
     ("TII"), under the terms of which TPL and TII each loaned us the sum of
     $325,000 (the "loans"), and were sold convertible debentures and granted
     warrants, described below. The loans are payable pursuant to the terms of
     identical convertible debentures (each, a "Debenture"), providing for full
     payment on or before June 16, 2002 (the "Due Date"), with interest at the
     current Bank of America prime rate, plus 1/2%. All accrued interest under
     each Debenture is payable only in shares of our common stock at a price of
     $0.71 per share. The Debentures are convertible in increments of no less
     than $10,000, at any time after November 15, 2000 and before the close of
     business on the due date, into shares of our common stock at a price of
     $0.71 per share, or a total of 457,746 shares each for TPL and

                                                                              37
<PAGE>

     TII. In addition to the Debentures, TPL and TII were granted warrants
     entitling each of them to purchase a total of 457,746 shares of our common
     stock at a price of $1.00 per share, at any time after November 15, 2000
     and before June 15, 2005. We agreed to file, on or before September 25,
     2000, a registration statement which includes the shares issuable under
     conversion of the Debentures and upon exercise of the warrants held by TPL
     and TII (the "Underlying Shares"), at TPL's and TII's request, and to cause
     such registration statement to become effective as soon as practicable. In
     addition, we agreed to include the Underlying Shares, on TPL's and TII's
     request, in any registration we file (exclusive of a registration relating
     to sales in employee benefit plans, a Rule 145 transaction, or the sale of
     debt or convertible debt instruments, or a registration statement which
     does not contain substantially similar information), subject to the
     holder's agreement to enter into appropriate underwriting agreement(s), and
     other requirements. The subscription agreements for the purchase of the
     Debentures and warrants held by TPL and TII provide that, on a one-time
     basis on the date we sell additional securities to or through an
     institutional investor, and only if our total market valuation is less than
     $30 million, TPL and TII will each be entitled to receive shares issuable
     upon conversion of Debentures and upon exercise of warrants, equal to the
     number of shares issuable upon such exercise of warrants and conversion of
     debentures, multiplied by a number, the numerator of which is $30 million
     and the denominator of which is the actual total of our market valuation.
     We issued these securities under an exemption provided by Rule 506 of
     Regulation D under the Act. Each of TPL and TII represented that it was an
     "accredited investor" as defined in Rule 501 of Regulation D, was acquiring
     the securities as an investment and not with a view to distribution, and
     would not resell the securities unless they became registered or another
     exemption from registration was available. The securities we issued were
     properly legended to reflect these restrictions.

15.  On July 17, 2000, we entered into a private financing transaction with two
     investors, International Fluid Dynamics ("IFD") and Garnier Holdings, Inc.
     ("Garnier"), under the terms of which IFD and Garnier each loaned us the
     sum of $127,500 (the "Loans"), and were granted warrants described below.
     The Loans are payable pursuant to the terms of a promissory note (the
     "Note"), providing for full payment on or before August 17, 2000 (the "Due
     Date"), with interest compounded annually at the Chase Manhattan Bank, N.A.
     rate quoted as its prime. The warrants entitle each of IFD and Garnier to
     purchase a total of 325,000 shares of our common stock at a price of $2.00
     per share at any time before July 17, 2005. If the Notes are not paid by
     5:00pm CST on August 17, 2000, the exercise price will decrease by one-
     half, or $1.00, and on and after each additional ten (10) day period that
     the Notes remain unpaid, the exercise price will decrease by an additional
     ten percent (10%). The Due Date of the Note has been extended to 5:00 p.m.
     CST on October 1, 2000, without prejudice to the right of Garnier and/or
     IFD to reduce the exercise price if the principal under the Note remains
     outstanding. Both IFD and Garnier were granted "piggyback" registration
     rights with respect to the shares underlying the warrants. We issued these
     securities under an exemption provided by Rule 506 of Regulation D under
     the Act. Each of Garnier and IFD represented that it was an "accredited
     investor" as defined in Rule 501 of Regulation D, was acquiring the
     securities as an investment and not with a view to distribution, and would
     not resell the securities unless they became registered or another
     exemption from registration was available. The securities we issued were
     properly legended to reflect these restrictions.

                                                                              38
<PAGE>

16.  On August 2, 2000, we entered into a private financing transaction with
     five foreign investors (the "Investors"), under the terms of which the
     Investors purchased an aggregate of 200,000 shares of our common shares at
     a price of $0.60 per share. We issued these securities under an exemption
     provided by Rule 903 of Regulation S under the Act. We made no directed
     selling efforts of these securities within the United States. Each
     purchaser was not a U.S. person, was not acquiring the securities for the
     account or benefit of any U.S. person, and will not resell the securities
     in the U.S. for at least one year. The securities we issued were
     appropriately legended to reflect these restrictions and we have the right
     to refuse to register any transfer of these securities not made in
     accordance with Regulation S.

17.  On August 4, 2000, we sold a total of 200,000 shares of common stock to One
     Click Investments, LLC, a Washington corporation ("One Click"), at a price
     of $0.60 per share. In connection with this sale, One Click was granted
     warrants to purchase an additional 200,000 shares of common stock,
     exercisable at any time for a five (5) year period, at a price of $2.00 per
     share. In connection with this transaction, One Click was granted
     registration rights under a Registration Rights Agreement (the "Agreement")
     granting One Click (a) one demand registration right, on or after November
     1, 2000, requiring us to file a registration statement upon request and (b)
     "piggyback" registration rights. We issued these securities under an
     exemption provided by Rule 506 of Regulation D under the Act. One Click
     represented that it was an "accredited investor" as defined in Rule 501 of
     Regulation D, was acquiring the securities as an investment and not with a
     view to distribution, and would not resell the securities unless they
     became registered or another exemption from registration was available. The
     securities we issued were properly legended to reflect these restrictions.

18.  On August 11, 2000, we entered into an agreement for the sale of 1,100,000
     shares of common stock to Tricorp Financial, Inc., a Delaware corporation
     ("Tricorp"), at a price of $1.50 per share. An additional 1,100,000 shares
     will be issued after the shares are registered for resale. The shares have
     not yet been paid for, but the purchaser has represented that payment will
     be received no later than September 15, 2000. There can be no assurance,
     however, that this transaction will be completed. In connection with this
     agreement, Tricorp was granted registration rights obligating us to file or
     have declared effective a registration statement registering the shares
     within 120 days of the date of the transaction. We issued these securities
     under an exemption provided by Rule 506 of Regulation D under the Act.
     Tricorp represented that it was an "accredited investor" as defined in Rule
     501 of Regulation D, was acquiring the securities as and investment and not
     with a view to distribution, and would not resell the securities unless
     they become registered or another exemption from registration is available.
     The securities we issued were properly legended to reflect these
     restrictions. If this transaction is completed, Rosenblum Partners, LLC
     ("Rosenblum"), a company with whom we entered into a financial advisory
     agreement, will receive a fee of 7% of the gross amount disbursed at
     closing. Rosenblum will be paid 50% in cash and 50% in shares at the price
     of the offering with registration rights mirroring those of Tricorp.

19.  On August 24, 2000, we entered into a private financing transaction with
     certain foreign investors (the "Investors"), under the terms of which the
     Investors purchased an aggregate of 80,000 of our common shares at a price
     of $0.50 per share. We issued these securities under an exemption provided
     by Rule 903 of Regulation S under the Act. We made no directed selling
     efforts of these securities within the United States. Each purchaser was
     not a U.S. person, was not acquiring the securities for the account or
     benefit of any U.S. person, and will not resell the securities in the U.S.
     for at least one year. The securities we issued were appropriately legended
     to reflect these restrictions and we have the right to refuse to register
     any transfer of these securities not made in accordance with Regulation S.

20.  On September 11, 2000, we entered into a private financing transaction with
     two investors, Travin Partners, L.L.L.P. ("TPL") and TCA Investments, Inc.
     ("TII"), under the terms of which TPL and TII each loaned us the sum of
     $125,000 (the "loans"), and we issued the convertible debentures and
     granted warrants, described below. The loans are payable pursuant to the
     terms of identical convertible debentures (each, a "Debenture"), providing
     for full payment on or before October 11, 2000 (the "Due Date"), with
     interest at the current Bank of America prime rate, plus 1/2%. All
     principal

                                                                              39
<PAGE>

     and accrued interest under each Debenture is convertible into shares of our
     common stock at a conversion price of (a) $1.00 per share or (b) sixty
     percent (60%) of the average of the bid price, whichever is less on the
     date of conversion. The Debentures are convertible in increments of no less
     than $10,000, at any time after September 11, 2000 and before repayment of
     such amounts. In addition to the Debentures, TPL and TII were granted
     warrants entitling each of them to purchase a total of 125,000 shares of
     our common stock at a price of $1.00 per share, at any time after September
     11, 2000 and before September 11, 2005. These warrants have a "cashless"
     exercise provision allowing TPL and/or TII to exercise the warrants for a
     reduced number of shares pursuant to a formula set forth in the warrants.
     We agreed to file, on or before September 25, 2000, a registration
     statement which includes the shares issuable under conversion of the
     Debentures and upon exercise of the warrants held by TPL and TII (the
     "Underlying Shares"), at TPL's and TII's request, and to cause such
     registration statement to become effective as soon as practicable. In
     addition, we agreed to include the Underlying Shares, on TPL's and TII's
     request, in any registration we file (exclusive of a registration relating
     to sales in employee benefit plans, a Rule 145 transaction, or the sale of
     debt or convertible debt instruments, or a registration statement which
     does not contain substantially similar information), subject to the
     holder's agreement to enter into appropriate underwriting agreement(s), and
     other requirements. We issued these securities under an exemption provided
     by Rule 506 of Regulation D under the Act. Each of TPL and TII represented
     that it was an "accredited investor" as defined in Rule 501 of Regulation
     D, was acquiring the securities as an investment and not with a view to
     distribution, and would not resell the securities unless they became
     registered or another exemption from registration was available. The
     securities we issued were properly legended to reflect these restrictions.

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

     The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto included elsewhere in this report.
The statements contained in this report that are not historical facts,
including, without limitation, statements containing the words "believes,"
"anticipates," "estimates," "expects," and words of similar import, constitute
"forward-looking statements." Forward-looking statements are made based upon
management's current expectations and beliefs concerning future developments and
their potential effects upon the Company.  Our actual results could differ
materially from those anticipated for many reasons, including risks faced by us
described below in this report and in "ITEM 1 - DESCRIPTION OF THE BUSINESS -
Additional Factors That May Affect Future Results."

Overview

     Insynq-WA was incorporated August 31, 1998, and is a development stage
company that provides Internet Appliances, managed and hosted software services,
Web hosting services, Web-based local and wide area networks, and access to
Internet marketing assistance and related equipment and services.

     In late 1999, we (then Insynq-WA) decided to target a combination with a
public company and on February 18, 2000, Xcel and Insynq-WA closed an asset
purchase transaction in which Xcel acquired substantially all of the assets of
Insynq-WA. Xcel continued the business of Insynq-WA and on August 3, 2000,
at a special meeting of its shareholders, Xcel completed a re-incorporation
merger with its wholly owned subsidiary, Insynq Inc., a Delaware corporation.
Today, as a combined entity, we continue to deliver the application hosting and
managed software services we founded incorporating Internet Appliances developed
as part of our IQ Delivery System.

Results of Operations
---------------------

     We had limited active operations during the year ended May 31, 1999
("Fiscal 1999"), and therefore, we believe that a comparison of the results of
operations of Fiscal 1999 to the year ended May 31, 2000 ("Fiscal 2000") has
limited value for evaluating trends and as a basis for predicting future
results. The following table represents our Income Statements for Fiscal 2000
and Fiscal 1999, extracted from our financial statements included in this Annual
Report on Form 10-KSB and should be read in conjunction with such financial
statements and notes thereto.

<TABLE>
<CAPTION>
                                                                 For the Years Ended
                                                             ----------------------------
                                                               May 31, 2000  May 31, 1999
<S>                                                          <C>             <C>
Revenue:
   Seat Subscriptions                                              $162,148       $10,306
   Managed Services                                                  39,287         3,310
   Hardware/Software                                                 34,373
                                                             ----------------------------
      Total Revenue:                                                235,808        13,616
                                                             ----------------------------
Cost and expenses:
   Cost of service                                                  370,561        43,617
   Network and infrastructure costs                                  64,962         7,038
   Selling, general, and administrative                           2,509,235        85,577
   Depreciation and amortization                                    106,225         9,647
                                                             ----------------------------
      Total expenses:                                             3,050,983       145,879
                                                             ----------------------------

      Loss from operations                                      (2,815,175)     (132,264)
Other income (expenses):
   Other revenue                                                    41,984              0
   Interest income                                                   4,986              0
   Interest expense                                               (62,222)        (6,468)
                                                             ----------------------------

   Loss before income taxes and extraordinary item             (2,830,427)      (138,732)
Extraordinary item - Gain on extinguishment of debt                     --        469,050

                                                             ----------------------------
      Net income (loss)                                       ($2,830,427)       $330,318
                                                             ============================
</TABLE>

                                                                              40

<PAGE>

     The following is an analysis and comparison (where applicable) of our
results of operations for Fiscal 2000 and Fiscal 1999:

     We incurred a net loss of $2,830,427 for Fiscal 2000 and a $138,732 loss
before extraordinary gain in Fiscal 1999. The Fiscal 2000 and Fiscal 1999 losses
resulted primarily from: (1) providing discounted or free services as we test-
marketed our products and services, (2) initial network, infrastructure, and
research and development costs associated with start-up operations, and (3)
increases in salaries and related benefits, reflecting headcount increases in
our technical, development, sales, marketing, finance, accounting, and
administrative staff.

     Total revenue for Fiscal 2000 was $235,808, an increase of $222,192 as
compared to Fiscal 1999.  The primary sources of Fiscal 2000 revenue, which
essentially did not occur in Fiscal 1999, includes: seat subscription revenue of
$162,148, managed software service revenue of $39,287, and hardware and software
sales revenue of $34,373.  We expect future revenue from all sources to trend
away from our practice of providing discounts and free offerings experienced in
Fiscal 2000 as we continue develop our sales and implement our sales and
marketing strategies, and prove our business model.

     Our continued growth is significantly dependent upon our ability to
generate sales relating to our subscription and managed software services. Our
main priorities relating to revenue are: (1) increase market awareness of our
products and services through our strategic marketing plan, (2) growth in the
number of customers and seats per customer, (3) continue to accomplish
technological economies of scale, and (4) continue to streamline and maximize
efficiencies in our system implementation model.

Costs and Expenses
------------------

     During Fiscal 2000, we recorded direct costs of services of $370,561, an
increase of $326,944 over the limited operations experienced in Fiscal 1999.
Network and infrastructure costs were $64,962 for Fiscal 2000, which is an
increase of $57,923 from Fiscal 1999.

     Selling, general, and administrative costs increased to $2,509,235 in
Fiscal 2000, an increase of $2,423,658 over Fiscal 1999, as we built out our
infrastructure, including hiring management and support staff, and started to
develop our sales and delivery systems.

     Depreciation and amortization expense increased to $106,225 in Fiscal 2000,
an increase of $96,578 over Fiscal 1999, as we purchased fixed assets, including
computer equipment needed for infrastructure to support active business
operations.

     Interest expense increased to $62,222 during Fiscal 2000 versus $6,468 in
Fiscal 1999 as a result of an increase in capital lease obligations incurred on
purchases of computer equipment needed for infrastructure to support active
business operations.  Other income increased $41,984 during the same time
periods, primarily due to trademark revenue that commenced in Fiscal 2000.

     We recorded a $469,050 non-recurring extraordinary gain on extinguishment
of debt for Fiscal 1999 in connection with the Xcel Asset Purchase Agreement.

Liquidity and Capital Resources
-------------------------------

     We had cash and cash equivalents of $106,806 at May 31, 2000, and $501 at
May 31, 1999, and working capital deficits of $514,258 and $226,972 at the same
dates, respectively.

     Our continuation as a going concern is dependent on our ability to obtain
additional financing and generate sufficient cash flow from operations to meet
our obligations on a timely basis.

     From June 1, 2000 through September 11, 2000, we raised additional funding
of $1,385,000.

     As of September 11, 2000, we are in technical default on two obligations,
one loan and the GKM Agreement. We have initiated discussions to restructure
these obligations. Currently, neither has (1) formally or informally given
notice of the covenant deficiencies, or (2) imposed penalties.

     We currently have no arrangements or commitments for accounts or accounts
receivable financing. We believe our need for additional capital going forward
will be met from private debt and equity offerings, and, increasingly, from
revenues from operations as we continue to implement our strategic plan;
however, future operations will be dependent upon our ability to secure
sufficient sources of financing and adequate vendor credit.

     We are currently developing and refining our acquisition and expansion
strategy. If we expand more rapidly than currently anticipated, if our working
capital needs exceed our current expectations, or if we consummate acquisitions,
we will need to raise additional capital from equity or debt sources. We cannot
be sure that we will be able to obtain the additional financings to satisfy our
cash requirements or to implement our growth strategy on acceptable terms or at
all. If we cannot obtain such financings on terms acceptable to us, our ability
to fund our planned business expansion and to fund our on-going operations will
be materially adversely affected. We are presently pursuing a variety of sources
of debt and equity financings. If we incur debt, the risks associated with our
business and with owning our common stock could increase. If we raise capital
through the sale of equity securities, the percentage ownership of our
stockholders will be diluted. In addition, any new equity securities may have
rights, preferences, or privileges senior to those of our common stock.

                                                                              41

<PAGE>

ITEM 7.   FINANCIAL STATEMENTS

     The information required by this item is included in pages F-1 through F-25
attached hereto and incorporated by reference. The index to the consolidated
financial statements can be found on page F-1.

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

     On April 3, 2000, our board of directors decided to terminate our
accountants, Jones, Jensen & Company ("JJC"), and engage G. Brad Beckstead, CPA
("Beckstead"), as our auditor for the year ending May 31, 2000. The firm of
Jones, Jensen & Co. served as our auditors for the fiscal year ended May 31,
1999. In February 2000 Beckstead was engaged as the independent auditor of
Insynq-WA to audit its financial statements for the years ended December 31,
1998 and 1999. Because of Beckstead's familiarity with the accounting and
business operations of Insynq-WA, the assets of which we acquired on February
18, 2000, our Board of Directors determined Beckstead is in the best position to
undertake the audit of our financial statements for the fiscal year ending May
31, 2000. Beckstead's office is located at 330 East Warm Springs, Las Vegas,
Nevada 89119.

     During the year ended May 31, 1999, and up to and including the present,
there have been no disagreements between JJC and us on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedures. JJC's report on our financial statements for the fiscal year ended
May 31, 1999, indicated there was substantial doubt regarding our ability to
continue as a going concern. The appointment of Beckstead was ratified at the
special meeting of shareholders held on August 3, 2000.


                                   PART III

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

     The table below sets forth the name, age, and position of each of our
executive officers and directors.

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

John P. Gorst            31        Chief Executive Officer, President and
                                   Director

Donald L. Manzano*       55        President and Chief Operating Officer

M. Carroll Benton        56        Chief Administrative Officer, Secretary,
                                   Treasurer and Director

David D. Selmon          43        Director


                                                                              42
<PAGE>


*    Mr. Manzano was our President and Chief Operating Officer from July 20,
     1999 to June 15, 2000. We no longer employ him in any capacity.

     All directors serve for a term of one year or until their successors are
chosen and qualified. Executive officers generally enter three-year employment
contracts.

     Certain biographical information with regard to our executive officers and
directors is set forth below.

     John P. Gorst has served as our Chief Executive Officer and director since
February 2000, and as our President since June 2000. Mr. Gorst was a co-founder
of Insynq-WA. Mr. Gorst has over eleven (11) years experience in founding
entrepreneurial technology ventures, specifically in the development of software
and data services for businesses. The prior experience of Mr. Gorst includes
serving as Vice President and General Manager of Interactive, and a training/IS
consulting business in conjunction with Nynex Business Centers of New York.

     Donald L. Manzano served as our President and Chief Operating Officer from
July 1999 to June 2000.  We no longer employ Mr. Manzano in any capacity.

     M. Carroll Benton has served as our Chief Administrative Officer,
Secretary, Treasurer, and Director since February 2000.  Ms. Benton was a co-
founder of Insynq-WA.  Ms. Benton directed and managed our fiscal
responsibilities prior to the appointment of Mr. DJ Johnson as Chief Financial
Officer.  Ms. Benton's early career spanned both the public and private sectors
working largely with banking systems and higher education institutions,
assisting in the development and deployment of computer systems.  Ms. Benton is
the sole owner of Interactive.

     David D. Selmon has served as our director since February 2000.  Mr. Selmon
is a certified tax professional and has practiced with David Selmon, Inc.  since
1982. In August 1999, Mr. Selmon, without admitting or denying the allegations
raised in a complaint by the National Futures Association ("NFA"), agreed to
withdraw from the NFA in all capacities and to refrain from applying in the
future for any status with the NFA.

     Appointment of Directors

     In a consulting agreement we assumed with One Click, originally entered
into on September 20, 1999, One Click was granted the right to appoint one (1)
person to serve on our Board of Directors. One Click has not yet exercised the
right to appoint a member to our Board.

     In a business services agreement we assumed with CSI, originally entered
into on November 18, 1999, CSI was granted the right to appoint two (2) persons
to serve on our Board of Directors, such members not to exceed forty

                                                                              43
<PAGE>

percent (40%) of our Board, subject to our becoming publicly traded. We began
trading publicly on February 18, 2000. CSI has not yet exercised its right to
appoint two members to our Board.

     Compensation of Directors

     Pursuant to a Consulting Agreement we entered into with David D. Selmon,
Mr. Selmon will receive 3,500 shares of our common stock for each full fiscal
quarter he serves on our board beginning June 1, 2000. Mr. Selmon also receives
$250 for each Board meeting attended.

     Section 16(a) Beneficial Ownership Reporting Compliance

     The following persons, David D. Selmon and Donald L. Manzano, each a
Section 16(a) reporting person during the prior fiscal year, failed to file on a
timely basis their Form 3 - Initial Statement of Beneficial Ownership. The forms
should have been filed on February 28, 2000, but Mr. Selmon's was not filed
until July 12, 2000 and at that time Mr. Manzano was no longer employed by us.
Mr. Manzano failed to file a Form 5 - Annual Statement of Beneficial Ownership
of Securities - on a timely basis. Each of our Section 16(a) reporting persons
filed a timely Form 3 on August 13, 2000, pursuant to the reincorporation merger
in which we changed our name, effective August 3, 2000, to Insynq, Inc.

ITEM 10.  EXECUTIVE COMPENSATION

     The following table summarizes the compensation earned by or paid to our
chief executive officer and the other most highly compensated executive officer
whose total salary and bonuses exceeded $100,000 for services rendered in all
capacities during fiscal year ended May 31, 2000.  We refer to these individuals
as our named executive officers.

                        Summary Compensation Table (1)

<TABLE>
<CAPTION>
                                                Annual Compensation                           Long-Term Awards
                                                -------------------                           ----------------
                                                                                                 Securities
                                                                                                 ----------
Name and Principal                                                  Other Annual             Underlying Options        All Other
------------------                                                  ------------             ------------------        ---------
Position                       Year   Salary ($)(3) Bonus ($)   Compensation ($) (5)                (#)             Compensation ($)
--------                       ----   ----------    ---------   --------------------                ---             ----------------
<S>                            <C>   <C>            <C>         <C>                          <C>                    <C>
John P. Gorst
  President, Chief
     Executive Officer,        2000   $107,919       $1,624           $20,129                    3,000,000 (4)
     and Director              1999    $53,731                              -                            -                       -
Donald L. Manzano (2)
  Former President and
     Chief Operating           2000    $123,250       $  575                 -                      196,632                      -
     Officer                   1999           -            -                 -                            -                      -
James R. Leigh, III
  Chief Technical              2000     $74,957       $1,624           $25,000                      780,000                      -
     Officer                   1999     $48,125       $  250                 -                            -                      -
</TABLE>

(1)  The compensation described in this table does not include medical, group
     life insurance or other benefits received by the named executive officers
     that are available generally to all of our salaried employees, and may not
     include certain perquisites and other personal benefits received by the
     named executive officers that do not exceed the lesser of $50,000 or ten
     percent (10%) of any such officer's salary and bonus disclosed in the
     table.

                                                                              44
<PAGE>

(2)  Mr. Manzano served as Chief Operating Officer and President from July 20,
     1999, through June 15, 2000.  We no longer employ him in any capacity.
     Under the terms of his employment agreement, 196,632 shares have vested and
     are exercisable at any time before February 21, 2005, at an exercise price
     of $0.71.  We are currently negotiating with Mr. Manzano about any
     additional terms regarding the termination of his employment and the
     receipt of any additional compensation.

(3)  Includes compensation from Insynq-WA during such period.

(4)  Represents options for Class A common stock granted under the Executive
     LTIP.

(5)  Includes non-cash compensation for services performed for the Company.

     Long Term Incentive Awards

     The following table provides information related to long-term incentive
awards granted to our named executive officers during the fiscal year ended May
31, 2000.  The information in this table reflects options granted by the board
of directors under our 2000 Executive Long Term Incentive Plan and our 2000 Long
Term Incentive Plan, which plans were approved by our stockholders on August 3,
2000.  Options granted to Mr. Gorst vest according to specific company-related
goals as outlined below.

             Long Term Incentive Plan -Awards in Last Fiscal Year

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
                                                                             Awards
                                                --------------------------------------------------------------
                                                   Number of Shares, Units
                                                       or Other Rights          Performance Or Other Period
  Name and Principal Location      Fiscal Year               (#)                 Until Maturation Or Payout
--------------------------------------------------------------------------------------------------------------
<S>                                <C>             <C>                          <C>
John P. Gorst, President,
 Chief Executive Officer
 and Director                        2000                 3,000,000                         (1)(2)

Don Manzano, former President
 and Chief Operating Officer         2000                   196,632                         (3)

James R. Leigh, III
Chief Technology Officer             2000                   780,000                         (4)
--------------------------------------------------------------------------------------------------------------
</TABLE>

     (1)  This includes 2,000,000 options that are currently exercisable. The
          remaining 1,000,000 options are not exercisable until eight (8) years
          from the date of grant unless we successfully raise $5,000,000 in
          outside investment capital.

     (2)  Our Board of Directors previously granted nonqualified stock options
          to acquire shares of Class A Common Stock to John P. Gorst and
          M. Carrol Benton with a strike price equal to $.20, which reflected
          the Board's determination of the fair market value of such shares on
          February 21, 2000. Based on its recent determination that the actual
          fair market value of a share of our Class A Common Stock on February
          21, 2000 was $1.00 per share, our Board of Directors has increased the
          exercise price of the options issued to Mr. Gorst and Ms. Benton to
          $1.00 per share which, post-split, equals $0.50 per share.

     (3)  Mr. Manzano served as Chief Operating Officer and President from July
          20, 1999 through June 15, 2000. We no longer employ him in any
          capacity. Under the terms of his option agreement, 196,632 shares have
          vested and are exercisable at any time before

                                                                              45
<PAGE>

        February 21, 2005, at an exercise price of $0.71. We are currently
        negotiating with Mr. Manzano regarding the termination of his employment
        and his receipt of any additional stock options.

  (4)   Includes 50,000 options that are currently exercisable at an exercise
        price of $0.50 and 730,000 options which will vest and are exercisable
        at an exercise price of $1.00 as follows: 243,332 shares on February 20,
        2001, and thereafter in increments of 1/24 (20,278) each month beginning
        March 20, 2001, and continuing until 2003.

        Options Grants In Last Fiscal Year

        The following table provides information related to options granted to
our named executive officers during the fiscal year ended May 31, 2000. The
information in this table reflects options granted by the board of directors
under our 2000 Executive Long Term Incentive Plan and our 2000 Long Term
Incentive Plan, which plans were approved by our stockholders on August 3, 2000.

        The following table sets forth each grant of stock options made during
the fiscal year ended May 31, 2000 to the named executive officers:

<TABLE>
<CAPTION>
                                                            % of Total
                                                             Options
                                Number of Securities         Granted
                                     Underlying          in Fiscal 2000         Exercise Price      Expiration
                                                         ---------------
            Name                  Options Granted             (5)                 Per Share          Date (6)
            ----                  ---------------             ---               --------------       --------
<S>                             <C>                      <C>                    <C>                 <C>
John P. Gorst (1)(2)........         3,000,000               35.9%                   $0.50            2/21/10
Donald L. Manzano (3).......           196,632                2.4%                   $0.71            2/21/05
James R. Leigh, III (4)                780,000                9.3%              $0.50 and $1.00       2/21/10
</TABLE>

(1)     This includes 2,000,000 options that are currently exercisable. The
        remaining options are not exercisable until eight (8) years from the
        date of grant unless we successfully raise $5,000,000 in outside
        investment capital.

(2)     Our Board of Directors previously granted nonqualified stock options to
        acquire shares of our Class A Common Stock to John P. Gorst and M.
        Carroll Benton with a strike price equal to $.20, which reflected the
        Board's determination of the fair market value of such shares on
        February 21, 2000. Based on its recent determination that the actual
        fair market value of a share of our Class A Common Stock on February 21,
        2000 was $1.00 per share, our Board of Directors has increased the
        exercise price of the options issued to Mr. Gorst and Ms. Benton to
        $1.00 per share which, post-split, equals $0.50 per share.

(3)     Mr. Manzano served as Chief Operating Officer and President from July
        20, 1999, through June 15, 2000. We no longer employ him in any
        capacity. Under the terms of his option agreement, 196,632 shares have
        vested and are exercisable at any time before February 21, 2005, at an
        exercise price of $0.71. We are currently negotiating with Mr. Manzano
        regarding the termination of his employment and his receipt of any
        additional stock options.

(4)     Includes 50,000 options that are currently exercisable at an exercise
        price of $0.50 and 730,000 options which will vest and are exercisable
        at an exercise price of $1.00 as follows: 243,332 shares on February 20,
        2001, and thereafter in increments of 1/24 (20,278) each month beginning
        March 20, 2001, and continuing until 2003.

(5)     Based on a total of 8,367,082 options granted during the fiscal year
        ended May 31, 2000.

                                                                              46
<PAGE>

(6)  Options may terminate before their expiration date upon death, disability,
     or termination of employment of the optionee.

     Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Options
Values

     The following table sets forth, for each of the named executive officers,
information concerning the number of shares received during fiscal 2000 upon
exercise of options and the aggregate dollar amount received from such exercise,
as well as the number and value of securities underlying unexercised options
held on May 31, 2000.

<TABLE>
<CAPTION>
                                                                       Number of Securities
                                 Shares Acquired        Value           Underlying Options            Value of In-The-Money
                                                                                                      ---------------------
                                  on Exercise(#)   Realized ($)(1)       at Year End (#)             Options at Year-End($)(2)
                                 ---------------   ---------------       ---------------             -------------------------
                                                                    Exercisable  Unexercisable    Exercisable      Unexercisable
                                                                    -----------  -------------    -----------      -------------
Name
----
<S>                              <C>               <C>              <C>          <C>              <C>              <C>
John P. Gorst (3)                       -              -              2,000,000      1,000,000    $ 4,120,000         $2,060,000
Don Manzano                             -              -                196,632              -    $   363,769                  -
James R. Leigh, III                     -              -                 50,000        730,000    $   103,000         $1,138,800
</TABLE>

(1)  Based on the difference between the option exercise price and the fair
     market value of our common stock on the exercise date as determined
     pursuant to the terms of the 2000 Long Term Incentive Plan and the 2000
     Executive Long Term Incentive Plan.

(2)  Based on the difference between the option exercise price and the closing
     sale price of $2.56 of our common stock as reported on the OTC Bulletin
     Board on May 31, 2000, the last trading day of our 2000 fiscal year,
     adjusted for the two-for-one stock split effected on August 3, 2000,
     multiplied by the number of shares underlying the options.

(3)  Our Board of Directors previously granted nonqualified stock options to
     acquire shares of our Class A Common Stock to John P. Gorst and M. Carroll
     Benton with a strike price equal to $.20, which reflected the Board's
     determination of the fair market value of such shares as of February 21,
     2000. Based on its recent determination that the actual fair market value
     of a share of the our Class A Common Stock on February 21, 2000 was $1.00
     per share, our Board of Directors has increased the exercise price of the
     options issued to Mr. Gorst and Ms. Benton to $1.00 per share which, post-
     split, equals $0.50 per share.

     Employment Agreements

     In March 2000, we entered into employment agreements with each of John P.
Gorst and M. Carroll Benton (each, an "Employee") (hereinafter referred to as
the "Executive Agreements").  Our board of directors approved the principal
terms of the Executive Agreements on February 21, 2000.

     The Executive Agreements are each for an initial term of three years, and
are automatically renewable for additional terms of one year each, unless
terminated by the Employee or us on at least thirty (30) days written notice
prior to the expiration of the current term.  The Executive Agreements contain
standard confidentiality and non-compete provisions that prohibit the Employee
from disclosing our confidential information, and from competing with us for a
period of six (6) months following the Employee's termination of employment,
whether voluntary or involuntary.  If we terminate either of the Executive
Agreements "for cause," our obligations under such Executive Agreement are
terminated as of the termination

                                                                              47
<PAGE>

date. If we terminate either of the Executive Agreements without cause, the
Employee shall be entitled to receive a severance payment equal to twice the
Employee's annual salary, payable within sixty (60) days of the termination
date, and shall be entitled to receive fully paid medical benefits of the type
the Employee had prior to termination, for a period of eighteen months after
such termination. Each of the Executive Agreements provides for payment of
certain benefits to the Employee upon the occurrence of a "change of control,"
as defined in the Executive Agreements. If the Employee's employment is
terminated upon a the event of a "change of control," for any reason other than
for cause or for "good reason" by the Employee, as defined in the Executive
Agreements, the Employee is entitled to receive a severance benefit equal to two
times the sum of the Employee's highest annual cash base salary in effect within
two years preceding the change of control, plus the average of the Employee's
annual bonuses paid for the two calendar years immediately preceding the change
of control. In addition, if the Employee is terminated under circumstances
requiring a severance payment, as described above, we are required to provide
the health and welfare benefits that are no less favorable than the benefits
that the Employee was entitled to prior to the change of control.

     The Executive Agreement with Gorst (the "Gorst Agreement"), pursuant to
which Mr. Gorst is employed as our Chief Executive Officer, provides for an
annual salary of $225,000 during the first year; $250,000 during the second
year; and $275,000 during the third year of employment.  In addition, the Gorst
Agreement provides for use of an Insynq-owned or leased automobile; executive
health, life, disability and dental insurance; and reimbursement of all ordinary
and necessary business expenses. The Gorst Agreement entitles Gorst to
participate in our 2000 Long Term Incentive Plan and 2000 Executive Officer Long
Term Incentive Plan.

     The employment agreement with Benton (the "Benton Agreement"), pursuant to
which Ms. Benton is employed as our Chief Administrative Officer, provides for
an annual salary of $135,000 during the first year; $150,000 during the second
year; and $165,000 during the third year of employment.  In addition, the Benton
Agreement provides for the use of an Insynq- owned or leased automobile;
executive health, life, disability and dental insurance; and reimbursement of
all ordinary and necessary business expenses.  The Benton Agreement entitles
Benton to participate in our 2000 Long Term Incentive Plan and 2000 Executive
Officer Long Term Incentive Plan."

     We have entered into an employment agreement with DJ Johnson,
effective as of February 20, 2000, providing for Mr. Johnson's full-time
employment as Chief Financial Officer of the Company.  Mr. Johnson was formally
appointed as Chief Financial Officer at the end of June 2000.  The employment
agreement provides for an initial employment term of three years, and automatic
one-year renewals thereafter, unless terminated by either party in writing on or
before ninety days prior to the end of a current term of the agreement. Under
the terms of the employment agreement, Mr. Johnson will be paid an annual salary
of $120,000 for the first year, $145,000 for the second year, and $175,000 for
the third year of employment. Mr. Johnson has been granted options to purchase a
total of 425,000 shares of our common stock, of which 50,000 shares have vested
and are exercisable at a price of $0.50 per share any time before February 20,
2010, and the remaining 375,000 shares vest and are exercisable at an exercise
price of $1.00, subject to Mr. Johnson's continued employment, as follows: (a)
125,000 shares vest and are exercisable after February 20, 2001 and before
February 20, 2010; and (b) 10,416.66 shares vest each month,

                                                                              48
<PAGE>

beginning in March 2001 and ending February 2003 (for 24 months), and are
exercisable prior to February 21, 2010. In addition, we have granted to Mr.
Johnson a performance bonus based on the achievement of certain milestones or
objectives as follows: (a) a payment of $100,000 in cash plus a stock option to
purchase an additional 200,000 shares of our common stock at $1.00 per share,
exercisable for a period of ten (10) years from the date of grant, if we receive
a total of $25 million in investment capital from February 20, 2000 to February
19, 2001; and (b) an option to purchase an additional 50,000 shares at a price
of $0.50 per share, exercisable for a period of ten (10) years from the date of
grant, if our stock is listed on the Nasdaq National Market before August 20,
2001. We have agreed to include the options and the resale of shares underlying
the options in a Form S-8 registration statement.

     We entered into an employment agreement with David Wolfe, effective as of
August 17, 2000, providing for Mr. Wolfe's full-time employment as Director of
Mergers and Acquisitions. The employment agreement provides for an initial
employment term of three years, and automatic one-year renewals thereafter,
unless terminated by either party in writing on or before ninety days prior to
the end of a current term of the agreement. Under the terms of the employment
agreement, Mr. Wolfe will be paid an annual salary of $180,000 and a signing
bonus of 25,000 options to purchase shares of common stock at an exercise price
of $2.00. Mr. Wolfe has been granted options to purchase a total of 225,000
shares of our common stock at an exercise price of $2.00. The 225,000 options
vest and are exercisable, subject to Mr. Wolfe's continued employment, as
follows: (a) 75,000 shares vest and are exercisable after August 17, 2001 and
before August 17, 2010; and (b) 6,250 shares vest each month, beginning
September 17, 2001 and ending August 17, 2003 (for 24 months), and are
exercisable prior to August 17, 2010. In addition, we have granted to Mr. Wolfe
an additional bonus of 3% of the "Value" of any reorganization, purchase of
assets, merger or other form of acquisition or similar transaction completed by
us during the term of this agreement, whether or not initiated by Mr. Wolfe or
us or a third party. This bonus will be awarded in the form of 50% cash and 50%
in shares of common stock. The term "value" means the total consideration paid
directly or indirectly by us or received by the seller in the transaction.

     We have also assumed the obligations under employment agreements between
Insynq-WA and a number of key employees, or entered into employment agreements
with our key employees. These include (a) Insynq-WA employment agreements with
Carey M. Holladay, currently a company employee, and Donald Manzano, our former
President and Chief Operating Officer; and (b) recent employment agreements with
James R. Leigh, III, as Chief Technical Officer, Joanie C. Mann as Vice
President of Operations, Jim Zachman as Vice President of Business Development,
William G. Hargin as Executive Vice President of Sales and Marketing,
Christopher Todd as Director of Development and Barbara D. Brown as Controller.
Mr. Todd's employment agreement provides for a royalty of two percent (2%) of
our monthly gross revenue from a hardware device that Mr. Todd assisted us in
developing for the deployment of our IQ Delivery System. Stock options were
granted to these individuals under the terms of their employment agreements. We
may enter into other employment agreements from time to time with other
executives and key employees.

     Long Term Incentive Plan

     Our Long Term Incentive Plan ("LTIP") was adopted by our Board of Directors
on March 31, 2000, effective as of February 21, 2000, and was approved by our
stockholders on

                                                                              49
<PAGE>

August 3, 2000. Our LTIP provides for the issuance of incentive and non-
qualified stock options, stock appreciation rights and restricted stock. The
maximum number of shares that may be issued upon the exercise of options under
the LTIP is 16,675,300.

     Our Board of Directors administers our LTIP. Generally, our Board may amend
or terminate our LTIP if it does not cause any adverse affect on any then
outstanding options or unexercised portions of any then outstanding options. Our
Board of Directors must obtain the consent of the stockholders to increase the
number of shares that the LTIP covers, to change the class of persons eligible
to receive options, or to extend the term of the LTIP beyond 10 years. Our Board
of Directors sets the consideration for each option award. Incentive stock
options must generally have an exercise price equal to 100% of the fair market
value of a share of stock as of the date of grant, and options granted to a
person who owns more than 10% of the voting power of our outstanding stock and
any outstanding stock of our subsidiaries must have an exercise price equal to
at least 110% of the fair market value of the underlying common stock on the
date of the grant. Non-qualified stock options must generally have an exercise
price equal to the fair market value of a share of stock on the date of grant.

     Options granted under the LTIP are non-transferable except through will or
the laws of descent and distribution upon the death of the option holder. If we
liquidate, reorganize, merge, or consolidate, and we are not the surviving
entity, each outstanding stock option shall become exercisable prior to such
event unless the options are assumed in the merger.

     Executive Long Term Incentive Plan

     Our Executive Long Term Incentive Plan (the "Executive LTIP") was adopted
by our Board of Directors on March 31, 2000, effective as of February 21, 2000,
and was approved by our stockholders on August 3, 2000. Our Executive LTIP
provides for the issuance of incentive and non-qualified stock options, stock
appreciation rights and restricted stock. The maximum number of shares that may
be issued upon the exercise of options under the Executive LTIP is 5,400,000.

     Our Board of Directors administers our Executive LTIP. Generally, our Board
may amend or terminate our Executive LITP if it does not cause any adverse
effect on any then outstanding options or unexercised portions of any then
outstanding options. Our Board of Directors must obtain the consent of the
stockholders to increase the number of shares that the Executive LTIP covers, to
change the class of persons eligible to receive options, or to extend the term
of the Executive LTIP beyond 10 years. Our Board of Directors sets the
consideration for each option award. Incentive stock options must generally have
an exercise price equal to 100% of the fair market value of a share of stock as
of the date of grant, and options granted to a person who owns more than 10% of
the voting power of our outstanding stock and any outstanding stock of our
subsidiaries must have an exercise price equal to at least 110% of the fair
market value of the underlying common stock on the date of the grant. Non-
qualified stock options must generally have an exercise price equal to the fair
market value of a share of stock on the date of grant.

                                                                              50
<PAGE>

     Options granted under the Executive LTIP are non-transferable except
through will or the laws of descent and distribution upon the death of the
option holder. If we liquidate, reorganize, merge, or consolidate and we are not
the surviving entity, each outstanding stock option shall become exercisable
prior to such event unless the options are assumed in the merger.

     Limitations of Liability and Indemnification Matters

     As permitted by the Delaware General Corporation Law, our certificate of
incorporation contains a provision eliminating the monetary liability of a
director for breach of fiduciary duty, subject to certain exceptions. The
provision does not eliminate a director's liability for (i) breaches of the
director's duty of loyalty to us or our stockholders, (ii) acts or omissions not
in good faith or involving intentional misconduct or a knowing violation of law,
(iii) the payment of unlawful dividends or unlawful stock repurchases or
redemptions, or (iv) any transaction from which the director derived an improper
personal benefit. Furthermore, the provision does not limit equitable remedies,
such as an injunction or rescission for breach of a director's fiduciary duty of
care.

     The Delaware General Corporation Law permits, and in some cases requires, a
corporation to indemnify directors and officers who are or have been a party or
are threatened to be made a party to litigation against certain expenses,
judgments, fines, settlements, and other amounts under certain circumstances.

     Article IX of our Bylaws provides for indemnification of and advancement of
expenses to directors, officers, employees, and agents to the fullest extent
authorized or permitted by the Delaware General Corporation Law.

     We have in force an officers' and directors' liability insurance policy
insuring, up to specified amounts and with specified exceptions, our directors
and officers and former directors and officers of us and our subsidiaries
against damages, judgments, settlements and costs for which they are not
indemnified by us that any such persons may become legally obligated to pay on
account of claims made against them for any error, misstatement or misleading
statement, act or omission, or neglect or breach of duty committed, attempted or
allegedly committed or attempted by such persons in the discharge of their
duties to us in their capacities as directors or officers, or any matter claimed
against them solely by reason of their serving in such capacities.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth information regarding the beneficial
ownership of our common stock as of September 7, 2000, for:

     .    Each person or group who is known by us to beneficially own more than
          5% of the outstanding shares of our common stock;

                                                                              51
<PAGE>

          .    Each of our directors;

          .    Each of our named executive officers named in the Summary
               Compensation Table; and

          .    All of our directors and executive officers as a group.

          The percentage of shares owned provided in the table is based on
     20,354,348 shares outstanding as of September 7, 2000. Beneficial ownership
     is determined in accordance with the rules of the Securities and Exchange
     Commission and generally includes voting or investment power with respect
     to securities. Except as indicated by footnote, the persons named in the
     table have sole voting and investment power with respect to all shares of
     common stock shown as beneficially owned by them. The determination of
     whether these persons have sole voting and investment power is based on
     information provided by them. In computing an individual's beneficial
     ownership, the number of shares of common stock subject to options held by
     that individual that are exercisable within 60 days of September 7, 2000
     are also deemed outstanding. These shares, however, are not deemed
     outstanding for the purpose of computing the beneficial ownership of any
     other person.


<TABLE>
<CAPTION>
Name                                                                                 Number         Percent
----                                                                                 -----         -------
                                                                                      Shares Beneficially
                                                                                      -------------------
                                                                                            Owned(8)
                                                                                            --------
<S>                                                                                 <C>              <C>
Directors and Officers:
  John P. Gorst (1)(2)(3)                                                            9,580,836        42.9%
  Donald L. Manzano (4)                                                                200,158         1.0%
  M. Carroll Benton (5)                                                              5,577,112        25.5%
  David D. Selmon                                                                        3,500            *
  James R. Leigh, III (6)                                                               85,264            *
All executive officers and directors as a group (5 persons) (7)                     15,446,870        64.1%
</TABLE>
     __________
     *    Less than 1%

     (1)  This includes 400,000 shares of common stock held by One Click
          Investments, LLC, as to which Mr. Gorst holds a voting proxy and as to
          which Mr. Gorst disclaims beneficial ownership. Also includes
          2,000,000 shares of common stock issuable upon the exercise of
          outstanding stock options that are presently exercisable or will
          become exercisable within 60 days of September 7, 2000.

     (2)  Mr. Gorst is currently named in a lawsuit in which the widow of a
          former Insynq-WA shareholder seeks, among other things, a rescission
          of the agreement pursuant to which Mr. Gorst purchased 2,500,000
          shares of Insynq-WA (See "Legal Proceedings").

     (3)  Of the shares that Mr. Gorst owns, approximately 3,878,000 of his
          shares represent shares originally purchased from Mr. Charles Benton,
          the husband of M. Carroll Benton, in exchange for a $65,000 promissory
          note secured by the shares. Our records reflect that this note has
          been repaid with 65,000 of Mr. Gorst's common stock. Mr. Benton has
          not yet executed a release of the pledged shares and we are in the
          process of obtaining such release. (See "Certain Transactions").

                                                                              52
<PAGE>

     (4)  Includes 196,632 shares of common stock issuable upon exercise of
          outstanding stock options that are presently exercisable or will
          become exercisable within 60 days of September 7, 2000.

     (5)  Includes 183,000 shares of common stock held by Charles Benton, the
          husband of Ms. Benton.

     (6)  Includes 50,000 shares of common stock issuable upon the exercise of
          outstanding stock options that are presently exercisable or will
          become exercisable within 60 days of September 7, 2000.

     (7)  Includes 3,946,632 shares of common stock issuable upon exercise of
          outstanding stock options held by Mr. Gorst, Mr. Manzano, who is no
          longer an officer of the company, Mr. Leigh and Ms. Benton that are
          presently exercisable or will become exercisable within 60 days of
          September 7, 2000.

     (8)  Adjusted for the two-for-one stock split effected on August 3, 2000.

     ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

          Interactive is a company wholly owned by M. Carroll Benton, our Chief
     Administrative Officer, Secretary and Treasurer. John P. Gorst, our Chief
     Executive Officer and President, was also an employee of Interactive.
     During their time at Interactive, Ms. Benton and Mr. Gorst began developing
     the "Insynq Project," which later developed into our current business. On
     September 16, 1998, Interactive transferred to Charles Benton, husband of
     Ms. Benton and then a creditor of Interactive, all of Interactive's title
     and interest in and to (1) certain equipment and other tangible personal
     property, and (2) the intellectual properties, computer software,
     trademarks, copyrights, ideas, work-in-progress, and other tangible and
     intangible property comprising the system known as the "Insynq Project" to
     retire a $200,000 debt obligation owed by Interactive to Charles Benton.
     These assets later developed into Insynq's IQ Delivery System. Mr. Benton
     contributed all of the "InSynq Project" intellectual property assets to
     Insynq-WA in exchange for the initial 5,500,000 shares of common stock
     issued by Insynq-WA at the time of its formation. On the same date, Mr.
     Benton sold the equipment and other tangible property to the newly-formed
     Insynq-WA, in exchange for a $70,000 promissory note. Mr. Benton then sold
     2,750,000 shares to each of Ms. Benton and Mr. Gorst in exchange for a
     $65,000 note from each of them secured by the shares. During the start-up
     operations of Insynq-WA, the business contacts of Interactive were utilized
     in the purchase of supplies and other items for Insynq-WA. As of September
     30, 1999, Insynq-WA owed Interactive $117,024 related to these purchases,
     and on November 12, 1999, the board of Insynq-WA approved the issuance of
     118,000 shares of its common stock in full payment of this debt, after a
     board determination that the shares of Insynq-WA should be valued at $1.00
     per

                                                                              53
<PAGE>

share. From October 1, 1999 through August 18, 2000, approximately $8,000 of
services/expenses on behalf of Interactive have been paid by us. During the same
time period, we received approximately $6,400 from Interactive for services.

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

================================================================================
   EXHIBIT
   NUMBER                                    DESCRIPTION
-------------------------------------------------------------------------------
     2.1         Asset Purchase Agreement, dated as of February 18, 2000, by and
                 between Xcel Management, Inc. and Insynq, Inc. (Incorporated by
                 reference to Exhibit 2 to the Company's Current Report on Form
                 8-K, filed March 3, 2000).
--------------------------------------------------------------------------------
     3.1         Certificate of Incorporation of Insynq, Inc. (Incorporated by
                 reference to Exhibit 2 to the Company's Current Report on Form
                 8-K filed August 17, 2000).

     3.2         By-Laws of Insynq, Inc. (Incorporated by reference to Exhibit 3
                 to the Company's Current Report on Form 8-K filed August 17,
                 2000).

     4.1*        Form of Specimen Common Stock Certificate.

     4.2*        Form of Warrant Agreement issued to Consulting & Strategy
                 International, LLC on February 24, 2000, as amended.

     4.3*        Form of Warrant Agreement issued to International Fluid
                 Dynamics, Inc. on May 17, 2000.

     4.4*        Form of Registration and Repurchase Agreement issued to
                 International Fluid Dynamics, Inc. on May 17, 2000, as amended.

     4.5*        Form of Warrant Agreement issued to Plazacorp Investors Limited
                 on April 26, 2000.

     4.6*        Form of Registration and Repurchase Agreement issued to
                 Plazacorp Investors Limited on April 26, 2000, as amended.
===============================================================================

                                                                              54
<PAGE>

===============================================================================

     4.7*      Form of Warrant Agreement issued to TCA Investments, Inc.
               L.L.L.P. on June 16, 2000, as amended.

     4.8*      Form of Convertible Debenture issued to TCA Investments, Inc. on
               June 16, 2000, as amended.

     4.9*      Form of Warrant Agreement issued to Garnier Holdings, Ltd. on
               July 17, 2000.

     4.10*     Form of Promissory Note issued to Garnier Holdings, Ltd. on July
               17, 2000, as amended.

     4.11*     Form of Warrant Agreement issued to One Click Investments, LLC on
               August 4, 2000.

     4.12*     Form of Registration Rights Agreement issued to One Click
               Investments, LLC on August 4, 2000.

     4.13*     Form of Warrant Agreement issued to Series A & B warrant holders.

     4.14*     Form of Warrant Agreement issued to One Click Investments, LLC
               on September 20, 1999, as amended.

     4.15*     Form of Warrant Agreement issued to Hewlett-Packard on June 1,
               1999.

     10.1*     Insynq, Inc. 2000 Executive Long Term Incentive Plan.

     10.2*     Insynq, Inc. 2000 Long Term Incentive Plan.

     10.3*     Business Services Contract with Consulting & Strategy
               International, L.L.C. dated November 18, 1999, as amended.

     10.4*     Independent Marketing Consultant Agreement with Vijay
               Alimchandani dated February 20, 2000.

     10.5*     Financial Public Relations Consulting Agreement with One Click
================================================================================

                                                                              55
<PAGE>

================================================================================
               Investments, LLC dated September 20, 1999, as amended.

     10.6*     Form of Registration Rights Agreement upon the issuance of shares
               to investors under the bridge financing dated December 14, 1999.

     10.7*     Form of Registration Rights Agreement upon the issuance of shares
               to investors under the bridge financing dated January 24, 2000.

     10.8*     Engagement Letter with Rosenblum Partners, LLC dated July 7,
               2000.

     10.9*     Employment Agreement, dated as of February 20, 2000, between John
               P. Gorst and Xcel Management, Inc.

     10.10*    Employment Agreement, dated as of February 20, 2000, between M.
               Carroll Benton and Xcel Management, Inc.

     10.11*    Employment Agreement dated as of February 20, 2000, between James
               R. Leigh, III, and Xcel Management, Inc.

     10.12*    Employment Agreement, dated as of February 20, 2000, between DJ
               Johnson and Xcel Management, Inc.

     10.13*    Employment Agreement, dated as of February 20, 2000, between
               Joanie C. Mann and Xcel Management, Inc.

     10.14*    Employment Agreement, dated as of February 20, 2000, between Jim
               Zachman and Xcel Management, Inc.

     10.15*    Employment Agreement, dated as of July 20, 1999, between Donald
               L. Manzano and Insynq, Inc.- Washington.

     10.16*    Employment Agreement, dated as of July 20, 1999, between Carey M.
               Holladay and Insynq, Inc.- Washington.

     10.17*    Employment Agreement, dated as of June 28 2000, between William
               G. Hargin and Xcel Management, Inc.

     10.18*    Employment Agreement, dated as of June 5, 2000, between Barbara
               D. Brown and Xcel Management, Inc.

     10.19*    Employment Agreement, dated as of June 16, 2000, between
               Christopher Todd and Xcel Management, Inc.

     10.20*    Employment Agreement, dated as of September 1, 2000, between
================================================================================

                                                                              56
<PAGE>

================================================================================
               David Wolfe and Insynq, Inc.

     10.21*    Lease Agreement dated January 3, 2000 between Howe/Horizon
               Holdings LLC and Insynq, Inc., for 1101 Broadway Plaza, Tacoma,
               Washington.

     10.22*    Sublease Agreement dated November 1, 1999 between Duane and Wendy
               Ashby, d/b/a Cargocare and Insynq Data Utilities for the property
               in the Seafirst Plaza Building in Tacoma, Washington, at the
               Northwest corner of South 9th and A Streets.

     10.23*    Lease Agreement dated March 21, 2000 between Walaire, Inc. and
               Insynq, Inc., for 3017 Douglas Boulevard, Suite 220 and 240,
               Roseville, California.

     10.24*    Master Licensing Agreement dated May 19, 2000 between Macola,
               Inc. and Insynq, Inc.

     10.25*    Citrix iLicense Agreement dated March 2, 2000 between Citrix and
               Insynq, Inc.

     10.26*    Citrix iBusiness Application Service Provider Agreement dated
               March 2, 2000 between Citrix and Insynq, Inc.

     10.27*    Master Licensing Agreement dated March 1, 2000 between Legacy
               Solutions and Insynq, Inc.

     10.28*    Master Licensing Agreement dated April 7, 2000 between Electronic
               Registry Systems, Inc. and Insynq, Inc.

     10.29*    Master Licensing Agreement dated March 22, 2000 between Viking
               Software Services, Inc. and Insynq, Inc.

     10.30*    Master Licensing Agreement dated June 1, 2000 between My Partner
               Online and Insynq, Inc.

     10.31*    Master Licensing Agreement dated April 24, 2000 between Veracicom
               and Insynq, Inc.

     10.32*    Master Licensing Agreement dated August 21, 2000 between
               CastaLink.com, Inc. and Insynq, Inc.

     10.33*    Application Hosting Agreement dated May 12, 2000 between Remedy
               Corporation and Insynq, Inc.

     10.34*    Novell Internet Commercial Service Provider Agreement dated July
               24, 2000 between Novell, Inc. and Insynq, Inc.

     10.35*    Agreement to Provide Collaborative Management Services dated July
               15, 1999 between Horizon Holdings I, LLC, and Insynq, Inc.

     10.36*    Referral Partner Agreement dated July 29, 1999 between Global
               Crossing Telecommunications, Inc. and Insynq, Inc.
================================================================================

                                                                              57
<PAGE>

================================================================================

     16.1      Letter on Change in Certifying Accountant (Incorporated by
               reference to Exhibit 1 to the Company's Current Report on Form 8-
               K/A filed May 23, 2000.

     23.1*     Consent of G. Brad Beckstead CPA for Financial Statements for the
               years ended May 31, 2000 and May 31,1999.

     24.1*     Power of Attorney (included on the signature page of this Annual
               Report.

     27.1*     Financial Data Schedule.
================================================================================
___________

* Filed Herewith

(b) Reports on Form 8-K

          (1)  On March 3, 2000, we filed a Current Report on Form 8-K reporting
our acquisition of Insynq, Inc., a Washington corporation.

          On July 3, 2000, we filed an amendment to this Form 8-K to include the
audited financial statements for Insynq, Inc. for the year ended December 31,
1999 and December 31, 1998, and the unaudited pro forma financial statements
showing our combination with Insynq, Inc. for the nine months ended February 29,
2000.

          (2)  On April 6, 2000, we filed a Current Report on Form 8-K reporting
the removal of Jones, Jensen & Company as our accountants and the approval of G.
Brad Beckstead CPA as our new accountant.

          On May 23, 2000 we filed an amendment to this Form 8-K to include the
letter from HJ & Associates, LLC (formerly Jones, Jensen & Company), as required
by Item 304(a)(3) of Regulation S-B.

          (3)  On June 29, 2000, we filed a Current Report on Form 8-K reporting
the resignation of Donald L. Manzano as our President and Chief Operating
Officer.

          (4)  On August 17, 2000, we filed a Current Report on Form 8-K
reporting our re-incorporation under Delaware law.

                                                                              58
<PAGE>

                                  SIGNATURES

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

                                    INSYNQ, INC.


                                    /s/ John P. Gorst
                                    -----------------
                                    John P. Gorst
                                    President and Chief Executive Officer

Date:  September 13, 2000

                               POWER OF ATTORNEY

          Each person whose signature appears below hereby authorizes and
constitutes John P. Gorst and DJ Johnson, and each of them singly, his, her or
its true and lawful attorneys-in-fact with full power of substitution and
reconstitution, for him, her or its and in his, her or its name, place and
stead, in any and all capacities to sign and file any and all amendments to this
report with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, and he, she or it hereby ratifies
and confirms all that said attorneys-in-fact or any of them, or their
substitutes, may lawfully do or cause to be done by virtue hereof.


<TABLE>
<CAPTION>
           SIGNATURES                           TITLE                        DATE
           ----------                           -----                        ----
<S>                                <C>                              <C>
  /s/ John P. Gorst                Chief Executive Officer,         September 13, 2000
---------------------------------  President, and Director
  John P. Gorst                    (Principal Executive Officer)

  /s/ DJ Johnson                   Chief Financial Officer          September 13, 2000
---------------------------------  (Principal Financial and
  DJ Johnson                       Accounting Officer)

  /s/ M. Carroll Benton            Chief Administrative Officer,    September 13, 2000
---------------------------------  Secretary, Treasurer and
  M. Carroll Benton                Director

  /s/ David D. Selmon              Director                         September 13, 2000
---------------------------------
  David D. Selmon
</TABLE>

                                                                              59
<PAGE>

 Index to Consolidated Financial Statements of Xcel Management, Inc., as of,
                and for the year ended, May 31, 1999 and 2000.


                                                                          Page
Index to Financial Statements...........................................  F-1
Report Of Independent Auditors..........................................  F-2
Balance Sheet...........................................................  F-3
Income Statement........................................................  F-5
Statement of Cash Flows.................................................  F-6
Statement of Stockholders' Equity.......................................  F-7
Notes to Financial Statements...........................................  F-8

                                      F-1
<PAGE>

G. BRAD BECKSTEAD
-----------------
Certified Public Accountant
                                                             330 E. Warm Springs
                                                             Las Vegas, NV 89119
                                                                    702.528.1984
                                                                425.928.2877efax


                         INDEPENDENT AUDITOR'S REPORT


Board of Directors
Xcel Management, Inc.
(A Development Stage Company)
Tacoma, WA 98405


I have audited the Balance Sheets of Xcel Management, Inc. (the "Company") (A
Development Stage Company) as of May 31, 2000 and 1999, and the related
Statements of Income, Stockholders' Equity, and Cash Flows for the years then
ended. These financial statements are the responsibility of the Company's
management. My responsibility is to express an opinion on these financial
statements based on my audit.

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

In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Xcel Management, Inc. (A
Development Stage Company) as of May 31, 2000 and 1999, and the results of its
operations, changes in stockholders' equity, and cashflows for the years then
ended, in conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming the Company
will continue as a going concern.  As discussed in Note 14 to the financial
statements, the Company has had limited operations.  This raises substantial
doubt about its ability to continue as a going concern.  Management's plans in
regard to these matters are also described in Note 14.  The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.

/s/ G. Brad Beckstead

September 11, 2000

                                      F-2
<PAGE>

                             Xcel Management, Inc.
                        (formerly Palace Casinos, Inc.)
                         (A Development Stage Company)
                                 Balance Sheet


                                                                  Pro forma
                                                                  Combined
                                               May 31, 2000     May 31, 1999
                                               ------------     ------------

Assets

Current assets:
   Cash and
   equivalents                                 $    106,806     $        501
   Accounts receivable, net of allowance
      for doubtful accounts                          49,249            3,424
   Other receivables                                 16,913                -
   Inventory                                         67,509            2,246
   Prepaid expenses                                  29,186                -
                                               ------------     ------------
                                                    269,663            6,171
Furniture, fixtures & equipment, net              1,031,676           79,001
Intellectual and other intangible
    property, net                                    87,824          128,270
Other assets                                        195,763           30,180
Deferred tax benefits                                22,651                -
                                               ------------     ------------

                                               $  1,607,577     $    243,622
                                               ============     ============


  The accompanying Notes are an integral part of these financial statements.

                                      F-3
<PAGE>

                            Xcel Management, Inc.
                        (formerly Palace Casinos, Inc.)
                         (A Development Stage Company)
                                 Balance Sheet


                                                                     Pro forma
                                                                     Combined
                                                   May 31, 2000    May 31, 1999
                                                   ------------    ------------
Liabilities and Stockholders' Equity

Current liabilities:
   Accounts payable                                $    308,171    $     39,924
   Accrued and other liabilities                        169,410         123,219
   Short-term notes payable                              39,471          70,000
   Current portion of long-term debt                    166,869               -
                                                   ------------    ------------
                                                        683,921         233,143
Convertible debentures                                  100,000               -
Capital leases payable, net of current portion          536,487               -
Deferred taxes                                                -               -
                                                   ------------    ------------

                                                      1,320,408         233,143
                                                   ------------    ------------

Stockholders' Equity:
   Common stock, $0.001 par value, 50,000,000
     shares authorized, 9,727,924 and 1,800,000
     shares issued and outstanding as of May 31,
     2000 and 1999, respectively                          9,728           1,800
   Additional paid-in capital                         3,107,868      19,613,634
   Subscriptions receivable                                   -         (25,000)
   Deficit accumulated during development stage      (2,830,427)    (19,579,955)
                                                   ------------    ------------
            Total stockholders' equity                  287,169          10,479
                                                   ------------    ------------

                                                   $  1,607,577    $    243,622
                                                   ============    ============

  The accompanying Notes are an integral part of these financial statements.

                                      F-4
<PAGE>

                             Xcel Management, Inc.
                        (formerly Palace Casinos, Inc.)
                         (A Development Stage Company)
                               Income Statement

                                                                     Pro forma
                                                                     Combined
                                                   May 31, 2000    May 31, 1999
                                                   ------------    ------------

Revenue                                            $    235,808    $     13,616
                                                   ------------    ------------
Costs and Expenses:
   Direct cost of services                              370,561          43,617
   Network and infrastructure costs                      64,962           7,038
   Selling, general and administrative                2,509,235          85,577
   Depreciation and amortization                        106,225           9,647
                                                   ------------    ------------
                   Total expenses                     3,050,983         145,880
                                                   ------------    ------------

Loss from operations                                 (2,815,175)       (132,264)
Other income (expenses)
   Other income                                          41,984               -
   Interest income                                        4,986               -
   Interest expense                                     (62,222)         (6,468)
                                                   ------------    ------------

Loss before income taxes and extraordinary items     (2,830,427)       (138,732)

Provision for income tax                                      -               -
                                                   ------------    ------------

Loss from operations before extraordinary item       (2,830,427)       (138,732)

Gain on extinguishment of debt net of zero
  tax expense                                                 -         469,050
                                                   ------------    ------------

Net income or (loss)                               $ (2,830,427)   $    330,318
                                                   ============    ============


Weighted average number of
   common shares outstanding                          9,727,924       1,800,000
                                                   ============    ============

Net income (loss) per share                        $      (0.29)   $       0.18
                                                   ============    ============

  The accompanying Notes are an integral part of these financial statements.

                                      F-5
<PAGE>

                             Xcel Management, Inc.
                        (formerly Palace Casinos, Inc.)
                         (A Development Stage Company)
                            Statement of Cash Flows

                                                                     Pro forma
                                                                     Combined
                                                   May 31, 2000    May 31, 1999
                                                   ------------    ------------

Cash flows from operating activities
Net income or (loss)                               $ (2,830,427)   $    330,318
Adjustments to reconcile net income to
  net cash (used) provided by
  operating activities:
    Depreciation and amortization expense               106,225           9,647
    Gain on extinguishment of debt                            -        (469,050)
    (Increase) decrease in:
      Accounts receivable, net                          (45,825)         (3,424)
      Prepaid expense                                   (29,186)              -
      Inventories                                       (65,264)         (2,246)
      Other current assets                             (165,583)              -
      Deferred tax benefits                             (22,651)              -
    Increase (decrease) in:
      Accounts payable                                  268,247          39,150
      Accrued and other liabilities                      46,191               -
                                                   ------------    ------------
Net used by operating activities                     (2,738,273)        (95,604)
                                                   ------------    ------------

Cash flows from investing activities
  Purchase of fixed assets                           (1,108,697)        (84,461)
  Acquisition of intellectual property                        -        (130,000)
                                                   ------------    ------------
Net cash used by investing activities                (1,108,697)       (214,461)
                                                   ------------    ------------

Cash flows from financing activities
  Increase (decrease) in short-term notes               (30,529)         70,000
  Increase in convertible debentures                    100,000               -
  Increase in long-term notes                           703,356               -
  Increase (decrease) in stock subscription              25,000         (25,000)
  Issuance of common stock                                7,928           1,760
  Additional paid-in capital                          3,147,520         260,619
                                                   ------------    ------------
Net cash provided by financing activities             3,953,275         307,379
                                                   ------------    ------------

Net increase (decrease) in cash                         106,305          (2,686)
Cash - beginning                                            501           3,188
                                                   ------------    ------------
Cash - ending                                      $    106,806    $        501
                                                   ============    ============

Supplemental disclosures:
  Interest paid                                    $     62,222    $      6,468
                                                   ============    ============
  Income taxes paid                                $          -    $          -
                                                   ============    ============

  Non-cash financing activities:
    Common stock issued for debt                    $         -    $        900
                                                   ============    ============

  The accompanying Notes are an integral part of these financial statements.

                                      F-6
<PAGE>

                             Xcel Management, Inc.
                        (formerly Palace Casinos, Inc.)
                         (a Development Stage Company)
                       Statement of Stockholders' Equity


<TABLE>
<CAPTION>

                                           Common Stock             Preferred Stock
                                      ----------------------     -----------------------
                                        Shares       Amount        Shares        Amount
                                      ---------     --------     ----------     --------
<S>                                   <C>           <C>          <C>            <C>
Balance, May 31, 1998                    38,980     $     40      2,602,000     $  3,000


Conversion of preferred
 stock to common                         51,020           50     (2,602,000)      (3,000)

Common stock issued for
 settlement of debt at $0.01
 per share                               90,000           90

Common stock issued for
 cash at $0.015 per share             1,620,000        1,620

Net income, year ended
May 31, 1999
                                      ---------     --------     ----------     --------

Balance, May 31, 1999                 1,800,000     $  1,800              -     $      -

Receipt of subscription
 receivable

Net loss, February 21, 2000

February 28, 2000
Equity restructuring pursuant to
 asset purchase agreement             7,466,238        7,466

April 6, 2000
Common stock issued for cash             30,972           31

April 26, 2000
Common stock issued for cash            285,714          286

May 17, 2000
Common stock issued for cash            125,000          125

May 26, 2000
Common stock issued for services         20,000           20

Net loss, May 31, 2000
                                      ---------     --------     ----------     --------

Balance, May 31, 2000                 9,727,924     $  9,728              -     $      -
                                      =========     ========     ==========     ========

<CAPTION>
                                                                             Accumulated
                                         Additional                        Deficit During         Total
                                          Paid-in        Subscriptions       Development       Stockholders'
                                          Capital         Receivable            Stage             Equity
                                        ------------     -------------     --------------     -------------
<S>                                     <C>              <C>               <C>                <C>
Balance, May 31, 1998                   $ 19,444,551     $           -     $  (19,890,875)    $    (443,284)


Conversion of preferred
 stock to common                               2,949                                                     (1)

Common stock issued for
 settlement of debt at $0.01
 per share                                       810                                                    900

Common stock issued for
 cash at $0.015 per share                     23,380           (25,000)                                   -

Net income, year ended
May 31, 1999                                                                      461,597           461,597
                                        ------------     -------------     --------------     -------------

Balance, May 31, 1999                   $ 19,471,690     $     (25,000)    $  (19,429,278)    $      19,212

Receipt of subscription
 receivable                                                     25,000                               25,000

Net loss, February 21, 2000                                                       (30,854)          (30,854)

February 28, 2000
Equity restructuring pursuant to
 asset purchase agreement                (17,113,411)                          19,460,132         2,354,187

April 6, 2000
Common stock issued for cash                                                                             31

April 26, 2000
Common stock issued for cash                 499,714                                                500,000

May 17, 2000
Common stock issued for cash                 249,875                                                250,000

May 26, 2000
Common stock issued for services                                                                         20

Net loss, May 31, 2000                                                         (2,830,427)       (2,830,427)
                                        ------------     -------------     --------------     -------------

Balance, May 31, 2000                   $  3,107,868     $           -     $   (2,830,427)    $     287,169
                                        ============     =============     ==============     =============
</TABLE>

  The accompanying Notes are an integral part of these financial statements.

                                      F-7
<PAGE>

                             XCEL MANAGEMENT, INC.
                         NOTES TO FINANCIAL STATEMENTS


Note 1 - Basis of Presentation
------

The Company:  Xcel Management, Inc. (the "Company"), was incorporated in the
state of Utah on May 22, 1980, under the name "Ward's Gas & Oil," to engage in
the oil and gas business.  This business was terminated after a few years of
operations.  From November 1992 until approximately the end of 1995, the Company
(which had changed its name to "Palace Casinos, Inc."), was engaged, through its
then wholly owned subsidiary, Maritime Group, Ltd. (the "Subsidiary"), in the
development of a dockside gaming facility in Biloxi, Mississippi.  In April
1994, the Subsidiary completed the development of the Biloxi gaming facility,
"Palace Casino," and commenced operations.  On December 1, 1994, the Company and
the Subsidiary separately filed voluntary petitions for relief under Chapter 11
of the federal bankruptcy laws.   Although the Company's original bankruptcy
petition was filed in the United States Bankruptcy Court for the District of
Utah, Central Division, the supervision of the Company's Chapter 11 proceedings
was transferred to the United States Bankruptcy Court for the Southern District
of Mississippi (the "Bankruptcy Court").  On September 22, 1995, the Company,
which had been operating as debtor-in-possession in connection with the
bankruptcy proceeding, entered into an asset purchase agreement ("Xcel Asset
Purchase Agreement") under the terms of which it agreed, subject to the approval
of the Bankruptcy Court, to sell substantially all of the Subsidiary's operating
assets.  This transaction was approved by the Bankruptcy Court, and completed in
the end of 1995, with all of the net proceeds of the transaction being
distributed to creditors.  Following the completion of the sale of the
Subsidiary's Assets, the Company had essentially no assets or liabilities and
the Company's business operations essentially ceased, except for efforts to
complete a plan of reorganization, described in Note 16.

On January 26, 2000, the Company entered into an Asset Purchase Agreement (See
Note 22 below) with Insynq, Inc. a closely held Washington corporation ("Insynq-
WA"). Insynq-WA provides server-based computing services, and is an application
services provider ("ASP"). Insynq-WA's services enable software applications to
be deployed, managed, supported and upgraded from centrally located servers,
rather than on individual desktop computers. For server-based computing
customers, Insynq installs and integrates software applications on customers'
servers. For ASP customers, Insynq hosts software applications on servers at
data centers, and rents computing services to customers for a monthly fee. ASP
customers connect to facilities over the Internet, through a dedicated
telecommunications line or by wireless connection.

Basis of Presentation:  The Company does not have operations significant to
sustain it without raising additional funds either through added debt or
offerings of equity.  Therefore, in accordance with Statement of Financial
Accounting Standards Board ("SFAS") No. 7, the Company is considered a
Development Stage Company.

Note 2 - Summary of Significant Accounting Policies
------

Cash and Cash Equivalents:  Cash and cash equivalents consist of money market
accounts and other short-term investments with maturity of three months or less
when purchased.

Fair Value of Financial Instruments:  Financial instruments, consisting
principally of cash, accounts receivable, payables, accrued liabilities, short-
and long-term obligations, and their carrying values in the accompanying
consolidated balance sheets, approximate their fair value. It is management's
opinion that the Company is not exposed to significant currency or credit risks
arising from these financial instruments.

Inventory:  Inventories are stated at the lower of cost (first in, first out) or
market and represent parts and supplies on hand for resale.

Property and Depreciation:  Equipment and hardware is stated at cost.
Depreciation, including amortization of capital leases, for financial statement
purposes is calculated using straight-line and declining balance methods.  The
cost of maintenance and repairs is charged to income as incurred; significant
replacements are capitalized.

                                      F-8
<PAGE>

                             XCEL MANAGEMENT, INC.
                         NOTES TO FINANCIAL STATEMENTS

Use of Estimates:  The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and disclosures.  Actual
results could differ from those estimates.

Revenue Recognition:  The Company generates revenue from ASP services,
information technology services, outsourcing contract services, and from the
resale of computer hardware and software. Service revenue is recognized when the
service is delivered, or over the term of the applicable contracts. Payments
received in advance, even if non-refundable, are recorded as customer deposits.
Revenue from the resale of computer hardware and software is recorded upon
shipment, or upon installation when required under contract terms.

Concentration of Credit Risk and Key Supplier:  The Company sells the majority
of its services and products throughout North America. Sales to the Company's
recurring customers are generally made on an open account while sales to
occasional customers may be made on a prepaid basis. The Company generally does
not require collateral. Reserves are maintained for potential credit losses.

Citrix Systems, Inc. ("Citrix") is one of the Company's key suppliers. The
Company uses Citrix software almost exclusively to connect its customers to
software applications.

Software Licenses:  The Company capitalizes the costs associated with the
purchase of licenses for major business process application software used in
providing ASP services.  The licenses specify the maximum number of users
permitted to utilize the license in connection with the Company's service. All
amounts are non-refundable, regardless of the actual number of users assigned a
license in connection with ASP services. The licenses are amortized over the
life of the contract.

Long-Lived Assets:  The Company follows SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present.

Long-lived assets and certain identifiable intangibles held and used by the
Company are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Based upon
this review, the Company believes that no impairment of the carrying value of
its long-lived assets existed at May 31, 2000 and 1999.

Income Taxes: The Company utilizes the liability method of accounting for income
taxes as set forth in SFAS No. 109, "Accounting for Income Taxes." Under this
method, deferred tax assets and liabilities are recognized based on the
anticipated future tax effects arising from the differences between the
financial statement carrying amounts of assets and liabilities and their
respective tax bases of assets and liabilities using enacted tax rates.

Stock-Based Compensation:  The Company accounts for stock-based awards to
employees in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations and has
adopted the disclosure-only alternative of SFAS No. 123, "Accounting for Stock-
Based Compensation." Options granted to consultants, independent representatives
and other non-employees are accounted for using the fair value method as
prescribed by SFAS No. 123.

                                      F-9
<PAGE>

                             XCEL MANAGEMENT, INC.
                         NOTES TO FINANCIAL STATEMENTS

Loss Per Share:  Basic loss per share is calculated by dividing the net loss by
the average number of common shares outstanding during the year. Diluted loss
per share is calculated by adjusting outstanding shares, assuming any dilutive
effects of options, warrants, and convertible securities. For all years
presented, the effect of stock options, warrants, and convertible securities
were not included as the results would be anti-dilutive. Consequently, there is
no difference between the basic and dilutive net loss per share.

Reclassifications:  Certain amounts in the 1999 consolidated financial
statements have been reclassified to conform to the current year presentation.

Recent Accounting Pronouncements:

The Financial Accounting Standards Board has issued SFAS No. 128, "Earnings Per
Share" and Statement of Financial Accounting Standards No. 129 "Disclosures of
Information About an Entity's Capital Structure."  SFAS No. 128 provides a
different method of calculating earnings per share than was previously used in
accordance with APB Opinion No. 15, "Earnings Per Share."  SFAS No. 128 provides
for the calculation of "Basic" and "Dilutive" earnings per share.  Basic
earnings per share includes no dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period.  Diluted earnings-per-share reflects the potential
dilution of securities that could share in the earnings of an entity, similar to
fully diluted earnings per share.  SFAS No. 129 establishes standards for
disclosing information about an entity's capital structure.  SFAS No. 128 and
SFAS No. 129 are effective for financial statements issued for periods ending
after December 15, 1997.  In fiscal 1998, the Company adopted SFAS No. 128,
which did not have a material impact on the Company's financial statements.  The
implementation of SFAS No. 129 did not have a material effect on the Company's
financial statements.

The Financial Accounting Standards Board has also issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information."  SFAS No. 130 establishes standards
for reporting and display of comprehensive income, its components and
accumulated balances.  Comprehensive income is defined to include all changes in
equity except those resulting from investments by owners and distributions to
owners.  In addition to other disclosures, SFAS No. 130 requires that all items
that are required to be recognized under current accounting standards as
components of comprehensive income be reported in a financial statement that
displays with the same prominence as other financial statements.  SFAS No. 131
supersedes SFAS No. 14 "Financial Reporting for Segments of a Business
Enterprise."  SFAS No. 131 establishes standards on the way that public
companies report financial information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public.  It
also establishes standards for disclosure regarding products and services,
geographic areas and major customers.  SFAS No. 131 defines operating segments
as components of a company about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.

SFAS No. 130 and 131 are effective for financial statements for periods
beginning after December 15, 1997 and requires comparative information for
earlier years to be restated.  Results of operations and financial position were
unaffected by implementation of these standards.

In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" was issued, which establishes new standards for recording
derivatives in interim and annual financial statements. This statement requires
recording all derivative instruments as assets or liabilities, measured at fair
value. Statement No. 133, as amended, is effective for all fiscal quarters of
all fiscal years beginning after June 15, 2000. Management does not anticipate
the adoption of the new statement will have a significant impact on the
consolidated results of operations or financial position of the Company.

                                      F-10
<PAGE>

                             XCEL MANAGEMENT, INC.
                         NOTES TO FINANCIAL STATEMENTS

Note 3 - Cash
------

The Company maintains a cash balance in a non-interest-bearing account that
currently does not exceed federally insured limits.  For the purpose of the
statements of cash flows, all highly liquid investments with an original
maturity of three months or less are considered to be cash equivalents.  There
were no cash equivalents as of May 31, 2000 and May 31, 1999.

Note 4 - Accounts Receivable
------

The Company had established an allowance for doubtful accounts based upon the
history of account collection and prior bad debts. The provision at May 31, 2000
and 1999 is $1,469 and $0, respectively.

Note 5 - Inventory
------

Inventory consists of computer hardware, parts, and supplies carried at cost and
held for resale to customers. Inventory totaled $67,509 and $2,246 at May 31,
2000 and 1999, respectively.

At present, the Company does not collect sales or other similar taxes in respect
of sales and shipments of its products through Internet purchases. However,
various states have sought to impose state sales tax collection obligations on
out-of-state direct marketing companies such as the Company. A successful
assertion by one or more of these states that it should have collected or be
collecting sales tax on the sale of its products could result in additional
costs and corresponding price increases to its customers. The U.S. Congress has
passed legislation limiting for three years the ability of states to impose
taxes on Internet-based transactions. Failure to renew this legislation could
result in the broad imposition of state taxes on e-commerce.

Note 6 - Fixed Assets
-------

Additions to fixed assets for the same periods are as follows:

<TABLE>
<CAPTION>
                                                                    2000        1999
                                                               ----------------------
        <S>                                                    <C>           <C>
           Computer hardware                                   $   93,984     $50,637
           Computer software                                       96,660       8,876
           Equipment                                              192,520      24,948
           Furniture and fixtures                                  86,650
           Capitalized lease equipment                            587,517
           Leasehold improvements                                  51,366
                                                               ----------------------
           Total additions to fixed assets                     $1,108,697     $84,461
                                                               ======================
</TABLE>

Depreciation expense for the years ended May 31, 2000 and 1999 is $95,390 and
$6,369, respectively.

Note 7 - Intellectual Property, Patents, and Other Intangibles
------

Insynq-WA acquired the rights to the "Insynq Project" on September 16, 1998, in
exchange for 5,500,000 common shares of stock valued at $130,000. The Insynq
Project, consisting of tangible and intangible properties, is the development of
a proprietary data utility services system. The cost is amortized over sixty
months with amortization expense of $10,835 and $3,278 for the years ending May
31, 2000 and 1999, respectively.

The Company regards its service marks, trademarks, domain names, and similar
intellectual property as critical to its success.  The Company's domain names
include: INSYNQ.com, ON-Q.net, SIMPLENETWORKS.net, APPLICATIONVAULT.com,
MESSAGEIQ.com, OURACCOUNTING.com, OURBOOKEEPER.com, and RAPIDNETWORKS.com, all
of which are now owned by the Company.

                                      F-11
<PAGE>

                             XCEL MANAGEMENT, INC.
                         NOTES TO FINANCIAL STATEMENTS

The Company relies on trademark, unfair competition and copyright law, trade
secret protection and contracts, such as confidentiality and license agreements
with its employees, customers, partners and others to protect its proprietary
rights.  Despite precautions, it may be possible for competitors to obtain
and/or use the proprietary information without authorization, or to develop
technologies similar to the Company's and independently create a similarly
functioning infrastructure.  Furthermore, the protection of proprietary rights
in Internet-related industries is uncertain and still evolving.  The laws of
some foreign countries do not protect proprietary rights to the same extent, as
do the laws of the United States. Protecting the Company's proprietary rights in
the United States or abroad may not be adequate.

Note 8 - Refundable Deposit
------

As of May 31, 1999 the Company had a deposit in the amount of $30,180 paid to
the Mississippi Gaming Commission.  This deposit was returned to the Company on
September 25, 1999.

Note 9 - Capital Lease Obligations and Rent Commitments
------

<TABLE>
<S>                                                                                     <C>
1.47% capital lease payable to Hewlett Packard with monthly principal
and interest payments beginning in April 2000 of $21,133, secured by
computer equipment, due March 2003.                                                     $  651,691

2.14% capital lease payable to Capital Connection with monthly principal
and interest payments beginning in April 2000 of $1,186, secured by
computer equipment, due January 2003.                                                       25,003

2.18% capital lease payable to Capital Connection with monthly principal
and interest payments beginning in February 2000 of $1,144, secured by
telephone equipment, due November 2002.                                                     26,662
                                                                                        ----------
                                                                                           703,356
Less current portion                                                                    (  166,869)
                                                                                        ----------
Total long-term debt                                                                    $  536,487
                                                                                        ==========
</TABLE>

The Company has executed a nine-year lease with Howe Horizon Holdings, LLC for
office space located in Tacoma, Washington commencing February 1, 2000 in the
amount of $25,557 per month. The minimum future rental payments total
$2,668,127.

The Company has executed a five-year lease with Walaire, Inc., for office space
located in Roseville, CA, commencing July 1, 2000, in the amount of $7,366
per month with incremental annual CPI increases.  The minimum future rental
payments total $490,132.

The Company has executed a one-year lease with Vantas Sacramento, LLC for office
space located in Costa Mesa, CA, commencing May 1, 2000, in the amount of $960
per month. The minimum future rental payments total $10,560.

The Company has executed a three-year lease with CargoCare, Inc. for office
space located in Tacoma, WA, commencing August 1, 2000, in the amount of
$2,479 per month.  The minimum future rental payments total $93,934.

Summary of Future Minimum Lease Payments:

<TABLE>
<CAPTION>
                                Fiscal Year                                               Amount
                                -----------                                               ------
                                <S>                                                     <C>
                                    2001                                                $  447,514
                                    2002                                                   429,169
                                    2003                                                   424,290
                                    2004                                                   412,354
                                    2005                                                   305,836
                                 Thereafter                                              1,247,622
                                                                                        ----------
                                                Total lease payments
                                                over the contractual period             $3,266,784
                                                                                        ==========
</TABLE>

                                      F-12
<PAGE>

                             XCEL MANAGEMENT, INC.
                         NOTES TO FINANCIAL STATEMENTS

Note 10 - Convertible Debentures
-------

The Company received a $100,000 advance on a loan pursuant to an agreement with
Travin Partners, LLP ("TPL"), and TCA Investments, Inc. ("TII"). On June 16,
2000, the Company entered into a private financing transaction with TPL and TII,
under the terms of which TPL and TII each loaned us the sum of $325,000 (the
"loans"), and were sold convertible debentures and granted warrants, described
in Note 23 below.

Note 11 - Income Taxes
-------

Income tax expense consists of the following components:

<TABLE>
        <S>                                                <C>            <C>
                                                               2000            1999
                                                           ------------    ------------
           Current provision                               $        -0-    $        -0-
           Deferred provision:
              Tax benefit of loss carry forward                  22,651             -0-
              Deferred tax liability                                -0-             -0-
              Valuation adjustment                              (22,651)            -0-
                                                           ------------    ------------
           Total income tax expense (benefit)              $        -0-    $        -0-
                                                           ============    ============
</TABLE>

The Company has unused net operating loss carry forwards of $138,732 expiring in
the year 2014, and $2,830,427 expiring in the year 2015.

Note 12 - Stockholders' Equity
-------

The Company is authorized to issue 50,000,000 of $0.001 par value common stock
and 5,000,000 shares of $0.001 par value preferred stock.  The Company has
issued and outstanding 9,727,924 and 1,800,000 shares of $0.001 par value common
stock as of May 31, 2000 and 1999, respectively.

Restructuring Pursuant to Chapter 11 Plan of Reorganization

Pursuant to the plan of reorganization under Chapter 11, the following stock
transactions occurred as of February 1, 1999.

1. The 2,602,000 shares of Series A preferred stock were converted into
5,204,000 pre-split shares of common stock.

2. The 2,205,002 pre-split shares of Series B common stock were combined with
the Series A common stock to leave one class of common stock.

3. The remaining class of common stock was reverse split on a 1-for-102-share
basis leaving 90,000 shares of common stock outstanding.

4. The Company issued 90,000 shares of common stock to convert $900 of unsecured
claims to equity valued at $0.01 per share.

5.  The Company issued 1,620,000 shares of common stock to the plan of
reorganization proponents for cash and services valued at $0.015 per share.

All references to common stock unless specifically noted as pre-split shares
have been retroactively restated to reflect the reverse stock split.

                                      F-13
<PAGE>

                             XCEL MANAGEMENT, INC.
                         NOTES TO FINANCIAL STATEMENTS

Issuance of Common Stock and Warrants for Cash

(The following have not been adjusted to reflect the two-for-one stock split
affected by the Company on August 3, 2000 in order to enhance the reader's
ability to compare to the financial statements.)

In July, 1999, in connection with a Chapter 11 plan of reorganization Edward D.
Bagley and Steve Rippon each received a total of 810,000 shares of common stock
of the Company.

During January of 2000, Insynq-WA completed a private offering, in reliance upon
applicable exemptions from the registration requirements under the Securities
Act of 1933, as amended, of a total of 655,910 shares of common stock, at an
offering price of approximately $1.42 per share, after giving effect to a stock
recapitalization by Insynq-WA in January 2000.   Each purchaser in the private
offering described above, was issued one Class A Warrant and one Class B
Warrant, for each share of common stock purchased by such purchaser. The Class A
Warrants and Class B Warrants entitled the purchasers to purchase a share of
common stock at any time on or before December 31, 2001, at a price of $3.54 and
$5.68, respectively.

On or about December 14, 1999, Insynq-WA, concurrently with the offering
described above, sold to nine (9) accredited investors a total of 650,000 shares
of presently constituted restricted common stock, at a price of $1.00 per share,
or a total purchase price of $650,000. In connection with their purchase of
shares, these purchasers were granted "piggyback" registration rights, entitling
them, under certain conditions, to include their shares in any registration of
securities by the Company.

In connection with the asset purchase transaction between Insynq-WA and the
Company, Insynq-WA transmitted to each of its shareholders a notice of a special
meeting of Insynq-WA's shareholders, and an accompanying proxy statement,
describing the proposed transaction with the Company, and soliciting the
approval of the shareholders to the transaction. In connection with such
solicitation, each of the shareholders of Insynq-WA were given the opportunity
to rescind his or her original purchase of shares of common stock of Insynq-WA,
and to exercise his or her dissenter's rights under Washington corporate law.
With the exception of one shareholder who dissented, and who was subsequently
paid the fair market value of his shares, Insynq-WA received approval of the
transaction from all of its shareholders. As a result of such approval, shares
of common stock of the Company were issued, pro rata, to the shareholders of
Insynq-WA in a liquidating distribution, in reliance on applicable exemptions
from the registration requirements under the Securities Act of 1933, as amended.

In January 2000, Timothy Horan, as trustee on behalf of certain parties named
below, advanced to Insynq-WA the sum of $150,000 to provide Insynq-WA with
capital to secure the Company's leased facility at 1101 Broadway Plaza, Tacoma,
Washington.  In consideration of this financing, and pursuant to Insynq-WA's
agreement with Mr. Horan, the Company issued a total of 150,000 shares of
restricted common stock, as follows: 75,000 shares - Timothy Horan; 37,500
shares - Travin Partners; and 37,500 shares - International Fluid Dynamics.  In
connection with this transaction, the Company entered into a registration rights
agreement, under the terms of which the Company agreed to file on the request of
Mr. Horan, a registration statement, and exercise commercially reasonable
efforts to register the shares as soon as possible after filing of the
registration statement.

On or about April 6, 2000, the Company sold a total of 30,972 shares of common
stock to two investors, the Perry Family Trust and John Anderson (cumulatively
referred to as "Perry") for a total offering of $108,400.  Under the terms of
which Perry was granted a total of 30,972 warrants to purchase shares of common
stock at an exercise price of $6.50 per share.  In connection with this
transaction, Perry was granted "piggyback" registration rights under a
Registration Rights Agreement.

On or about April 26, 2000, the Company sold a total of 142,857 shares of common
stock to Plazacorp Investors Limited, ("Plaza"), an Ontario corporation, at a
price of $3.50 per share.  In connection with this sale, the Company granted to
Plaza, warrants to purchase an additional 285,714 shares of common stock,
exercisable at any time for a five (5) year period, at a price of $5.50 per
share with respect to 142,857 shares, and $7.50 per share with respect to the
remaining 142,857 shares.  In connection with this transaction, Plazacorp was
granted registration rights under a Registration and Repurchase Agreement (the

                                      F-14
<PAGE>

                             XCEL MANAGEMENT, INC.
                         NOTES TO FINANCIAL STATEMENTS

"Agreement") requiring the Company to file a registration statement by September
15, 2000 and to cause the registration statement to be effective on or before
December 15, 2000.  In the event the Company does not file a registration
statement by September 15, 2000, or the registration statement is not declared
effective by December 15, 2000, Plazacorp has the right, but not the obligation,
to require the Company to repurchase the shares (but not shares issuable on
exercise of the warrants), at a price of $5.00 per share.  The Company issued
these securities under an exemption provided by Rule 903 of Regulation S under
the Act.  The Company made no directed selling efforts of these securities
within the United States.  Plazacorp represented that it was not a U.S. person,
was not acquiring the securities for the account or benefit of any U.S. person,
and would not resell the securities in the U.S. for at least one year.  The
securities issued were appropriately legended to reflect these restrictions and
the Company has the right to refuse to register any transfer of these securities
not made in accordance with Regulation S.

On or about May 17, 2000, the Company sold an additional 62,500 shares of common
stock at a price of $4.00 per share to the following investors:  Raymond Betz -
12,500 shares; Timothy Horan - 25,000 shares; and International Fluid Dynamics,
Inc. ("IFD") - 25,000 shares.  In connection with these transactions, the
purchasers were granted warrants to purchase an equivalent number of additional
shares (or a total of 62,500 shares), at any time on or before May 17, 2005, at
an exercise price of $6.00 per share. In connection with this transaction, the
purchasers were granted registration rights under a Registration and Repurchase
Agreement (the "Agreement") requiring the Company to file a registration
statement by September 15, 2000, and to cause the registration statement to be
effective on or before December 15, 2000.  In the event the Company does not
file a registration statement by September 15, 2000, or the registration
statement is not declared effective by December 15, 2000, the purchasers have
the right, but not the obligation, to require the Company to repurchase the
shares (but not shares issuable on exercise of warrants), at a price of $5.72
per share.  The Company issued these securities under an exemption provided by
Rule 506 of Regulation D under the Act.

Issuance of Common Stock for Services

In May, 2000, the Company entered into a consulting agreement with MQ Holdings,
Inc. ("MQI"), under the terms of which the Company has agreed to issue a total
of 20,000 shares of restricted common stock to MQI, for services to be rendered
by MQI in assisting the Company in its corporate and securities filings, and
other consulting services.  Under the terms of the consulting agreement, the
Company agreed to file an S-8 registration statement for the registration of the
shares to be issued to MQI.

Stock Option Plans and Warrants

The Company's stock option plan provides that non-qualified and incentive stock
options to purchase Common Stock may be granted to directors, officers and key
employees at prices established on date of grant.  Generally, a portion
of the options vest on grant date, and the remainder become exercisable in
installments beginning one year after date of grant.

(All amounts have been adjusted to reflect the two-for-one split affected by the
Company on August 3, 2000.)

Activity under the non-qualified plan is as follows:

<TABLE>
<CAPTION>
                                                                                           Options Outstanding
                                                                                     --------------------------------
                                                                        Number                          Weighted
                                                                          of             Price Per       Average
                                                                        Shares             Share      Exercise Price
                                                                       ----------------------------------------------

<S>                                                                    <C>               <C>          <C>
Balance at May 31, 1999............................................          -0-                  -0-             -0-

Options granted....................................................    8,237,082         $.50 - $1.00           $0.64
                                                                       ---------         ------------           -----

Balance at May 31, 2000                                                8,237,082         $.50 - $1.00           $0.64
                                                                       =========         ============           =====
</TABLE>

                                      F-15
<PAGE>

                             XCEL MANAGEMENT, INC.
                         NOTES TO FINANCIAL STATEMENTS

The weighted average remaining contractual life and weighted average exercise
price of options outstanding and of options exercisable as of May 31, 2000, were
as follows:

<TABLE>
<CAPTION>
                                                                         Weighted Average
Range of                     Options             Weighted Average            Remaining
Exercise Prices            Outstanding            Exercise Price         Contractual  Life
--------------------------------------------------------------------------------------------
<S>                        <C>                   <C>                     <C>
   $.50 - $1.00              8,237,082                 $0.64                   9.72

</TABLE>

In consideration of an equipment financing arrangement with Hewlett Packard
("HP"), the Company has granted to HP an option to purchase a total of 282,112
shares of common stock at any time prior to June 1, 2002, at a price of $0.35
per share.

In consideration of consulting services rendered to the Company and Insynq-WA,
the Company has granted options to Robert J. Torres and Lowell Cooper, entitling
them to purchase a total of 218,637 shares and 134,003 shares, respectively, at
any time prior to November 2, 2003, at an exercise price of $2.13 per share.

Non-qualified stock options must generally have an exercise price equal to the
fair market value of a share of stock on the date of grant. The exercise price
of all options granted through May 31, 2000, was greater than the fair market
value of the underlying stock.  Therefore, the Company has not recorded any such
deferred compensation as of May 31, 2000.

Long Term and Executive Long Term Incentive Plans

The Company's Long Term Incentive Plan ("LTIP") was adopted by the Board of
Directors on March 31, 2000, effective as of February 21, 2000, and was approved
by the stockholders on August 3, 2000.  The LTIP provides for the issuance of
incentive and non-qualified stock options, stock appreciation rights and
restricted stock.  The maximum number of shares, which may be issued upon the
exercise of options under the LTIP, is 16,675,300.

The Company's Executive Long Term Incentive Plan (the "Executive LTIP") was
adopted by the Board of Directors on March 31, 2000, effective as of February
21, 2000, and was approved by the stockholders on August 3, 2000.  The Executive
LTIP provides for the issuance of incentive and non-qualified stock options,
stock appreciation rights and restricted stock.  The maximum number of shares,
which may be issued upon the exercise of options under the Executive LTIP, is
5,400,000.  Effective February 21, 2000, a  total of 5,000,000 options were
granted to M. Carroll Benton, the Chief Administrative Officer, Secretary and
Treasurer, and John P. Gorst, the Chief Executive Officer, President and Chief
Operating Officer, under the Executive LTIP.

The Company's board of directors (the "Board") administers the LTIP and
Executive LTIP (the "Plans").  Generally, the Board may amend or terminate the
Plans if they do not cause any adverse affect on any then outstanding options or
unexercised portions of any then outstanding options.  The Board must obtain the
consent of the stockholders to increase the number of shares that the Plans
cover, to change the class of persons eligible to receive options, or to extend
the term of the Plans beyond 10 years.  The Board sets the consideration for
each option award.  Incentive stock options must generally have an exercise
price equal to 100% of the fair market value of a share of stock as of the date
of grant, and options granted to a person who owns more than 10% of the voting
power of the outstanding stock and any outstanding stock of the subsidiaries
must have an exercise price equal to at least 110% of the fair market value of
the underlying common stock on the date of the grant.

                                      F-16
<PAGE>

                             XCEL MANAGEMENT, INC.
                         NOTES TO FINANCIAL STATEMENTS


The following table sets forth each grant of stock options made during the
fiscal year ended May 31, 2000, to the named executive officers:

<TABLE>
<CAPTION>
                                                             % of Total
                                                              Options
                                      Number of               Granted
                                      Securities           in Fiscal 2000        Exercise
                                      Underlying           --------------         Price          Expiration
          Name                     Options Granted              (5)             Per Share         Date (6)
          ----                     ---------------              ---             ---------         --------
<S>                                <C>                     <C>                <C>                <C>
John P. Gorst (1)(2)....              3,000,000                35.9%          $    0.50            2/21/10
Donald L. Manzano (3)...                196,632                 2.4%          $    0.71            2/21/05
James R. Leigh, III (4).                780,000                 9.3%          $0.50 & $1.00        2/21/10

</TABLE>

(1)  This includes 2,000,000 options that are currently exercisable.  The
     remaining 1,000,000 options are not exercisable until eight (8) years from
     the date of grant unless the Company successfully raises $5,000,000 in
     outside investment capital.

(2)  The Company's Board of Directors previously granted nonqualified stock
     options to acquire shares of the Company's Class A Common Stock to John P.
     Gorst and M. Carroll Benton with a strike price equal to $.20 which
     reflected the Board's determination of the fair market value of such shares
     on February 21, 2000. Based on its recent determination that the actual
     fair market value of a share of the Company's class A Common Stock on
     February 21, 2000 was $1.00 per share, the Company's Board of Directors has
     increased the exercise price of the options issued to Mr. Gorst and Ms.
     Benton to $1.00 per share which, post-split, equal $0.50 per share.

(3)  Mr. Manzano served as Chief Operating Officer and President from July 20,
     1999 through June 15, 2000.  The Company no longer employs him in any
     capacity.  Under the terms of his option agreement, 196,632 shares have
     vested and are exercisable at any time before February 21, 2005, at an
     exercise price of $0.71.  The Company is currently negotiating with Mr.
     Manzano regarding the termination of his employment and his receipt of any
     additional stock options.

(4)  Includes 50,000 options that are currently exercisable at an exercise price
     of $0.50 per share, and 730,000 options which will vest and are exercisable
     at an exercise price of $1.00 per share for a period of ten years, in
     increments of one-third (1/3) (243,333 shares), beginning February 21,
     2001, and continuing each year thereafter until 2003.

(5)  Based on a total of 8,367,082 options granted during the fiscal year ended
     May 31, 2000.

(6)  Options may terminate before their expiration date upon death, disability,
     or termination of employment of the optionee.

In connection with the completion of the asset purchase transaction with -WA,
the Company has converted the Class A and Class B Warrants, described above,
into Class A and Class B Warrants of the Company, each entitling the same
holders to purchase a total of 2,623,640 Shares of Common Stock at any time
before December 31, 2001, at a price of $1.77 and $2.84, respectively.

As of September 11, 2000, the Company has a total of approximately 9,680,460
shares of Common Stock issuable pursuant to options granted under the Company's
Incentive Plans, and an additional 12,377,748 shares of Common Stock issuable
upon exercise of other convertible debentures, outstanding options and warrants
(see Notes 10, 17 and 22 for disclosure on additional issuance of convertible
debentures, options and warrants). The exercise of any material portion of these
debentures, options, and warrants would have a significant dilutive effect on
the ownership interest held by present shareholders. If all convertible
debentures were converted and all outstanding options and warrants were
exercised, the shares held by the present shareholders (20,354,348 post-split
shares), would represent approximately 48.0% of a total of 42,412,556 (post-
split) shares of common stock which would then be issued and outstanding.

                                      F-17
<PAGE>

                             XCEL MANAGEMENT, INC.
                         NOTES TO FINANCIAL STATEMENTS


Note 13 - Gain on Extinguishment of Debt
--------

During the fiscal year ended May 31, 1999, the Company realized a $469,050 gain
on extinguishment of debt pursuant to the settlement reached in the bankruptcy
proceedings (see Note 16 below).  The amount represents the difference between
the settlement and the remaining balances released from liability.

Note 14 - Going Concern
-------

The Company's financial statements are prepared using the generally accepted
accounting principles applicable to a going concern, which contemplates the
realization of assets and liquidation of liabilities in the normal course of
business. Without realization of additional capital, it would be unlikely for
the Company to continue as a going concern.  Additionally the Company does not
have significant cash or other material assets, nor does it have an established
source of revenue sufficient to cover its operating costs to allow it to
continue as a going concern indefinitely.

The Company plans to continue to raise funds through public and private debt and
equity financings. Consistent with this approach, the Company has entered into
various non-exclusive financial agreements.

Note 15 - Related Party Transactions
--------

Interactive Information Systems ("Interactive") is a wholly owned company of M.
Carroll Benton, the Company's Chief Administrative Officer, Secretary and
Treasurer. John P. Gorst, Chief Executive Officer and President, was also an
employee of Interactive. During their time at Interactive, Ms. Benton and Mr.
Gorst began developing the "Insynq Project," which later developed into our
current business. On September 16, 1998, Interactive exchanged substantially all
of its assets with Charles Benton, the husband of Ms. Benton, to retire a
$200,000 debt owed by Interactive to Mr. Benton. On that same date, Mr. Benton
sold the tangible assets he had acquired to Insynq-WA of which Ms. Benton and
Mr. Gorst were principals, for a $70,000 promissory note and he contributed the
intangible assets, consisting of the "Insynq Project," to Insynq-WA for
5,500,000 shares of common stock of Insynq-WA. Mr. Benton then sold 2,500,000
shares to each of Ms. Benton and Mr. Gorst in exchange for a $65,000 note from
each of them. The shares purchased secured each such note. During the start-up
operations of Insynq-WA, the business contacts of Interactive were utilized in
the purchase of supplies and other items for Insynq-WA. As of September 30,
1999, Insynq-WA owed Interactive $117,024 related to these purchases, and on
November 12, 1999, the board of Insynq-WA approved the issuance of 118,000
shares of its common stock in full payment of this debt, after a board
determination that the shares of Insynq-WA should be valued at $1.00 per share.
From October 1, 1999 through August 18, 2000, approximately $8,000 of services
consisting primarily of rental allocation was charged to the Company by
Interactive. During the same time period, the Company sold approximately $6,400
of services to Interactive.

Note 16 - Bankruptcy Proceedings
--------

On December 1, 1994, the Company filed a voluntary petition for relief under
Chapter 11 of the Federal Bankruptcy Laws in the United States Bankruptcy Court
for the District of Utah, Central Division.  In June 1995, the supervision of
the Company's Chapter 11 proceedings was transferred to the United States
Bankruptcy Court for the Southern District of Mississippi.  Under Chapter 11,
certain claims against the Company in existence prior to the filing of the
petition for relief are stayed while the Company continues business operations
as debtor-in-possession. On February 1, 1999, the plan proponents filed a plan
of reorganization, which was approved on June 15, 1999, which called for the
following items:

     1. Payment to the priority claimholders of $5,000 cash.  Actual priority
        claims were $6,060.

     2. Issuance of 90,000 shares of common stock to convert the unsecured
        claims to equity.

     3. The additional stock transactions noted in Note 12.

On December 3, 1999, the United States Bankruptcy Court of the Southern District
of Mississippi closed the bankruptcy proceedings.

                                      F-18
<PAGE>

                             XCEL MANAGEMENT, INC.
                         NOTES TO FINANCIAL STATEMENTS


Note 17 - Commitments
-------

(All share amounts and prices have been adjusted to reflect the two-for-one
stock split affected by the Company on August 3, 2000.)

On May 15, 2000, the Company entered into a financial advisory agreement with
Gerard Klauer Mattison & Co., Inc. ("GKM"), under the terms of which the Company
and its affiliates have engaged GKM, and GKM has agreed to serve, as the
Company's exclusive financial advisor concerning certain "strategic"
transactions.  Under the terms of the agreement (the "GKM Agreement"), GKM has
agreed to provide assistance to the Company in identifying and contacting
parties, which may be interested in considering a "strategic transaction," and,
as exclusive financial advisor to the Company, to assist the Company, on a best-
efforts basis, in analyzing, structuring, negotiating and effecting potential
"strategic transactions" on terms and conditions satisfactory to the Company.

The Company has recently entered into an amendment to a business services
contract between Insynq-WA and Consulting & Strategy International, LLC ("CSI"),
an unrelated third party.  Under the terms of the amended agreement, amended on
July 31, 2000, CSI has provided, and agreed to continue to provide, for the
duration of the agreement, business consulting services to the Company.  In
consideration of such services, the Company has granted to CSI, options to
purchase a total of 600,000 shares, at a price of $1.00 per share, and warrants
to purchase up to a total of 2,000,000 shares, exercisable at any time after
November 1, 2000 and before February 20, 2003, in increments of 500,000 shares,
at exercise prices of $1.25, $1.50, $2.00 and $2.25.  In addition, the Company
has agreed to pay to CSI a monthly retainer of $2,500, increasing to $5,000 per
month after the Company's common stock bid price in the over-the-counter market
exceeds $3.00 per share for five (5) consecutive business days; $7,500 per month
at such time as the Company's common stock bid price exceeds $4.00 per share for
five consecutive business days; and $10,000 at such time as the Company's stock
bid price exceeds $5 per share for five consecutive business days, or until such
time as the Company and any of its subsidiaries have obtained a funding
commitment from any source for $4 million or more.

The Company has entered into a consulting agreement with Vijay Alimchandani
("VJ"), dated February 20, 2000, under the terms of which the Company has
engaged VJ to provide to the Company general consulting services, including
strategic planning, the identification of possible strategic alliances with
software vendors, the evaluation and development of cooperative alliances, and
related activities. The agreement is for an initial term of twelve months, and
is automatically renewable for successive one-year terms unless terminated by
either party prior to the end of a term. The Company has agreed to reimburse VJ
for all travel and entertainment and reasonable expenses related to his
consulting services, and to pay VJ a consulting fee of $5,000 per month,
increasing to $7,000 per month as such time as the Company has secured $2
million in equity financing, and to $10,000 per months at such time as the
Company has secured an additional $10 million in equity financing. In addition,
the Company has granted options to VJ, as follows: (a) 500,000 shares,
exercisable at any time prior to February 21, 2005, at a price of $0.25 per
share; and (b) 400,000 shares, exercisable one year from the beginning date of
the contract, for a period of five years, at an exercise price of $.50 per
share. The Company has also agreed to grant to VJ (a) an

                                      F-19
<PAGE>

                             XCEL MANAGEMENT, INC.
                         NOTES TO FINANCIAL STATEMENTS

additional option, entitling him to purchase a total of 180,000 shares for a
five year period beginning at the end of 24 months from the date of the
agreement, if such agreement is extended by the Company, at price of $.75 per
share; and (b) bonus options of between 50,000 to 100,000 shares, to be granted
at the discretion of the board of directors based on the performance of VJ, at
an exercise price of not more than $1.50 per share. The Company has granted to
VJ "piggyback" registration rights in connection with the shares under options,
pursuant to which the Company has agreed to include such shares in a Form S-8
registration statement to register the initial 900,000 shares under option
described above.

The Company has assumed the obligation of Insynq-WA under a financial public
relations consulting agreement with One Click Investments, LLC ("One Click"), a
Washington state limited liability company of which Eric Estoos, a shareholder
of the Company, is a principal.  Under the terms of the agreement with One
Click, the Company has agreed to engage One Click to provide various financial
public relations services.  The Company has agreed to compensate One Click for
its services at the rate of $8,000 per month during the term of the agreement
(through August 19, 2000, which is automatically renewable for six additional
months unless terminated by either party in writing), to reimburse One Click for
all reasonable expenses in connection with the agreement, and to pay One Click a
fee of 10% of all funding obtained by One Click for the Company, to the extent
permitted by law. The Company also issued One Click 700,000 restricted shares of
common stock and granted One Click warrants to purchase a total of 1,500,000
shares of common stock, exercisable at any time after December 31, 2000, and
prior to December 31, 2003, in one-third increments of 500,000 shares, at
exercise prices of $2.00, $4.00 and $7.50 per share. One Click has executed a
voting proxy in favor of John Gorst, Chief Executive Officer, with respect to
the restricted shares.

Note 18 - Contingencies
-------

From time to time the Company is a defendant or plaintiff in litigation arising
in the ordinary course of business.  To date, other than the litigation outlined
below, no litigation has had a material effect on the Company, and the Company
is not a party to any material litigation.

On August 14, 2000, Kathleen McHenry ("McHenry"), the widow of a former
principal and shareholder of Insynq-WA, filed a lawsuit in the Superior Court of
Washington against the Company, Insynq-WA, M. Carroll Benton, the Company's
Chief Administrative Officer, Secretary, and Treasurer, and Mr. John Gorst, the
Company's President, Chief Executive Officer, and Chairman of the Board,
alleging that the defendants attempted to defraud her out of the shares issued
to her deceased husband during his tenure with Insynq-WA.  In May 1999, Mr.
Gorst and Ms. McHenry entered into an agreement whereby Ms. McHenry sold to Mr.
Gorst 2,500,000 shares of Insynq-WA left to her after her husband's death.  The
lawsuit alleges that both Mr. Gorst and Insynq-WA did not perform under the
terms of the agreement, and seeks a rescission of that agreement, a declaration
from the court that the agreement is unenforceable, and damages in an
unspecified amount.  Management does not consider the contingency to be probable
or quantifiable, and therefore has not accrued an amount on the Company's
financial statements.

The Company is currently in negotiations with Mr. Donald L. Manzano, the
Company's former President and Chief Operating Officer, regarding the
termination of his employment contract, and what, if any additional compensation
shall be awarded him.  Management does not consider the contingency to be
significant in order to be accrued as a liability on the Company's financial
statements.

The Company's pending lawsuits involve complex questions of fact and law and
could require the expenditure of significant costs and diversion of resources to
defend.  Although management believes the outcome of the Company's outstanding
legal proceedings, claims and litigation will not have a material adverse effect
on the Company's business, results of operations or financial position, the
results of litigation are inherently uncertain.  The Company is unable to make
an estimate of the range of possible loss from outstanding litigation, except as
noted, and no amounts have been provided for such matters in the financial
statements.

                                      F-20
<PAGE>

                             XCEL MANAGEMENT, INC.
                         NOTES TO FINANCIAL STATEMENTS

Note 19 - Supplementary Cash Flow Information
-------

The following non-cash transactions have been appropriately excluded from the
statement of cash flows:

The Company has entered into an agreement with Horizon Holdings I, LLC to
provide facilities management services at its location in Tacoma, Washington at
the Tacoma Technology Center.  The agreement to provide collaborative management
services is effective July 1, 1999 for a monthly base fee of $3,000 and will
continue through December 31, 2000.  The Company will have the use of this
location for its data utility equipment in exchange for managing the facilities.
The rental value of the office space is offset with an appropriate charge to
service income.  Future minimum rental payments over the life of the agreement
total $21,000.

Note 20 - Retained Earnings
-------

The amount of deferred tax asset and liability estimates as of May 31, 2000 and
1999 have been reflected in the prior year retained earnings balance for
presentation purposes to conform with the Statements on Financial Accounting
Standards and generally accepted accounting principles.

Note 21 - Year 2000 Issue
-------

The Year 2000 issue arises because many computerized systems use two digits
rather than four to identify a year.  Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed.  In addition, similar problems may arise in
systems that use certain dates in 1999 to represent something other than a date.
The effects of the Year 2000 issue may be experienced before, on, or after
January 1, 2000, and if not addressed, the impact on operations and financial
reporting may range from minor errors to significant system failure which could
affect an entity's ability to conduct normal business operations.  It is not
possible to be certain that all aspects of the Year 2000 issue affecting the
entity, including those related to the efforts of customers, suppliers, or other
third parties will be fully resolved.

Note 22 - Asset Purchase Agreement
-------

On January 26, 2000, the Company entered into an Asset Purchase Agreement with
Insynq-WA. The terms of the Asset Purchase Agreement were substantially
completed on February 18, 2000. Under the terms of the Asset Purchase Agreement,
the Company acquired substantially all of the assets of Insynq-WA, and assumed
substantially all of the obligations of Insynq-WA, in exchange for the issuance
by the Company of a total of 7,604,050 shares of restricted common stock of the
Company, to the Insynq-WA shareholders pro rata in a liquidating distribution.
As a result of the transaction, the Company had a total of approximately
9,404,050 shares issued and outstanding, of which the former Insynq-WA
shareholders held 7,604,050 shares, or approximately 81%. In connection with the
Asset Purchase Agreement, Insynq-WA obtained approval of the sale of its assets
by its shareholders at a duly called and convened shareholders' meeting.

As a result of the Asset Purchase Agreement, the Company has acquired
essentially all of the assets, tangible and intangible, of Insynq-WA, and has
become engaged in Insynq-WA's business, described below. These assets include
computer hardware and software, related equipment, furniture and fixtures,
proprietary technology developed by Insynq-WA, all contractual rights including
capitalized lease equipment and other leasehold rights, trade names and
trademarks and all client lists and marketing data and materials, cash and cash
equivalents, accounts receivable, inventory, work in progress and related
assets. The asset considered most valuable by Insynq-WA and the Company in
completing the Asset Purchase Agreement, is Insynq-WA's proprietary data utility
services system that was designed to offer enhanced technological computer
processing and communication capabilities.

In addition, the Company has agreed to assume all equipment leases, leasehold
obligations covering office space utilized by Insynq-WA, all consulting
contracts, and all other contract obligations. Finally, at the time of
completion of the Insynq-WA asset acquisition, Insynq-WA had outstanding to
various shareholders, a number of warrants and options, entitling the holders to
purchase shares up to a total of 3,679,196 shares of

                                      F-21
<PAGE>

                             XCEL MANAGEMENT, INC.
                         NOTES TO FINANCIAL STATEMENTS

restricted common stock of Insynq-WA, which warrants and options have been
converted into options and warrants to purchase a total of approximately
3,679,196 shares of the Company's common stock, at prices of between $.50 to
$15.00 per share. The exercise of all or any portion of these outstanding
options and warrants would have the effect of substantially diluting the
ownership of the present shareholders in the Company.

Note 23 - Subsequent Events
-------

(All share amounts and prices have been adjusted to reflect the two-for-one
stock split affected by the Company on August 3, 2000.)

On or about June 15, 2000, the Company entered into a non-exclusive financial
advisory agreement with Sunstate Equity Trading, Inc. ("Sunstate"), a Florida
corporation, which is a member of the NASD, under the terms of which the Company
has engaged Sunstate, on a non-exclusive basis, to provide financial advisory
services and advice.  The agreement is for an initial term of one year, and may
be extended for additional terms as agreed upon by the parties.  In
consideration of the services undertaken by Sunstate, the Company has issued to
Sunstate a total of 250,000 shares of restricted common stock, and agreed to
reimburse Sunstate for all out-of-pocket expenses incurred in providing services
under the agreement.

On or about June 16, 2000, the Company entered into a private financing
transaction with two investors, Travin Partners, L.L.L.P. ("TPL") and TCA
Investments, Inc. ("TII"), under the terms of which TPL and TII each loaned to
the Company the sum of $325,000 (the "loans"), and were sold convertible
debentures and granted warrants, described below.  The loans are payable
pursuant to the terms of a convertible debenture (the "debenture"), providing
for full payment on or before June 16, 2002 (the "due date"), with interest at
the current Bank of America prime rate, plus 1/2%.  All accrued interest under
each debenture is payable only in shares of the Company's common stock, at a
price of $.71 per share.  The debentures are convertible in increments of no
less than $10,000, at any time after November 1, 2000 and before the close of
business on the due date, into shares of common stock of the Company, at a price
of $.71 per share, or a total of 457,746 shares each for TPL and TII.  In
addition to the debentures, TPL and TII were granted warrants entitling each of
them to purchase a total of 457,746 shares of the Company's common stock at a
price of $1.00 per share, at any time after November 1, 2000 and before June 15,
2005.  The number of shares and exercise or conversion prices of the shares
exercisable under the debentures and warrants held by TPL and TII, are subject
to usual adjustments in the event of stock dividends, merger, consolidations,
stock splits or distributions or similar events.  The Company has agreed to
file, on or before September 15, 2000, a registration statement which includes
the shares issuable under conversion of the debentures and upon exercise of the
warrants held by TPL and TII (the "underlying shares"), at TPL's and TII's
request, and to cause such registration statement to become effective as soon as
practicable.  In addition, the Company has agreed to include the underlying
shares, on TPL's and TII's request, in any registration filed by the Company
(exclusive of a registration relating to sales in employee benefit plans, a Rule
145 transaction, or the sale of debt or convertible debt instruments, or a
registration statement which does not contain substantially similar
information), subject to the holder's agreement to enter into appropriate
underwriting agreement(s), and other requirements.  The subscription agreements
for the purchase of the debentures and warrants held by TPL and TII provide
that, on a one-time basis on the date the Company sells additional securities to
or through an institutional investor, and only if the total market valuation of
the Company is less than $30 million, TPL and TII will each be entitled to
receive shares issuable upon conversion of debentures and upon exercise of
warrants, equal to the number of shares issuable upon such exercise of warrants
and conversion of debentures, multiplied by a number, the numerator of which is
$30 million and the denominator of which is the actual total market valuation of
the Company.

On or about July 10, 2000, the Company entered into a non-exclusive financial
consulting agreement with Union Atlantic LC and Union Atlantic Capital LC to
provide financial consulting services to the Company in the form of: (i)
evaluating the Company's capital requirements for funding growth and expansion
of the Company's operations; (ii) advising the Company as to alternative modes
and sources of financing; (iii) analyzing the impact of business decisions,
policies, and practices on the value of the Company's business and securities;
and (iv) bringing to the attention of the Company possible business
opportunities and

                                      F-22
<PAGE>

                             XCEL MANAGEMENT, INC.
                         NOTES TO FINANCIAL STATEMENTS

evaluating business opportunities generally, whether or not such opportunities
are oriented by United Atlantic or others. Pursuant to the terms of the Union
Atlantic agreement, the Company has agreed to pay to Union Atlantic a cash fee
equal to ten percent (10%) of the aggregate purchase price of the securities
purchased by or through any investor or intermediary identified to the Company
by Union Atlantic. In addition, upon the closing of each transaction
contemplated in the Union Atlantic agreement, the Company has agreed to issue to
Union Atlantic through escrow a warrant entitling Union Atlantic or its
designees to purchase 50,000 shares per one million dollars ($l,000,000) raised,
subject to adjustment of the Company's common stock. The warrant will be
immediately exercisable for a four (4) year period and shall have unlimited
piggyback registration rights.

On July 17, 2000, the Company entered into a private financing transaction with
two investors, International Fluid Dynamics ("IFD") and Garnier Holdings, Inc.
("Garnier"), under the terms of which IFD and Garnier each loaned the Company
the sum of $127,500, or a total of $255,000, (the "loans"), and were granted
warrants described below.  The Loans are payable pursuant to the terms of a
promissory note (the "Note"), providing for full payment on or before August 17,
2000 (the "Due Date"), with interest compounded annually at the Chase Manhattan
Bank, NA rate quoted as its prime.  The warrants entitle each of IFD and Garnier
to purchase a total of 325,000 shares of common stock at a price of $2.00 per
share at any time before July 17, 2005.  If the Notes are not paid by 5:00pm CST
on August 17, 2000, the exercise price will decrease by half, or $1.00, and on
and after each additional ten (10) day period that the Notes remain unpaid, the
exercise price will decrease by an additional ten percent (10%).  The due date
of the Notes has been extended to 5:00pm CST on October 1, 2000, without
prejudice to the Company's rights to reduce the exercise price.  Both IFD and
Garnier were granted "piggyback" registration rights with respect to the shares
underlying the warrants.

On August 2, 2000, the Company entered into a private financing transaction with
five foreign investors (the "Investors"), under the terms of which the Investors
purchased an aggregate of 200,000 shares of common shares at a price of $0.60
per share pursuant to Subscription Agreement (the "Agreements").  The Company
issued these securities under an exemption provided by Rule 903 of Regulation S
under the Act.

On August 4, 2000, the Company sold a total of 200,000 shares of common stock to
One Click Investments, LLC, a Washington corporation ("One Click"), at a price
of $0.60 per share.  In connection with this sale, One Click was granted
warrants to purchase an additional 200,000 shares of common stock, exercisable
at any time for a five (5) year period, at a price of $2.00 per share.  In
connection with this transaction, One Click was granted registration rights
under a Registration Rights Agreement (the "Agreement") granting One Click (a)
one demand registration right, on or after November 1, 2000, requiring the
Company to file a registration statement upon request and (b) "piggyback"
registration rights. The Company issued these securities under an exemption
provided by Rule 506 of Regulation D under the Act.

On August 11, 2000, the Company entered into an agreement for the sale of
1,100,000 shares of common stock to Tricorp Financial, Inc., a Delaware
corporation ("Tricorp"), at a price of $1.50 per share.  An additional 1,100,000
shares will be issued after the shares are registered for resale.  The shares
have not  yet been paid for, but the Company has been assured that payment will
be received no later than September 15, 2000.  In connection with this sale,
Tricorp was granted registrations rights obligating the Company to file or have
declared effective a registration statement registering the shares within 120
days of the date of the transaction. The Company issued these securities under
an exemption provided by Rule 506 of Regulation D under the Act.

On August 24, 2000, the Company entered into a private financing transaction
with certain foreign investors (the "Investors"), under the terms of which the
Investors purchased an aggregate of 80,000 of common shares  at a price of $0.50
per share pursuant to Subscription Agreements (the "Agreements"). The Company
issued these securities under an exemption provided by Rule 903 of Regulation S
under the Act.

On September 11, 2000, the Company entered into a private financing transaction
with two investors, Travin Partners, L.L.L.P. ("TPL") and TCA Investments, Inc.
("TII"), under the terms of which TPL and TII each loaned us the sum of
$125,000, or a total of $250,000, (the "loans"), and were sold convertible

                                      F-23
<PAGE>

                             XCEL MANAGEMENT, INC.
                         NOTES TO FINANCIAL STATEMENTS

debentures and granted warrants, described below.  The loans are payable
pursuant to the terms of identical convertible debentures (each, a "Debenture"),
providing for full payment on or before October 11, 2000 (the "Due Date"), with
interest at the current Bank of America prime rate, plus  1/2%.  All accrued
interest under each Debenture is payable only in shares of common stock at a
price of (a) $1.00 per share or (b) sixty percent (60%) of the average of the
bid price, whichever is less on the date of conversion.  The Debentures are
convertible in increments of no less than $10,000, at any time after September
11, 2000 and before the close of business on the due date  for a total of
125,000 shares each for TPL and TII.  In addition to the Debentures, TPL and TII
were granted warrants entitling each of them to purchase a total of 250,000
shares of common stock at a price of $1.00 per share, at any time after
September 11, 2000 and before September 11, 2005.  The Company agreed to file,
on or before September 25, 2000, a registration statement which includes the
shares issuable under conversion of the Debentures and upon exercise of the
warrants held by TPL and TII (the "Underlying Shares"), at TPL's and TII's
request, and to cause such registration statement to become effective as soon as
practicable.  In addition, the Company agreed to include the Underlying Shares,
on TPL's and TII's request, in any registration it files (exclusive of a
registration relating to sales in employee benefit plans, a Rule 145
transaction, or the sale of debt or convertible debt instruments, or a
registration statement which does not contain substantially similar
information), subject to the holder's agreement to enter into appropriate
underwriting agreement(s), and other requirements. The Company issued these
securities under an exemption provided by Rule 506 of Regulation D under the
Act.


On August 3, 2000, the Company held a special meeting of the shareholders and
unanimously voted to adopt the following:

a)  REINCORPORATION IN DELAWARE

Changing the state of incorporation of the Company from Utah to Delaware.  In
order to accomplish the re-incorporation in accordance with the laws of the
states of Utah and Delaware, the Company has merged with and into a wholly owned
subsidiary, Insynq, Inc., formed under the laws of the state of Delaware
(hereinafter "Insynq"), pursuant to the terms of a Plan of Merger.  Under the
terms of the merger, Insynq is the surviving corporation. The Certificate of
Incorporation and Bylaws of Insynq will be the governing instruments of the
surviving corporation.

Through the merger, and in connection with the recapitalization described under
"RECAPITALIZATION," the shareholders of the Company received two shares of
Insynq common stock, par value $0.001 per share, in exchange for each share of
the Company's common stock, par value $0.001 per share, held immediately prior
to the merger.

The Certificate of Incorporation of Insynq increased the authorized number of
shares of common stock (the "Common Stock") to 100,000,000 shares, par value
$0.001 per share, and 10,000,000 shares of preferred stock, par value $0.001 per
share.  In addition, the Certificate of Incorporation of Insynq also authorizes
a total of 10,000,000 shares of Class A Common Stock (the "Class A Common
Stock"), par value $0.001 per share.

Change of Company's Name

In connection with the re-incorporation, the name of the Company is changed to
"Insynq, Inc.,".  The Company believes that changing the Company's name to
"Insynq, Inc." will be more reflective of the Company's activities.

Forward Stock Split

In connection with the re-incorporation of the Company in the state of Delaware,
the company has affected a forward split in the Company's issued and outstanding
$0.001 par value common stock, increasing the number of outstanding shares to
approximately 19,830,848 shares of common stock.  The issued and outstanding
shares of the Company's common stock immediately prior to the re-incorporation
in Delaware

                                      F-24
<PAGE>

                             XCEL MANAGEMENT, INC.
                         NOTES TO FINANCIAL STATEMENTS

will be effectively forward split through the merger on a two-for-one basis.
Through the merger with Insynq, the shareholders of the Company will receive two
shares of common stock, par value $0.001, of Insynq for each one share of the
Company's common stock.

b)  RECAPITALIZATION

The shareholders unanimously voted for the adoption of a plan of
recapitalization (the "Recapitalization") pursuant to which the issued and
outstanding shares of the Company's common stock, will be forward split, two-
for-one, so that holders of common stock will receive two shares of the
Company's $0.001 par value common stock ("Split Common Stock") for each share
now held.

The rights of existing shareholders will not be altered in connection with the
Recapitalization, and no shareholders will be eliminated as a result of the
Recapitalization.  The authorized number of shares of common stock will not
change, and the par value of the Company will remain at $0.001.  The
Recapitalization will have the effect of increasing the stated capital of the
Company by approximately $9,915 (which is the number of additional shares as a
result of the Recapitalization multiplied by the par value for such shares).

If the Recapitalization is approved by the shareholders, the 9,915,424 shares of
common stock outstanding immediately prior to the reorganization would be
converted to approximately 19,830,848 shares of common stock, and outstanding
options and warrants to purchase shares would be converted into options and
warrants entitling the holders to purchase twice as many shares upon exercise of
such options and warrants.

c)  ADOPTION OF INCENTIVE PLANS

The shareholders unanimously voted to adopt the Company's 2000 Long Term
Incentive Plan (the "Employee Plan") and its 2000 Executive Officer Long Term
Incentive Plan Option Plan (the "Executive Plan").  The two plans are
hereinafter referred to together as the "Incentive Plans."  The essential terms
of the Incentive Plans are substantially identical, except for two differences:

  1)  The Employee Plan is for executives, managers and key employees of the
Company.  The Executive Plan is for executive officers of the Company.

  2)  The Company has reserved a total of 8,337,650 shares of common stock for
issuance under the Employee Plan, and the Company has reserved a total of
2,700,000 shares of Class A Common Stock for issuance under the Executive Plan.
As described below, the Class A Common Stock carries preferred voting rights,
entitling the holder to three (3) voting shares for each share of common stock
held by a holder of Class A Common Stock.

d)  RATIFICATION OF ACCOUNTANT

The selection of G. Brad Beckstead, as independent auditor of the Company in
2000 was unanimously ratified.

                                      F-25
<PAGE>

EXHIBIT                             DESCRIPTION
NUMBER
--------------------------------------------------------------------------------
  2.1      Asset Purchase Agreement, dated as of February 18, 2000, by and among
           Xcel Management, Inc. and Insynq, Inc. (Incorporated by reference to
           Exhibit 2 to the Company's Current Report on Form 8-K, filed March
           3, 2000).

  3.1      Certificate of Incorporation of Insynq, Inc.  (Incorporated by
           reference to Exhibit 2 to the Company's Current Report on Form 8-K
           filed on August 17, 2000).

  3.2      By-Laws of Insynq, Inc. (Incorporated by reference to Exhibit 3 to
           the Registrant's Current Report on Form 8-K filed August 17, 2000).

  4.1*     Form of Specimen Common Stock Certificate.

  4.2*     Form of Warrant Agreement issued to Consulting & Strategy
           International, LLC on February 24, 2000, as amended.

  4.3*     Form of Warrant Agreement issued to International Fluid Dynamics,
           Inc. on May 17, 2000.

  4.4*     Form of Registration and Repurchase Agreement issued to International
           Fluid Dynamics, Inc. on May 17, 2000, as amended.

  4.5*     Form of Warrant Agreement issued to Plazacorp Investors Limited on
           April 26, 2000.

  4.6*     Form of Registration and Repurchase Agreement issued to Plazacorp
           Investors Limited on April 26, 2000, as amended.

  4.7*     Form of Warrant Agreement issued to Travin Partners, L.L.L.P.  on
           June 16, 2000.

  4.8*     Form of Convertible Debenture issued to Travin Partners, L.L.L.P.
           and TCA Investments, Inc. on June 16, 2000, as amended.

  4.9*     Form of Warrant Agreement issued to Garnier Holdings, Ltd. on July
           17, 2000.

  4.10*    Form of Promissory Note issued to Garnier Holdings, Ltd. on July 17,
           2000, as amended.

  4.11*    Form of Warrant Agreement issued to One Click Investments, LLC on
           August 4, 2000.

  4.12*    Form of Registration Rights Agreement issued to One Click
<PAGE>

           Investments, LLC on August 4, 2000.

  4.13*    Form of Warrant Agreement issued to Series A & B warrant holders.

  4.14*    Form of Warrant Agreement issued to One Click Investments, LLC on
           September 20, 1999, as amended.

  4.15*    Form of Warrant Agreement issued to Hewlett-Packard on June 1, 1999.

  10.1*    Insynq, Inc. 2000 Executive Long Term Incentive Plan.

  10.2*    Insynq, Inc. 2000 Long Term Incentive Plan.

  10.3*    Business Services Contract with Consulting & Strategy International,
           L.L.C. dated November 18, 1999, as amended.

  10.4*    Independent Marketing Consultant Agreement with Vijay Alimchandani
           dated February 20, 2000.

  10.5*    Financial Public Relations Consulting Agreement with One Click
           Investments, LLC dated September 20, 1999.

  10.6*    Form of Registration Rights Agreement upon the issuance of shares to
           investors under the bridge financing dated December 14, 1999.

  10.7*    Form of Registration Rights Agreement upon the issuance of shares to
           investors under the bridge financing dated January 24, 2000.

  10.8*    Engagement Letter with Rosenblum Partners, LLC dated July 7, 2000.

  10.9*    Employment Agreement, dated as of February 20, 2000, between John P.
           Gorst and Xcel Management, Inc.

  10.10*   Employment Agreement, dated as of February 20, 2000, between M.
           Carroll Benton and Xcel Management, Inc.

  10.11*   Employment Agreement dated as of February 20, 2000, between
<PAGE>

           James R. Leigh, III and Xcel Management, Inc.

  10.12*   Employment Agreement, dated as of February 20, 2000, between DJ
           Johnson and Xcel Management, Inc.

  10.13*   Employment Agreement, dated as of February 20, 2000, between Joanie
           C. Mann and Xcel Management, Inc.

  10.14*   Employment Agreement, dated as of February 20, 2000, between Jim
           Zachman and Xcel Management, Inc.

  10.15*   Employment Agreement, dated as of July 20, 1999, between Donald L.
           Manzano and Insynq, Inc. - Washington.

  10.16*   Employment Agreement, dated as of July 20, 1999, between Carey M.
           Holliday and Insynq, Inc.- Washington.

  10.17*   Employment Agreement, dated as of June 28 2000, between William G.
           Hargin and Xcel Management, Inc.

  10.18*   Employment Agreement, dated as of June 5, 2000, between Barbara D.
           Brown and Xcel Management, Inc.

  10.19*   Employment Agreement, dated as of June 16, 2000, between Christopher
           Todd and Xcel Management, Inc.

  10.20*   Employment Agreement Dated as of September 1, 2000, between InsynQ,
           Inc. and David S. Wolfe.

  10.21*   Lease Agreement dated January 3, 2000 between Howe/Horizon Holdings
           LLC and Insynq, Inc. for 1101 Broadway Plaza, Tacoma, Washington.

  10.22*   Sublease Agreement dated November 1, 1999 between Duane and Wendy
           Ashby, d/b/a/ Cargocare and Insynq Data Utilities for the property in
           the Seafirst Plaza Building in Tacoma, Washington, at the Northwest
           corner of South 9th and A Streets.

  10.23*   Lease Agreement dated March 21, 2000 between Walaire, Inc. and
           Insynq, Inc. for 3017 Douglas Boulevard, Suites 220 and 240,
           Roseville, California.

  10.24*   Master Licensing Agreement dated May 19, 2000 between Macola, Inc.
           and Insynq, Inc.

  10.25*   Citrix iLicense Agreement dated March 2, 2000 between Citrix and
           Insynq, Inc.

  10.26*   Citrix iBusiness Application Service Provider Agreement dated March

<PAGE>

           2, 2000 between Citrix and Insynq, Inc.

  10.27*   Master Licensing Agreement dated March 1, 2000 between Legacy
           Solutions and Insynq, Inc.

  10.28*   Master Licensing Agreement dated April 7, 2000 between Electronic
           Registry Systems, Inc. and Insynq, Inc.

  10.29*   Master Licensing Agreement dated March 22, 2000 between Viking
           Software Services, Inc. and Insynq, Inc.

  10.30*   Master Licensing Agreement dated June 1, 2000 between My Partner
           Online and Insynq, Inc.

  10.31*   Master Licensing Agreement dated April 24, 2000 between Veracicom and
           Insynq, Inc.

  10.32*   Master Licensing Agreement dated August 21, 2000 between
           CastaLink.com, Inc. and Insynq, Inc.

  10.33*   Application Hosting Agreement dated May 12, 2000 between Remedy
           Corporation and Insynq, Inc.

  10.34*   Novell Internet Commercial Service Provider Agreement dated July 24,
           2000 between Novell, Inc. and Insynq, Inc.

  10.35*   Agreement to Provide Collaborative Management Services dated July 15,
           1999 between Horizon Holdings I, LLC and Insynq, Inc.

  10.36*   Referral Partner Agreement dated July 29, 1999 between Global
           Crossing Telecommunications, Inc. and Insynq, Inc.

  16.1     Letter on Change in Certifying Accountant (Incorporated by reference
           to Exhibit 1 to the Company's Current Report on Form 8-K/A filed May
           23, 2000.

  23.1*    Consent of G. Brad Beckstead CPA for Financial Statements as of May
           31, 2000 and May 31, 1999.

  24.1*    Power of Attorney (included on the signature page of this Annual
           Report.

  27.1*    Financial Data Schedule.

-----------
* Filed herewith