Edgar Filing: PALWEB CORP

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SCHEDULE 14C INFORMATION

Information Statement Pursuant to Section 14(c)
of the Securities Exchange Act of 1934

Check the appropriate box:

[X] Preliminary Information Statement

[_] Confidential, for Use of the Commission Only
(as permitted by Rule 14c-5(d)(2))

[_] Definitive Information Statement

PALWEB CORPORATION
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(Name of Registrant as Specified in its Charter)

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[ ] Fee paid previously with preliminary materials.

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PALWEB CORPORATION
1607 WEST COMMERCE STREET
DALLAS, TEXAS 75208

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON APRIL 22, 2002

TO OUR SHAREHOLDERS:

The 2002 Annual Meeting of Shareholders of PalWeb Corporation (the "Company")
will be held at the Hyatt Regency Dallas located at 300 Reunion Blvd., Dallas,
Texas, on Monday, April 22, 2002, at 10:00 a.m., local time, for the following
purposes:

1. To elect six (6) directors to hold office until the next annual meeting of
the shareholders and until their respective successors shall have been
elected and qualified.

2. To approve the Stock Option Plan, as amended (the "Stock Plan"), previously
adopted by the Board of Directors.

3. To approve the merger of the Company with PalWeb Oklahoma Corporation, an
Oklahoma corporation, for the purpose of redomiciling the Company to the
State of Oklahoma and authorizing additional shares of common and preferred
stock and authorizing the Board of Directors to approve a reverse stock
split.

4. To transact such other business as may properly be brought before the
Annual Meeting or any adjournment thereof.

The foregoing items of business are more fully described in the Information
Statement accompanying this Notice. The Annual Meeting may be adjourned from
time to time, and, at any reconvened meeting, action with respect to the matters
specified in the notice may be taken without further notice to the shareholders,
unless required by applicable law or the Bylaws of the Company.

Shareholders of record of Common Stock and Convertible Preferred Stock at the
close of business on March 18, 2002, are entitled to notice of, and to vote at,
the Annual Meeting. A list of such shareholders will be available for
examination by any shareholder for any purpose germane to the Annual Meeting,
during normal business hours, at the principal executive office of the Company,
1607 West Commerce Street, Dallas, Texas 75208, for a period of ten days prior
to the Annual Meeting and at the Annual Meeting.

WE ARE NOT ASKING YOU FOR A PROXY, AND YOU ARE REQUESTED NOT TO SEND US A PROXY.

BY THE ORDER OF THE BOARD OF DIRECTORS

___________________________
Julie Barksdale, Secretary

DATED: ______________, 2002

PALWEB CORPORATION

INFORMATION STATEMENT
FOR
ANNUAL MEETING OF SHAREHOLDERS

TO BE HELD ON APRIL 22, 2002

The following information is furnished in connection with the 2002 Annual
Meeting of Shareholders ("Annual Meeting") of PalWeb Corporation, a Delaware
corporation (the "Company"), which will be held on Monday, April 22, 2002, at
10:00 a.m., local time, at the Hyatt Regency Dallas located at 300 Reunion
Blvd., Dallas, Texas 75207, and at any adjournment or adjournments thereof. This
Information Statement will be mailed on or about March 25, 2002, to the holders
of record of the Company's Common Stock, par value $0.10 ("Common Stock"), and
Convertible Preferred Stock, par value $0.00001 ("Convertible Preferred Stock")
as of the record date.

SHAREHOLDERS ENTITLED TO VOTE

The record date for determining holders of Common Stock and Convertible
Preferred Stock entitled to notice of, and to vote at, the Annual Meeting has
been fixed as the close of business on March 18, 2002 (the "Record Date"). On
that date, there were [233,423,244] shares of Common Stock and [1,130,000]
shares of Convertible Preferred Stock outstanding and entitled to vote at the
Annual Meeting.

With respect to each matter presented to the holders of Common Stock and
Convertible Preferred Stock at the Annual Meeting, the holders of record of each
outstanding share of Common Stock on the Record Date will be entitled to one
vote per share, and the holders of record of each outstanding share of
Convertible Preferred Stock on the Record Date will be entitled to one vote per
share because, as of the Record Date, each share of Convertible Preferred Stock
is convertible into one share of Common Stock.

NO SOLICITATION OF PROXIES

WE ARE NOT ASKING YOU FOR A PROXY, AND YOU ARE REQUESTED NOT TO SEND US A
PROXY.

ANNUAL REPORT

Certain financial information about the Company required by the Securities
and Exchange Commission ("SEC") to be distributed to shareholders as an annual
report is set forth in Appendix A. The financial statements in Appendix A were
originally filed with the SEC on September 13, 2001, as part of the Company's
Annual Report on Form 10-KSB for the fiscal year ended May 31, 2001 (the "Form
10-KSB"), and the other information contained in Appendix A is substantially
similar to disclosures made in the Form 10-KSB.

The Company also filed with the SEC Quarterly Reports on Form 10-QSB for the
quarterly periods ending August 31, 2001, and November 30, 2001. Such Forms
10-QSB were filed on October 15, 2001, and January 14, 2002, respectively.
Copies of such Forms 10-QSB and other reports filed by the Company may be found
at the SEC's website located at http://www.sec.gov. You are encouraged to review
the financial information set forth below together with subsequent information
filed by the Company with the SEC and other publicly available information.

CHANGE IN CONTROL OF THE COMPANY

On May 8, 2001, the Company announced that it had signed a letter of intent
(the "Letter of Intent") for a private placement of 500,000 shares of
convertible preferred stock and warrants to purchase 150,000,000 shares of
common stock for a total of $5,500,000. The letter of intent was with Westgate
Capital Company, L.L.C., a private limited liability company of which Warren
Kruger, Paul A. Kruger's brother, is a manager ("WCC"), and Hidalgo Trading
Company, LC ("Hildalgo"), which is 100% owned by Paul A. Kruger.

The financing provided by Yorktown Management and Financial Services, LLC
("Yorktown"), which is principally owned by Warren F. Kruger, Paul A. Kruger's
brother, described below under the heading "Related Party Transactions" was
provided in partial reliance on the Letter of Intent. Subsequent to the signing
of the Letter of Intent, WCC required as an additional condition to its equity
investment that the Company acquire the land and building in which its
manufacturing facilities are located (the "Building") from Onward, LLC, an
entity that is 100% owned by Paul A. Kruger ("Onward"), subject to existing debt
in exchange for additional shares of convertible preferred stock and additional
warrants on the same terms as described in the Letter of Intent. Hildalgo and
Onward are sometimes referred to herein as the "Paul A. Kruger Controlled
Entities."

On January 4, 2002, the Company entered into a Securities Purchase
Agreement which was subsequently amended on January [__], 2002 (the "Purchase
Agreement") with Hildalgo, Onward and Westgate Investments, L.P., an Oklahoma
limited partnership ("Westgate") (collectively, the "Purchasers"). Pursuant to
the Purchase Agreement, the Company issued 750,000 shares of Series 2001 12%
Cumulative Convertible Senior Preferred Stock ("2001 Preferred Stock") and
warrants to purchase up to 225,000,000 shares of Common Stock for $0.10 per
share ("Warrants") to Purchasers in exchange for total consideration of
$7,500,000. Hildalgo acquired 95,020 shares of 2001 Preferred Stock and Warrants
to purchase 28,506,660 shares of Common Stock in exchange for the conversion of
$950,200 of existing indebtedness owed to Hildalgo. Onward acquired 81,282
shares of 2001 Preferred Stock and Warrants to purchase 24,384,000 shares of
Common Stock in exchange for the conversion of $276,082 of existing indebtedness
owed to Onward and $536,745 of equity in the Building, based on an agreed value
of $1,350,000, less indebtedness assumed by the Company of $813,255. Westgate
acquired 573,698 shares of 2001 Preferred Stock and Warrants to purchase
172,109,340 Shares in Common Stock in exchange for $[522,683] in cash and the
conversion of $5,214,297 of existing indebtedness owed to Yorktown.

The terms of the 2001 Preferred Stock and Warrants are the same as those
announced in May of 2001 when the Letter of Intent was signed; however, the
total amount of 2001 Preferred Stock and Warrants offered was increased to
account for additional indebtedness that was incurred and the transfer of the
Building from Onward to the Company. Each share of the 2001 Preferred Stock has
a stated value of $10 per share and is convertible at any time into 350 shares
of Common Stock of the Company or a total of 262,500,000 shares, which is an
effective conversion price of $0.0286 per share. Holders of the 2001 Preferred
Stock are also entitled to cumulative dividends of 12% per annum, $1.20 per
share, or a total of $900,000. The Warrants are exercisable at a price of $0.10
per share for a period of four years, subject to acceleration of the expiration
date for three separate 25% tranches of the total Warrants, if the Company's
Common Stock trades at prices of $0.15, $0.20 and $0.25 per share, respectively.

The ability to convert the 2001 Preferred Stock and exercise the Warrants
depends on the Company amending its capital structure to authorize additional
shares of Common Stock and reduce the par value of its Common Stock. At the 2002
Annual Meeting, the Company intends to submit to its shareholders a proposal
whereby the Company will merge with PalWeb Oklahoma Corporation, an Oklahoma
corporation, and become redomiciled in Oklahoma, and in connection with such
merger, the surviving entity will have sufficient authorized shares of Common
Stock, par value $0.0001, to be issued upon the conversion of the 2001 Preferred
Stock and the exercise of the Warrants. See "Approval of the Merger of the
Company with Palweb Oklahoma Corporation, an Oklahoma corporation, for the
Purpose of Redomiciling the Company to the State Of Oklahoma," beginning on page
[__].

In connection with the Purchase Agreement, the Company and Westgate entered
into a Shareholders and Voting Agreement dated January 4, 2002, as amended on
January [__], 2002 (the "Shareholders Agreement"), whereby the parties agreed,
among other things, that Westgate shall have the right to:

o designate at least two-thirds of the members of the Board of Directors of
the Company for as long as Westgate holds at least 5% of the 2001 Preferred
Stock or Common Stock of the Company;

o designate one of the Westgate designees for appointment on every committee
of the Board of Directors of the Company for as long as Westgate continues
to have one or more designees serving on the Board of Directors of the
Company; and

o routinely consult with, and advise, the management of the Company regarding
the Company's operations.

In addition, the Shareholders Agreement provides that the following actions may
not be taken without the prior approval of 60% of the members of the Board of
Directors of the Company:

o amend the Certificate of Incorporation or Bylaws of the Company;

o consolidate with, or merge with or into, any entity, except for certain
mergers of wholly owned subsidiaries of the Company with or into the
Company;

o make certain sales, leases, transfers or dispositions of the properties or
assets of the Company;

o change the general nature of the business of the Company;

o make certain acquisitions or issuances of shares of the Company;

o enter into certain commitments or obligations for the grant of options,
warrants or rights to acquire or issue shares of the Company;

o incur any funded indebtedness, except for indebtedness incurred as
contemplated by an annual budget, incurred under the Company's primary
credit facility, or in an aggregate amount not exceeding $250,000;

o make any investment by the Company in any entity other than a wholly-owned
subsidiary in an amount exceeding $100,000;

o pay any dividends on shares of Common Stock of the Company;

o file any petition seeking to reorganize the Company pursuant to, or to
obtain relief under, any federal or state bankruptcy or insolvency law;

o dissolve, liquidate or wind-up of the affairs of the Company;

o appoint or dismiss the chief executive officer, the president, the chief
operating officer, the chief financial officer or any senior vice president
of the Company; or

o make any capital expenditures not approved in an annual budget in an
aggregate amount exceeding $250,000 in any fiscal year.

Westgate's voting and other rights in connection with the Purchase
Agreement and Shareholders Agreement constitute a change in control of the
Company. Westgate's general partner is WCC, whose managers are Warren F. Kruger,
Paul A. Kruger's brother, and William W. Pritchard. By virtue of their authority
to control Westgate, WCC, Warren F. Kruger and William W. Pritchard may be
deemed to be in control of the Company.

Based on the number of shares of Common Stock and Convertible Preferred
Stock outstanding as of the Record Date, and prior to considering the Common
Stock issuable upon the exercise of the Warrants and the conversion of the 2001
Preferred Stock, Paul A. Kruger, or his affiliated entities, beneficially own
30.5% of the Common Stock. Likewise, Warren F. Kruger, or his affiliated
entities, including Westgate and WCC, beneficially own 9.5% of the Common Stock.
Upon the redomiciliation merger described above, Paul A. Kruger and his

affiliated entities will have obtained in connection with the Purchase Agreement
the right to acquire approximately 15.7% of the fully-diluted outstanding common
shares of the Company (the "Fully-Diluted Shares"), assuming conversion of all
shares of Convertible Preferred Stock and 2001 Preferred Stock and exercise of
all Warrants and options outstanding on the Record Date. Likewise, Westgate,
WCC, Warren F. Kruger and William W. Pritchard will have the right to obtain or
acquire approximately 51% of the Fully-Diluted Shares. Consequently, Paul A.
Kruger and Warren F. Kruger, or their affiliated entities, beneficially own
approximately 25.6% and 54% of the Fully-Diluted Shares, respectively.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

As of the Record Date, the Company had [233,423,244] shares of Common
Stock, [1,130,000] shares of Convertible Preferred Stock, and 750,000 shares of
2001 Preferred Stock outstanding. The Convertible Preferred Stock is considered
the equivalent of Common Stock since it is voting and convertible into Common
Stock on a share for share basis. Each share of the 2001 Preferred Stock is
convertible into 350 shares of Common Stock. As further described above under
the section titled "Change in Control," Westgate's voting and other rights in
connection with the Purchase Agreement and Shareholders Agreement constitute a
change in control of the Company. Consequently, pursuant to Rule 13d-3(d)(1)(i)
of the Exchange Act, the Purchasers are deemed to own beneficially all of the
Common Stock issuable upon the exercise of the Warrants and the conversion of
the 2001 Preferred Stock.

The following table sets forth certain information regarding the shares of
Common Stock beneficially owned as of the Record Date, by (i) each person known
by the Company to own beneficially five percent (5%) or more of the outstanding
Common Stock, (ii) each director, nominee and executive officer, and (iii) all
directors and executive officers as a group.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF
BENEFICIAL OWNER BENEFICIAL OWNER(1) CLASS(2)
------------------- -------------------- ----------

Paul A. Kruger 186,976,360(3) 53.2%
2500 South McGee, Ste. 147
Norman, OK 73072

Hildalgo Trading Company, LC 62,993,000(4) 21.3%
2500 South McGee
Norman, OK 73072

Onward, L.L.C. 52,833,360(5) 18.4%
2500 South McGee
Norman, OK 73072

Westgate Investments, L.P. 379,903,640(6) 62.5%
320 S. Boston, Suite 400
Tulsa, OK 74103-3708

Westgate Capital Company, LLC 379,903,640(7) 62.5%
320 S. Boston, Suite 400
Tulsa, OK 74103-3708

Warren F. Kruger 395,083,224(8) 65%
1613 East 15th Street
Tulsa, OK 74120

William W. Pritchard 379,931,640(9) 62.5%
320 S. Boston, Suite 400
Tulsa, OK 74103-3708

Bill J. English, Trustee 34,650,000(10) 14.8%
114 E Main
Norman, OK 73072

Lyle W. Miller, Director, 9,000,000(11) 3.8%
Executive Vice President of
Marketing and Sales, and
Nominee for Director
2566 Timber Meadow Court
East Lansing, MI 48823

Bradley C. Shoup, 0 0.0%
Nominee for Director
3309 Westminster Avenue
Dallas, TX 85205

Bryan R. Kirchmer, 100,000 0.04%
Nominee for Director
601 S. Boulder Ave., Suite 105
Tulsa, OK 74119

All Current Directors &
Officers as a Group (6 persons) 591,187,584(12) 81.3%

(1) The number of shares beneficially owned by each person is calculated in
accordance with the rules of the Securities Exchange Commission, which
provide that person shall be deemed to be a beneficial owner of a security
if that person has the right to acquire beneficial ownership of the
security within 60 days through options, warrants, or the conversion of a
security; provided, however, if such person acquires any such rights in
connection with or as a participant in any transaction with the effect of
changing or influencing control of the issuer, immediately upon such
acquisition, the holder will be deemed to be the beneficial owner of the
securities. The 2001 Preferred Stock and the Warrants were issued in
connection with a transaction that involved a change in control of the
Company. Consequently, the number of shares the Common stock beneficially
owned by each person includes Common Stock and Convertible Preferred Stock
outstanding as of the Record Date (the Convertible Preferred Stock is
essentially equivalent to the Common Stock), the number of shares of Common
Stock each person has the right to acquire upon the conversion of 2001
Preferred Stock, and the number of shares of Common Stock each person has
the right to acquire upon the exercise of Warrants or options.

(2) The percentage ownership for each person is calculated in accordance with
the rules of the Securities Exchange Commission, which provide that any
shares a person is deemed to beneficially own by virtue of having a right
to acquire shares upon the conversion of warrants, options or other rights,
or upon the conversion of preferred stock or other rights are considered
outstanding solely for purposes of calculating such persons percentage
ownership. The percentage ownership is also based on the combined Common
Stock and Convertible Preferred Stock outstanding as of the Record Date of
[234,553,244] shares, as the Convertible Preferred Stock is essentially
equivalent to the Common Stock.

(3) The total includes: (i) 56,850,000 shares held of record by Paul A. Kruger,
(ii) 2,500,000 shares that Paul A. Kruger has the right to acquire upon the
exercise of options, and (iii) shares held of record by Hildalgo and shares
which Hildalgo and Onward have the right to acquire, upon conversion of
2001 Preferred Stock, or exercise of warrants as set forth in the table. By
virtue of Paul A. Kruger's ownership of and control over Hildalgo and
Onward, Paul A. Kruger is deemed to beneficially own the shares of Common
Stock beneficially owned by Hildalgo and Onward. The total also includes
2,500,000 shares of Common Stock that Mr. Kruger holds on behalf of his
minor children, of which he only holds the power to vote, and 9,300,000
shares of Common Stock of which Mr. Kruger only holds the power to vote
pursuant to a proxy granted by Michael John. However, as of July 31, 2000,
Michael John publicly claimed that he only owns 240,000 shares of Common
Stock.

(4) The total includes 1,230,000 shares held of record by Hildalgo and
61,763,000 shares that Hildalgo has the right to acquire upon the
conversion of 2001 Preferred Stock and exercise of Warrants. By virtue of
his ownership of and control over Hildalgo, these shares are also included
in the number of shares beneficially owned by Paul A. Kruger.

(5) The total includes 52,833,360 shares that Onward has the right to acquire
upon the conversion of 2001 Preferred Stock and exercise of Warrants. By
virtue of his ownership of and control over Onward, these shares are also
included in the number of shares beneficially owned by Paul A. Kruger.

(6) The total includes: (i) 7,000,000 shares held of record by Westgate, (ii)
200,794,300 shares that Westgate has the right to acquire upon the
conversion of 2001 Preferred Stock, and (iii) 172,109,340 shares Westgate
has the right to acquire upon the exercise of Warrants. WCC is the general
partner of Westgate, and Warren F. Kruger and William W. Pritchard are the
sole members of WCC. By virtue of their ability to control Westgate, WCC,
Warren F. Pritchard and William W. Pritchard are also deemed to
beneficially own the shares beneficially owned by Westgate.

(7) The total includes the shares owned by Westgate as further described in
footnote (6). By virtue of its ability to control Westgate, WCC is also
deemed to beneficially own the shares beneficially owned by Westgate.

(8) The total includes: (i) 13,729,584 shares held of record by Warren F.
Kruger, (ii) 950,000 shares held of record by Yorktown, and (iii) the
shares owned by Westgate as further described in footnote (6). WCC is the
general partner of Westgate, and Warren F. Kruger is one of the two members
of WCC. By virtue of his ability to control Westgate, Warren F. Kruger is
also deemed to beneficially own the shares beneficially owned by Westgate.
The total also includes 500,000 shares of Common Stock that Mr. Kruger
holds on behalf of his minor children, of which he only holds the power to
vote.

(9) The total includes 28,000 shares held of record by William W. Pritchard and
the shares owned by Westgate as further described in footnote (6). WCC is
the general partner of Westgate, and William W. Pritchard is one the two
members of WCC. By virtue of his ability to control Westgate, William W.
Pritchard is also deemed to beneficially own the shares beneficially owned
by Westgate.

(10) These shares are held by Bill J. English, as trustee, for the benefit of
the deposit holders of a subsidiary of the Company, Paceco Financial
Services, Inc. See "Related Party Transactions - Paceco Financial Services,
Inc."

(11) The total includes 6,500,000 shares held of record by Lyle W. Miller and
2,500,000 shares that Lyle W. Miller has the right to acquire upon the
exercise of options.

(12) The total includes: (i) 98,687,584 outstanding shares; (ii) 5,000,000
shares issuable upon exercise of options; (ii) 262,500,000 shares issuable
upon conversion of 2001 Preferred Stock; and (iv) 225,000,000 shares
issuable upon exercise of Warrants.

There are currently no plans for any arrangement or acquisition that would
change ownership of a controlling interest in the Common Stock of the Company.

PROPOSAL ONE

ELECTION OF DIRECTORS

The Bylaws of the Company provide that the number of directors of the
Company shall be not less than one (1) nor more than nine (9). The Board of
Directors of the Company proposes that the six (6) existing directors be
re-elected to serve as directors of the Company. Each nominee, if elected, will
hold office until the next annual meeting of shareholders and until his or her
successor is duly elected and qualified, or until his or her earlier death,
resignation or removal. Each nominee has agreed to serve if elected, and the
Company has no reason to believe that any nominee will be unable to serve.
Proxies cannot be voted for a greater number of nominees than the number of
nominees named herein.

As described more fully under the heading "Change in Control of the
Company" above, pursuant to the Shareholders Agreement, Westgate may designate
for nomination by management for election to the Board of Directors at least
two-thirds of the Board's members. In addition, the Company agreed to recommend
to the Company's shareholders the election of such Westgate designees and to
vote in favor of such designees all legally effective proxies received from
shareholders that authorize any officer or director, as proxy holder, to vote
for such designees or which grant to any officer or director the power to
exercise his or her discretion in voting in the election of directors.

NOMINEES

The nominees for the position of director of the Company are:

Paul A. Kruger
Lyle W. Miller
Warren F. Kruger
Bryan R. Kirchmer
Bradley C. Shoup
William W. Pritchard

Messrs. Warren Kruger, Kirchmer, Shoup and Pritchard are the nominees designated
by Westgate under the Shareholders Agreement.

The following is certain information relating to each nominee:

PAUL A. KRUGER
CHAIRMAN OF THE BOARD OF DIRECTORS AND PRESIDENT

Mr. Paul A. Kruger, age 47, earned a Bachelor of Business Administration
degree in accounting from Cameron University, Lawton, Oklahoma, and earned a
Juris Doctor degree from the University of Oklahoma City Law School. He has over
twenty-five years of experience in the financial services industry. In 1980, Mr.
Kruger co-founded MCM Group, Ltd. ("MCM Group"),

which owned and operated United Bank Club Association, Inc. ("UBCA"), in Norman,
Oklahoma, and served as its President and CEO until February 1996, when UBCA was
sold to a subsidiary of Cendant Corp. (CD-NYSE) ("Cendant"). Mr. Kruger
supervised and participated in every facet of UBCA's business, including
strategic planning, sales, marketing, operations and service quality. Under Mr.
Kruger's leadership, UBCA grew to more than 350 employees, and had operational
and sales branches in Michigan, Florida, Arizona, Texas and Mexico. At the time
UBCA was sold, it provided financial enhancement services to more than 2,000
client institutions serving more than 6,000,000 individual customers throughout
the United States, Puerto Rico, the U.S. Virgin Islands and Mexico.

In 1997, Mr. Kruger became the Chairman of the Board of Directors of Paceco
Financial Services, Inc. In February 1999, Mr. Kruger became Chief Executive
Officer and a director of Foresight, Inc. in Norman, Oklahoma. Foresight, Inc.
is a marketing company that develops membership and loyalty programs for
companies that are designed to solidify and enhance customer relationships.
Foresight, Inc. services over 250,000 customers nationwide through relationships
with companies in numerous industries including rent-to-own, banking, and
financial services. Effective December 7, 2000, Foresight, Inc. was acquired by
a subsidiary of Precis, Inc., a publicly-held company. Precis, Inc. designs
membership programs for rental-purchase companies, financial organizations,
employer groups, retailers and association-based organizations. Memberships in
these programs are offered and sold as a part of point-of-sale transactions and
through direct marketing. Since December 2000, Mr. Kruger has served as the
Chairman of the Board of Directors and the Chief Executive Officer of Precis,
Inc. His responsibilities and contributions to these companies include assisting
in the development, implementation and execution of strategic planning. Mr.
Kruger also currently holds managing officer positions in privately-held
Hildalgo Trading Co., L.C. and Onward, L.L.C.

Mr. Kruger became a director and Chairman of the Board of Directors of the
Company on July 8, 1999, and became President on January 22, 2000. He is the
brother of Warren F. Kruger.

LYLE W. MILLER
DIRECTOR AND EXECUTIVE VICE PRESIDENT OF MARKETING AND SALES

Mr. Lyle W. Miller, age 58, earned a Bachelor of Business Administration
degree from Michigan State University and attended Central Michigan University's
Master's program in Finance. For the past six years, Mr. Miller has been the
President and a Director of Lyle W. Miller Holding Company, Northern Leasing &
Sales, Inc. and Northern Connections, Inc., which are based in Lansing,
Michigan. Each of these companies are privately held and are engaged in the real
estate business. Additionally, Mr. Miller is a partner in MahMill Acres, a
closely held real estate development partnership; President and a director of
Servco Incorporated, a privately-held company; and owner of the Landings
Restaurant in Charlavoix, Michigan. Mr. Miller is a director and Vice-Chairman
of Capital Bancorp Limited, a publicly-held bank holding company; a director of
Sun Community Bankcorp Limited, a publicly-owned bank holding company; and a
director of Precis, Inc., a publicly-held corporation.

Mr. Miller became a director of the Company and Executive Vice President of
Marketing and Sales on January 22, 2000.

WARREN F. KRUGER

Mr. Warren F. Kruger, President of privately-held Yorktown Management &
Financial Services, L.L.C., is 45 years old. Yorktown Management is involved in
investment banking, real estate, manufacturing, and energy endeavors. Mr. Kruger
earned a Bachelor of Business Administration from the University of Oklahoma,
and an Executive MBA from Southern Methodist University. Mr. Kruger has over
twenty-five years experience in the financial services industry. In 1980, Mr.
Kruger co-founded MCM Group, which owned and controlled UBCA until 1996 when the
firm was sold to a subsidiary of Cendant. He also owned and operated Century
Ice, a manufacturer and distributor of ice products from 1996 to 1997, when
Packaged Ice (ICED-NASDAQ) acquired Century Ice in an industry rollup. Mr.
Kruger is a partner with William W. Pritchard in privately-held WCC, with
investments in oil and gas, real estate, and investment banking. Additionally,
he is a director of privately-held The F & M Bank and Trust Company in Tulsa,
Oklahoma.

Mr. Kruger became a director of the Company on January 4, 2002. He is the
brother of Paul A. Kruger.

BRYAN R. KIRCHMER

Mr. Bryan R. Kirchmer, age 30, earned a Bachelor of Science in Mechanical
Engineering from the University of Tulsa and is a registered Professional
Engineer in the State of Oklahoma. Mr. Kirchmer has business and project
development experience in a variety of industries including investment casting,
control valves, and plastics equipment. Mr. Kirchmer is a co-founder of an
independent engineering consulting firm serving the plastics industry, Gravity
Management and Engineering Group, Inc. ("GME Group"). As President of GME Group,
Mr. Kirchmer has been responsible for developing and implementing marketing
strategies for the entire range of project management, engineering and
construction (EPC). In recent years, Mr. Kirchmer has spent a substantial amount
of time working on the development of next-generation injection molding
machines. Mr. Kirchmer and GME Group have been responsible for overseeing the
construction of the Company's new line of injection molding equipment.

Mr. Kirchmer became a director of the Company on January 4, 2002.

BRADLEY C. SHOUP

Mr. Bradley C. Shoup, age 43, earned a Bachelor of Science in Civil
Engineering, with distinction, from the University of Kansas, and a Master of
Science from the Sloan School of Management at the Massachusetts Institute of
Technology. From 1988 through 1998, Mr. Shoup was a founding partner in several
related investment management and corporate finance advisory entities, including
Batchelder & Partners, Inc., DHB Partner LP, Girard Partners LP, and Relational
Investors LLC. Relational Investors is an investment management firm with over

one billion dollars under management. From 1999 to present, Mr. Shoup has been a
private investor focused on private start-up ventures and small public companies
in the development or high-growth stages. He has been an advisor or executive at
certain companies in which he has invested, including CRT Holdings, Inc.,
Belzberg Technologies Corporation (BLZ-Toronto Stock Exchange), Ivanhoe Energy
Corp. (IVAN-NASDAQ), and CyberCity Holdings Inc. Currently, Mr. Shoup is the
Chief Financial Officer of CRT Holdings Inc., a private company engaged in the
development of innovative technologies in the power generation industry.

Mr. Shoup became a director of the Company on January 4, 2002.

WILLIAM W. PRITCHARD

Mr. William W. Pritchard is 50 years old and has been an attorney with the
law firm of Hall, Estill, Hardwick, Gable, Golden & Nelson in Tulsa, Oklahoma,
since 1996. He earned his Bachelor Degree with Honors at the University of
Kansas and his Juris Doctorate at the University of Tulsa. Mr. Pritchard served
as the Vice-President and General Counsel for Parker Drilling Company (PKD-NYSE)
for 20 years preceding his tenure with Hall, Estill and has extensive experience
in financial and commercial transactions in both domestic and international
markets. He is a partner with Warren F. Kruger in WCC, with investments in oil &
gas, real estate and investment banking. He was co-founder of The Seminole
Group, a top tier, privately-held, crude marketing and gathering company. In
addition, Mr. Pritchard was a co-founder and currently serves as a director of
privately-held Transcontinental Drilling Services, the largest seismic shot hole
company in the United States.

Mr. Pritchard became a director of the Company on January 4, 2002.

THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE NAMED
NOMINEES.

BOARD COMMITTEES AND MEETINGS

The Company's Board of Directors does not currently act through committees.
The business and affairs of the Company are managed by the Board of Directors.
The entire Board evaluates and recommends nominees for election to the Board of
Directors. Although there is no formal procedure for shareholders to recommend
nominees for the Board of Directors, the Board will consider such
recommendations if submitted in writing addressed to the Secretary of the
Company.

During fiscal year 2001 which ended May 31, 2001, and until January 2,
2002, Paul A. Kruger, Lyle W. Miller and Mark R. Kidd comprised the Board of
Directors. During the fiscal year ended May 31, 2001, the Board of Directors met
two times and acted by unanimous written consent in lieu of a meeting ten times.
All incumbent directors attended the meetings of the Board of Directors.

On January 2, 2002, Mr. Kidd resigned from all positions he held with the
Company and its affiliates, including his position as director of the Company.
On January 4, 2002, in connection with the approval and issuance of the 2001
Preferred Stock and as required by the Purchase Agreement, the remaining members
of the Board of Directors determined to increase the number of directors serving
to six. The then-incumbent Board members voted in favor of the election of
Warren F. Kruger, Bryan R. Kirchmer, Bradley C. Shoop and William W. Pritchard
to serve as the Westgate designees as additional directors until the next annual
meeting of shareholders.

COMPENSATION OF DIRECTORS

At this time, all members of the Board of Directors serve without cash
compensation except for such compensation paid to certain directors solely in
return for their services as executives of the Company. All directors, including
non-employee directors, are eligible for option grants under the Company's Stock
Option Plan. The terms of such Stock Option Plan are more fully described under
the heading "Proposal Two - Approval of Stock Option Plan" below. During the
fiscal year ended May 31, 2001, the Company granted options to purchase Common
Stock to members of the Board of Directors on May 11, 2001, at an exercise price
of $0.04 per share which was equal to the market price of the Common Stock on
the date of grant as follows:

DIRECTOR OPTIONS GRANTED OPTIONS EXERCISED EXPIRATION DATE
-------- --------------- ----------------- ---------------
Paul A. Kruger 2,500,000 - 0 - May 11, 2011
Lyle W. Miller 2,500,000 - 0 - May 11, 2011
Mark R. Kidd 2,500,000 - 0 - April 2, 2002(1)

(1) Pursuant to the terms of the Stock Option Plan, Mr. Kidd's options will
expire on April 2, 2002, three months after his resignation.

PROPOSAL TWO

APPROVAL OF STOCK OPTION PLAN

Effective May 11, 2001, the Company's Board of Directors approved the
adoption of a Stock Option Plan (the "Stock Plan"). The Stock Plan is intended
as an incentive to managerial and other key employees of the Company and its
subsidiaries. The Stock Plan's purposes include the retention of employees with
a high degree of training, experience and ability, the attraction of new
employees whose services are considered unusually valuable, the encouragement of
a sense of proprietorship of such persons, and the stimulation of the active
interest of such persons in the development and financial success of the
Company. The options granted under the Stock Plan may be either "incentive stock
options" as provided by Section 422 of the Internal Revenue Code of 1986, as
amended, and as may be further amended from time to time (the "Code"), or
options which do not qualify as incentive stock options.

The grant of any incentive stock options is subject to the Stock Plan being
approved by the shareholders of the Company within twelve months after the Stock
Plan was adopted by the Board. However, the failure of the shareholders of the
Company to approve the Stock Plan will only affect an option's status as an
"incentive stock option" and not the validity of any options granted under the
Stock Plan.

When originally adopted, the Stock Plan provided that 25,000,000 shares of
the Company's Common Stock would be subject to the Stock Plan. On January 7,
2002, the Board of Directors adopted an amendment to the Stock Plan to increase
the maximum number of shares of Common Stock in respect of which options may be
granted under the Stock Plan from 25,000,000 shares to 100,000,000 shares.

The Company is in the development stage, and it has incurred significant
losses from operations. There is no assurance that it will achieve profitability
or obtain funds to finance continued operations. The Board of Directors
considers the Company's ability to offer competitive compensation opportunities,
including long-term, equity-based incentive and compensation opportunities in
the form of stock options, an important component of the Company's director,
officer and key employee retention and recruitment strategy.

DESCRIPTION OF THE STOCK PLAN

ADMINISTRATION. The Stock Plan is administered by the Board of Directors of
the Company or, if the Board so authorizes, by a committee of the Board of
Directors consisting of not less than two members of the Board of Directors. The
Stock Plan is presently administered by the entire Board of Directors; no
separate committee of the Board has been designated to administer the Stock
Plan. Unless the context otherwise requires, references herein to the Committee
shall be references to the entire Board of Directors or to any committee of the
Board designated to administer the Stock Plan. The selection of participants and
the terms and conditions of options granted under the Stock Plan are determined
by the Committee, subject to applicable limitations under the Stock Plan. The
Committee's determinations, decisions or actions with respect to the
construction, interpretation, administration or application of the Stock Plan
are final, conclusive and binding upon all persons participating in the Stock
Plan or validly claiming under or through such persons.

PARTICIPANTS. All managerial and other key employees of the Company and/or
its subsidiaries who hold positions of significant responsibility or whose
performance or potential contribution, in the judgment of the Committee, will
benefit the future success of the Company are eligible to receive grants under
the Stock Plan. In addition, each director of the Company who is not an employee
of the Company is eligible to receive certain option grants pursuant to
provisions of the Stock Plan described below. At the Record Date, outstanding
options had been granted to six (6) persons under the Stock Plan.

SHARES SUBJECT TO THE STOCK PLAN. If the Stock Plan, as amended, is
approved, the maximum number of shares of Common Stock in respect of which
options may be granted under the Stock Plan will be 100,000,000 shares, par
value $0.10 per share. The Board of Directors

intends these shares to consist of authorized but unissued shares or treasury
shares that may be held by the Company. This number is subject to appropriate
equitable adjustment in the event of a reorganization, stock split, stock
dividend, reclassification or other change affecting the Company's Common Stock,
as further described below. If the redomiciliation merger discussed in this
Information Statement is approved, these shares will have a par value of $0.0001
per share.

PRICE, TERMS AND EXERCISE OF OPTIONS. The Committee has discretion to
determine the times when, and the terms upon which, options shall be
exercisable, including such provisions as deemed advisable to permit
qualifications as "incentive stock options" within the meaning of Section 422 of
the Code, and incentive stock options outstanding under the Stock Plan may be
amended, if necessary, to permit such qualification. The Committee will
designate at the time of granting of any option whether such option or any
portion thereof will be an "incentive stock option." Each option will be
evidenced by an agreement between the Company and the optionee containing
provisions determined by the Committee consistent with the Stock Plan. Unless
otherwise determined by the Committee at the time of grant, all options will
become exercisable at the rate of 25% of the total shares subject to the option
on each of the first four anniversary dates of the date of grant. The Committee
may, at any time, accelerate the date any outstanding option becomes
exercisable. The exercise price for each share placed under option pursuant to
the Stock Plan is determined by the Committee but cannot in any event be less
than 100% of the fair market value of such share on the date the option was
granted. In the event that there are insufficient authorized shares or treasury
shares of Common Stock of the Company available for issuance upon exercise of an
option or the exercise price is less than the par value of authorized but
unissued shares, the right of the optionee to exercise its option shall be
suspended and deferred until such time as either or both of such circumstances
shall be cured prior to the time that any such option would otherwise expire.
Accordingly, until the redomiciliation merger occurs which will increase the
number of authorized shares and decrease the par value per share, all existing
outstanding options are not exercisable because the exercise price is less than
the par value.

EFFECT OF TERMINATION OF EMPLOYMENT OR DEATH. If an optionee's employment
with the Company is terminated for any reason other than death or termination
for cause, an option will be exercisable for a period of three months after the
date of termination of employment as to all then vested portions of the option.
In addition, the Committee may, in its sole discretion, approve acceleration of
the vesting of any unvested portions of the option. If an optionee's employment
with the Company is terminated for cause (as defined in the Stock Plan), the
option shall terminate as of the date of such termination of employment, and the
optionee shall have no further rights to exercise any portion of the option. If
an optionee dies while employed by the Company, any unvested portion of the
option as of the date of death shall be vested as of the date of death, and the
option shall be exercisable in full by the heirs or legal representatives of the
optionee for a period of twelve months following the date of death. In any
event, options terminate and are no longer exercisable after ten years from the
date of the grant.

CONTINUED SERVICE AS A DIRECTOR. In the event any optionee who is an
employee and also a director of the Company ceases to be employed by the Company
but continues to serve as a

director of the Company, the Committee may determine that all or a portion of
such optionee's options shall not expire three months following the date of
employment as described above, but instead shall continue in effect until the
earlier of the date the optionee ceases to be a director of the Company or the
date the option otherwise expires according to its stated date of expiration.
Termination of any such option in connection with the optionee's termination of
service as a director will be on terms similar to those described above in
connection with termination of employment.

GRANTS TO NON-EMPLOYEE DIRECTORS. In order to retain, motivate and reward
non-employee directors of the Company, the Stock Plan extends participation to
non-employee directors on the terms and conditions described below.

The exercise price for options granted to non-employee directors is equal
to 100% of the fair market value per share of Common Stock on the date the
option is granted. As with options granted to employees, unless otherwise
determined by the Committee at the time of grant, all options granted to
non-employee directors become exercisable at the rate of 25% of the total shares
subject to the option on each of the first four anniversary dates of the date of
grant. The Committee is also entitled at any time to accelerate the date any
outstanding option becomes exercisable. If a non-employee director's service on
the Board of Directors is terminated for any reason other than death or removal
from the Board of Directors for cause, an option will be exercisable for a
period of three (3) months after the date of removal from the Board of Directors
as to all then vested portions of the option. If a non-employee director is
removed from the Board of Directors for cause, the option shall terminate as of
the date of such removal, and the optionee shall have no further rights to
exercise any portion of the option. If a non-employee director optionee dies
while serving on the Board of Directors, any unvested portion of the option as
of the date of death shall be vested as of the date of death, and the option
shall be exercisable in full by the heirs or legal representatives of the
optionee for a period of twelve months following the date of death. In any
event, options terminate and are no longer exercisable after ten years from the
date of the grant.

Other than as described above, all options granted to non-employee
directors are subject to the same terms and conditions generally applicable to
options granted to employees under the Stock Plan.

ASSIGNABILITY. Options granted under the Stock Plan generally are not
assignable or transferable by optionees other than by will or the laws of
descent and distribution and are otherwise exercisable only by optionees.
However, optionees are permitted, with the prior consent of the Committee, to
transfer nonqualified stock options under the Stock Plan by gift or other means
pursuant to which no consideration is given for the transfer. The Committee will
impose in connection with any non-incentive options so transferred such
limitations and restrictions as it deems appropriate. Any options so transferred
will remain subject to all of the restrictions and limitations of the Stock
Plan. Due to the limited scope of permitted transfers, it is anticipated that
optionees who may elect to utilize such transferability feature will do so
primarily for estate planning or other family oriented purposes and that any
transferees will be family members of the optionee.

EXERCISE OF OPTIONS. The exercise price of options may be paid in cash, by
certified check, by tender of stock of the Company (valued at fair market value
on the date immediately preceding the date of exercise), by surrender of a
portion of the option, or by a combination of such means of payment. The prior
consent of the Committee is required in connection with the payment of the
exercise price of options by tender of shares or surrender of a portion of the
option, except that the consent of the Committee is not required if the exercise
price is paid by surrender of shares that have been owned by the optionee for
more than six months prior to the date of exercise of the option or by a
combination of cash and shares that have been owned for more than six months.

EFFECT OF CERTAIN CORPORATE TRANSACTIONS. In the event of any change in
capitalization affecting the Common Stock of the Company, such as a stock
dividend, stock split, recapitalization, merger, consolidation, split-up,
combination or exchange of shares or other form of reorganization, liquidation,
or any other change affecting the Common Stock, proportionate adjustments will
be made with respect to the aggregate number and type of securities for which
options may be granted under the Stock Plan, the number and type of securities
covered by each outstanding option, and the exercise price of outstanding
options so that optionees will be entitled upon exercise of options to receive
the same number and kind of stock, securities, cash, property or other
consideration that the optionee would have received in connection with the
change in capitalization if such option had been exercised immediately preceding
such change in capitalization. The Committee may also make such adjustments in
the number of shares covered by, and the price or other value of any outstanding
options in the event of a spin-off or other distribution, other than normal cash
dividends, of company assets to shareholders. In addition, unless the Committee
expressly determines otherwise, in the event of a Change in Control (as defined
in the Stock Plan) of the Company, all outstanding options will become
immediately and fully exercisable and optionees will be entitled to surrender,
within 60 days following the Change in Control, unexercised options or portions
of options in return for a cash payment equal to the difference between the
aggregate exercise price of the surrendered options and the fair market value of
the shares of Common Stock underlying the surrendered options.

MODIFICATION AND TERMINATION OF THE STOCK PLAN. The Stock Plan will
terminate on May 11, 2011, except with respect to awards then outstanding. The
Committee may from time to time amend, alter, suspend, or discontinue the Stock
Plan, without the further approval of the shareholders of the Company, except to
the extent such approval may be required by applicable laws or by the rules of
any securities exchange upon which the Company shares are admitted to listed
trading. No amendment, alteration or discontinuation of the Stock Plan may
adversely affect any stock option grants made prior to the time of such
amendment, alteration or discontinuation, except with the consent of the holder
of the affected options.

SATISFACTION OF TAX WITHHOLDING OBLIGATIONS. The Company may require as a
condition to the issuance of any shares of Common Stock upon exercise of an
option that the optionee remit an amount sufficient to satisfy applicable tax
withholding requirements. Optionees are permitted to satisfy such withholding
obligations in cash, by tendering stock of the Company owned by the optionee
(valued at fair market value on the date immediately preceding the date of
exercise of the option), by surrender of a portion of the option or by a
combination of such means. The prior consent of the Committee is not required in
connection with the tender of shares or the surrender of a portion of the option
in satisfaction of tax withholding obligations.

FEDERAL INCOME TAX CONSEQUENCES. An optionee receiving an option qualifying
as an "incentive stock option" under Section 422 of the Code will not recognize
taxable income upon the grant or exercise of the option. Upon disposition of the
shares acquired, the optionee will recognize a capital gain or loss based on the
difference between the amount realized and the option price, assuming certain
holding period requirements are satisfied and the shares are held as a capital
asset. However, the alternative minimum tax may be applicable. The Company will
not receive any tax deduction in connection with the grant or exercise of an
incentive stock option or, assuming the holding period requirements are
satisfied, sale of the shares by an optionee.

An optionee receiving a nonqualified stock option will not recognize
taxable income on the grant of an option, but will be deemed to have received
ordinary income on the exercise of an option equal in amount to the difference
between the fair market value of the shares acquired as of the date of exercise
and the option price. The Company will be entitled to a tax deduction at the
same time in the same amount, assuming the deduction is not disallowed by
Section 162(m) of the Code (which limits the deduction in any one year for
certain compensation paid to certain executive officers). An optionee's tax
basis in the shares acquired will be equal to the fair market value of the
shares as of the date of exercise for purposes of measuring any gain or loss on
subsequent disposition of the shares.

SUMMARY OF AWARD ACTIVITY PURSUANT TO THE STOCK PLAN

As of the Record Date, the Company had issued 9,500,000 options under the
Stock Plan. No issued options had been exercised, and 90,500,000 options
remained available for future grants. All issued options vested immediately on
May 11, 2001, the effective date of the grants, and became exercisable for a
period of ten (10) years from the date of grant, or until May 11, 2011, subject
to the terms of the Stock Plan. However, the 2,500,000 options granted to Mark
R. Kidd will expire on April 2, 2002, three months after he resigned from his
position as a director of the Company.

The following table summarizes the award activity under the Stock Plan
through the Record Date, by named executive officers and other participant
classes:

NAME AND POSITION NUMBER OF OPTIONS
----------------- -----------------
Paul A. Kruger, Chairman of the Board and
President/ Nominee for Re-election as Director 2,500,000

Executive Group 2,500,000

Non-Executive Director Group 5,000,000

Lyle W. Miller, Incumbent Director/Nominee for
Re-election as Director 2,500,000

Non-Executive Officer Employee Group 2,000,000

All of the outstanding options were granted with an exercise price equal to
the market value of the Common Stock on the date of grant of $0.04 per share.
Based on the closing price of the Common Stock as reported by ____________ on
the Record Date, of $___________ per share, the market value of the total number
of shares underlying outstanding options under the Stock Plan was
$__________________. With respect to the options previously granted, however,
the exercise price of $0.04 per share is less than the current par value of the
Company's Common Stock. Therefore, unless the Reincorporation Proposal (as
defined and discussed under Proposal Three of this Information Statement), which
will also result in a decrease of the par value of the Common Stock below the
exercise price, is approved, no outstanding option may be exercised.

The Committee has not at this time considered or approved any future awards
under the Stock Plan, and, as a result, the identity of future award recipients
and the size and terms of future awards are not known at this time.

THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE APPROVAL
OF THE STOCK OPTION PLAN, AS AMENDED.

PROPOSAL THREE

APPROVAL OF THE MERGER OF THE COMPANY WITH PALWEB OKLAHOMA CORPORATION,
AN OKLAHOMA CORPORATION, FOR THE PURPOSE OF REDOMICILING THE
COMPANY TO THE STATE OF OKLAHOMA

The Board of Directors of the Company has approved a plan of reorganization
("Plan of Reincorporation"), by which the Company's state of incorporation will
be changed from Delaware to Oklahoma (the "Reincorporation Proposal"). If the
shareholders approve the Reincorporation Proposal and the Board determines to
proceed, this reincorporation would be accomplished through a merger (the
"Merger") of the Company into PalWeb Oklahoma Corporation, an Oklahoma
corporation ("New PalWeb"), a newly-formed, wholly-owned subsidiary of the
Company, which, upon the effective date of the Merger, will change its name to
PalWeb Corporation. New PalWeb was formed under the laws of the State of
Oklahoma on ______, 2002, solely for the purpose of reincorporating the Company
in that state. The Merger is subject to shareholder approval.

The following discussion summarizes certain aspects of the Reincorporation
Proposal. This summary is not intended to be complete and is qualified in its
entirety by reference to the Plan of Reincorporation, the Certificate of
Incorporation of New PalWeb (the "New Certificate of Incorporation") and New
PalWeb's Bylaws (the "New Bylaws"). Copies of the New Certificate of
Incorporation and the New Bylaws may be obtained from the Company by contacting
PalWeb Corporation, 1607 West Commerce Street, Dallas, Texas 75208.

GENERAL

The Company's Board of Directors has unanimously approved the
Reincorporation Proposal, and, for the reasons set forth below, believes that
the best interests of the Company and its shareholders will be served by
changing the Company's state of incorporation from Delaware to Oklahoma. The
proposed reincorporation will be accomplished by merging the Company into New
PalWeb.

The Merger will not result in any change in the number of shares owned or
percentage of ownership of any shareholder of the Company. Pursuant to the Plan
of Reincorporation, at the effective date of the Merger, each outstanding share
of the Company's Common Stock and each share of the Company's Convertible
Preferred Stock will automatically be converted into one share of Common Stock,
par value $0.0001 per share, of New PalWeb ("New PalWeb Common Stock"). Each
outstanding share of 2001 Preferred Stock will automatically be converted into
one share of 2001 Preferred Stock of New PalWeb with identical terms ("New
PalWeb 2001 Preferred Stock"). Each outstanding certificate representing shares
of Company Common Stock will continue to represent the same number of shares of
New PalWeb Common Stock. Following the Merger, previously outstanding shares of
Common Stock of the Company may be delivered in effecting sales through a
broker, or otherwise. IT WILL NOT BE NECESSARY FOR HOLDERS OF COMMON STOCK OR
2001 PREFERRED STOCK OF THE COMPANY TO EXCHANGE THEIR EXISTING STOCK
CERTIFICATES FOR STOCK CERTIFICATES OF NEW PALWEB, ALTHOUGH THEY MAY DO SO IF
THEY WISH. HOLDERS OF THE COMPANY'S CONVERTIBLE PREFERRED STOCK WILL BE REQUIRED
TO SURRENDER THEIR EXISTING STOCK CERTIFICATES IN EXCHANGE FOR CERTIFICATES OF
NEW PALWEB COMMON STOCK. When presently outstanding certificates are presented
for transfer after the Merger, new certificates for the stock of New PalWeb will
be issued. New certificates will also be issued upon the request of any
shareholder, subject to normal requirements as to proper endorsement, signature,
guarantee, if required, and payment of applicable taxes. At the Effective Date
of the Merger, the Company's Common Stock will continue to be traded on the
National Association of Securities Dealers Automatic Quotation ("NASDAQ")
over-the-counter bulletin board system ("OTCBB") without interruption and under
the same symbol ("PAEB-OB").

Approval of the Reincorporation Proposal will effect a change in the legal
domicile of the Company and certain other changes of a legal nature, as
described in this Information Statement. Reincorporation of the Company will
not, in and of itself, result in any change in the business, management,
location of the principal executive offices, assets, liabilities or
shareholders' equity of the Company. The officers and directors of New PalWeb
will be identical in all respects to the officers and directors of New PalWeb on
the Effective Date of the Merger.

New PalWeb will possess all the assets and be responsible for all the
liabilities of the Company. The stated purposes of New PalWeb, as set forth in
the New Certificate of Incorporation, will permit New PalWeb in the future to
enter into any lawful business activity. The power and authority to operate in
such manner is equivalent to the power and authority granted to the Company
under Delaware law and the Company's present Certificate of Incorporation.
Reincorporation, in and of itself, will not change the financial condition of
the Company and, as noted, will involve only the Company and New PalWeb, which
is presently a wholly-owned subsidiary of the Company.

The Company's Stock Plan will be continued by New PalWeb. Each option or
other right to purchase Company Common Stock issued pursuant to the Stock Plan
will automatically be converted into an option or right to purchase the same
number of shares of New PalWeb Common Stock at the same price per share, upon
the same terms and subject to the same conditions as set forth in the Stock
Plan. Approval of the Reincorporation Proposal by the shareholders of the
Company will constitute approval by the shareholders of New PalWeb of the Stock
Plan.

The New Certificate of Incorporation will include provisions that modify
the currently authorized capitalization of the Company. The proposed changes
would:

1. effect an increase in the authorized Common Stock of the Company from
250,000,000 to 5,000,000,000 shares;

2. decrease the par value of the Company's Common Stock from $0.10 to $0.0001
per share;

3. recognize as a separate series of preferred stock the 2001 Preferred Stock
with 750,000 shares outstanding and authorized; and

4. authorize 20 million additional shares of preferred stock that may be
issued from time to time and on such terms as the Board of Directors may
determine without action by the shareholders.

The New Certificate of Incorporation will also include provisions that
authorize the Board of Directors to effect a reverse split of all outstanding
shares of the Common Stock of New PalWeb at an exchange ratio of not less than
1-for-100. The Board of Directors would have the sole discretion to elect, as it
determines to be in the best interests of New PalWeb and its shareholders,
whether or not to effect a reverse stock split, and if so, at what exchange
ratio, at any time in the future when the Board of Directors determines that a
reverse stock split is necessary or in the best interest of the Company and its
shareholders based on relevant business factors, including, but not limited to,
the Company's current and prospective Common Stock price, trading liquidity,
eligibility for listing on the NASDAQ SmallCap or National Market System or a
national securities exchange effect, on number of shareholders, the Company's
business prospects and such other matters as are appropriately considered by the
Board.

If the Company's shareholders adopt and approve the Reincorporation
Proposal, the proposed reorganization will be consummated at such time as the
Board of Directors of the Company determines is advisable. The Merger will take
effect on the date upon which a certificate of ownership and merger is field
with the appropriate officers of the States of Oklahoma and Delaware, which
filing is anticipated to be as soon as practicable after adoption and approval
of the Reincorporation Proposal by the shareholders of the Company.

PURPOSE FOR PROPOSED REINCORPORATION

The Board of Directors of the Company believes that the best interests of
the Company and its shareholders will be served by changing the Company's state
of incorporation from Delaware to Oklahoma.

In 1986, the Oklahoma Legislature enacted a new General Corporation Act
(the "Act") which was intentionally patterned off the Delaware General
Corporation Law ("Delaware Law"). The Act provides a flexible, clear and modern
statutory framework for governance of the Company and other publicly-owned
corporations domiciled in Oklahoma which remains substantially equivalent to the
Delaware Law. Because the Act is substantially equivalent to the Delaware Law
which currently governs the Company, reincorporating under the Act will not
result in any material change to the laws governing the Company or the rights
and obligations of its shareholders, directors and officers.

Moreover, the Oklahoma Legislature has demonstrated a desire and practice
of adopting changes, including changes similar to or based on changes made to
the Delaware Law, that provide a business climate conducive to the growth of
Oklahoma-based corporations by accommodating the evolving needs and interests of
Oklahoma corporations and their shareholders. An additional benefit of being
incorporated under Oklahoma law will be an enhancement of the Company's position
to have some voice in legislative and executive branch actions and other
governmental decisions affecting corporations incorporated and maintaining
offices in Oklahoma. This opportunity can be an important one, as Oklahoma
corporations are substantially affected by changes in the legal and financial
environment in which they operate, and by the variety of legislative and other
governmental actions which may be taken in response to such changes.

Reincorporation will also permit the Company to go forward with a new
certificate of incorporation and bylaws. The New Certificate of Incorporation
and New Bylaws should help to eliminate any deficiencies in the prior
certificate and bylaws which were adopted and approved during prior ownership of
the Company.

An insignificant additional benefit to reincorporating in Oklahoma is that
the franchise taxes that the Company pays as a Delaware corporation will be
eliminated. Management of the Company estimates that, on the basis of the
business presently conducted by the Company, reincorporation in Oklahoma will
not result in any material savings, but savings could be achieved in the future
if the Company is successful.

PURPOSE FOR MODIFIED CAPITAL STRUCTURE OF NEW PALWEB

The Company's Certificate of Incorporation, as amended, presently
authorizes capital stock of the Company as follows:

o 250,000,000 shares of common stock, with a par value of $0.10 per
share; and

o 20,000,000 shares of preferred stock, with a par value of $0.0001 per
share, with voting rights, and that may be convertible to common stock
of the corporation.

o Such stock may be issued from time to time without action by the
shareholders for such consideration as may be determined, from time to
time, by the Board of Directors and such shares so issued shall be
deemed fully paid stock, and the holders of such stock shall not be
liable for any further payments thereon. Further, the preferred stock
may be issued in one or more series, from time to time, at the
discretion of the Board of Directors without shareholder approval,
with each such series to consist of such number of shares and to have
such voting powers (whether full or limited or no voting powers) and
such designations, powers, preferences, and relative, participating,
optional, redemption, conversion, exchange, or other special rights,
and such qualifications, limitation, or restrictions thereof, as shall
be stated in the resolution or resolutions providing for the issuance
of such series adopted by the Board of Directors, and the Board of
Directors is hereby expressly vested with the authority, to the full
extent now or hereafter provided by law, to adopt any such resolution
or resolutions.

As of the Record Date, the Company had issued and outstanding
capitalization as follows:

Common Stock [233,423,244] shares
Convertible Preferred Stock [1,130,000] shares
2001 Preferred Stock 750,000 shares
Warrants to Purchase Common Stock 225,000,000 warrants
Options to Purchase Common Stock 9,500,000 options
(100 million authorized)

The Company had only 17,526,756 shares of Common Stock authorized but
unissued as of the Record Date and 15,250,000 shares of preferred stock
authorized which had not yet been established as a series.

The Company has insufficient shares of Common Stock authorized for issuance
in the event that all holders of outstanding Warrants and options could and
would determine to exercise such Warrants and options and that the holders of
outstanding Convertible Preferred Stock and

2001 Preferred Stock could and would determine to convert such preferred stock
in accordance with the terms of applicable Warrants, options and preferred stock
agreements, plans and certificates. If all such Warrants and options were
immediately exercised and all such preferred stock were immediately converted,
the Company would be required to issue 497,000,000 shares of Common Stock.
Therefore, the Company must authorize at least 481,553,244 additional shares of
Common Stock to meet its obligations in connection with outstanding Warrants,
options and preferred stock and an additional 90,500,000 shares of Common Stock
to meet its obligatory to reserve shares under the Stock Plan.

In addition, the current par value of the Company's Common Stock of $0.10
precludes the exercise of the Company's outstanding options and precludes the
conversion of the Company's 2001 Preferred Stock which has a conversion price of
$0.0286 per share. Effective May 11, 2001, the Company issued options to certain
eligible participants to purchase 9,500,000 shares of its Common Stock at $0.04
per share. The options vested immediately and became exercisable for a period of
ten (10) years from the date of grant, subject to the terms of the Stock Plan.
The options are currently not exercisable because the exercise price of $0.04 is
less than the Common Stock's par value of $0.10. The Reincorporation Proposal
will result in a reduction in the par value of the Company's Common Stock to
$0.0001 which will enable the holders of outstanding options to exercise such
options at their discretion, subject to the terms of the Stock Plan. The reduced
par value will also eliminate the preclusive effect of the current par value on
the conversion of the 2001 Preferred Stock.

The Board believes that the proposed increase in authorized capital is
necessary to raise further capital and to support reserves required for issuance
in the event of the exercise of outstanding warrants and options and the
conversion of outstanding Convertible Preferred Stock and 2001 Preferred Stock.
The Board believes that the additional shares of Common Stock resulting from the
increase in authorized capital should be available for issuance from time to
time as may be required for various purposes, including the issuance of Common
Stock in connection with financing or acquisition transactions and the issuance
of Common Stock to managerial and key employees and non-employee directors in
lieu of compensation and the issuance or reservation of Common Stock for stock
options granted under the Stock Plan.

The Board anticipates that in the future it will consider a number of
possible financing and acquisition transactions that may involve the issuance of
additional equity, debt or convertible securities. If the Plan of
Reincorporation is approved by the shareholders, the Board would be able to
authorize the issuance of shares for these purposes without the necessity, and
related costs and delays, of either calling a special shareholders' meeting or
of waiting for the regularly scheduled annual meeting of shareholders in order
to increase the authorized capital. If in a particular instance shareholder
approval were required by law or otherwise deemed advisable by the Board, then
the matter would be referred to the shareholders for their approval regardless
of whether a sufficient number of shares previously had been authorized. The
shareholders are not entitled to preemptive rights with respect to the issuance
of any authorized but unissued shares.

The proposed change in capital is not intended to have any anti-takeover
effect and is not part of any series of anti-takeover measures contained in any
debt instruments, the Certificate of Incorporation or Bylaws in effect on the
date of this Information Statement. However, shareholders should note that the
availability of additional authorized and unissued shares of Common Stock could
make any attempt to gain control of the Company or the Board more difficult or
time consuming and that the availability of additional authorized and unissued
shares might make it more difficult to remove current management. Although the
Board currently has no intention of doing so, shares of Common Stock could be
issued by the Board to dilute the percentage of Common Stock owned by a
significant shareholder and to increase the cost of, or the number of, voting
shares necessary to acquire control of the Board or to meet the voting
requirements imposed by applicable law with respect to a merger or other
business combination involving the Company. The Board is not aware of any
proposed attempt to take control of the Company or of any attempt to acquire a
large block of stock, other than as disclosed elsewhere in this Information
Statement. The Board has no present intention to use the increased authorized
Common Stock for anti-takeover purposes.

PURPOSE FOR GRANT OF AUTHORITY TO EFFECT REVERSE STOCK SPLIT

The Reincorporation Proposal includes a provision in the New Certificate of
Incorporation granting the Board discretion to effect a reverse stock split of
the Common Stock when and on terms the Board determines in the best interest of
the Company and its shareholders (subject to a maximum exchange ratio of 1-for
100).

The Board believes that a reverse stock split may be beneficial due to the
large number of shares that are outstanding. In addition, the Board believes
that the low trading price of the Company's Common Stock may impair efficiency
of the market for the Common Stock and that brokerage commissions on the
purchase or sale of a relatively lower priced stock generally tend to represent
a higher percentage of the sales price than the commission on a relatively
higher priced stock. The current low trading price of the Company's Common Stock
may make the Company unattractive to investors and sources of financing and
exposes the Company to many of the risk factors discussed in the Company's Form
10-KSB, a portion of which is attached hereto as Appendix A. The Board of
Directors believes that a reverse stock split will improve these factors and may
inure it to the benefit of the Company, its shareholders and the market for the
Company's Common Stock. The discretion to effect a reverse stock split granted
to the Board in the New Certificate of Incorporation would allow the Board to
determine the exact size and timing of a reverse split. While the Board has
unlimited discretion (subject to the 1-for-100 limit), the Board intends to
attempt to use the reverse split as a mechanism to increase the purchase price
per share of the Company's Common Stock without significantly altering the
overall market capitalization of the Company by selecting an appropriate time
and amount of the reverse split.

If a reverse stock split were effected, the Company would have fewer shares
outstanding. A reduction in the number of shares would increase the book value,
if any, per share as well as the earnings (or loss) per share. The reduction
should also increase the market price per share. These increases could make the
Common Stock more attractive to brokers and investors, thereby

possibly expanding the group of brokers interested in making a market for the
Common Stock and the group of investors interested in investing in the capital
of the Company. Nevertheless, the Board of Directors cannot predict what effect
the reverse stock split would have on the market price of the Common Stock. A
reverse stock split could cause the Company to experience a decline in its
overall market capitalization and thus decrease the value of shareholders'
investments.

If the Reincorporation Proposal is approved by the shareholders, the ratio
and effective time for any reverse stock split will be as determined by the
Board of Directors. A maximum of one hundred (100) shares of Common Stock at the
effective time would be deemed to be one (1) share of Common Stock without
further action by the shareholders. It will be necessary for a shareholder to
exchange certificates representing stock issued prior to the reverse stock split
for certificates representing shares resulting after the reverse stock split. If
and when a reverse split is authorized by the Board, shareholders will be
notified in advance and will be given instructions as to how to exchange their
certificates.

If a reverse stock split is effected, the Company will not issue
certificates for fractional shares. Instead, persons who are shareholders at the
effective time of the reverse stock split and who otherwise would be entitled to
a fractional share would be issued one whole share. All shares of Common Stock
held by a record holder will be aggregated for purposes of computing the number
of shares of Common Stock subject to the reverse stock split.

The Company has not and does not intend to seek an opinion of counsel or a
ruling from the Internal Revenue Service regarding the federal income tax
consequences of a reverse stock split. The Board of Directors believes that a
shareholder who does not receive cash in connection with a reverse stock split
would not recognize any gain or loss on the exchange, and the Company would not
recognize any gain or loss as a result of the reverse stock split.

COMPARISON OF SHAREHOLDER RIGHTS

GENERAL. The Company's Board of Directors has unanimously approved the New
Certificate of Incorporation and the New Bylaws to be effective upon completion
of the Merger. The New Certificate of Incorporation and New Bylaws are
substantively equivalent in all material respects to the Company's current
Certificate of Incorporation and Bylaws, except as described below.

CONTROL SHARE ACQUISITION ACT. The Oklahoma legislature enacted the Control
Share Acquisition Act in 1987, and has enacted several amendments since that
time. The purpose of the Control Share Acquisition Act is to discourage hostile
takeover attempts or the acquisition of a potentially controlling ownership
position without the approval of the Board of Directors. The Control Share
Acquisition Act is not currently applicable to corporations which are not
incorporated under Oklahoma law, and there are no provisions in Delaware Law
comparable to the Control Share Acquisition Act. The Act permits an Oklahoma
corporation which would otherwise be subject to the Act to be excluded from its
application by having an appropriate provision its certificate of incorporation
to such effect. The Board of Directors has included such

a provision in the New Certificate of Incorporation because (i) the
Reincorporation Proposal is not intended to result in additional anti-takeover
protections, and (ii) the Board of Directors does not believe the Control Share
Acquisition Act provides any benefits not already available by other provisions
of the Oklahoma Act which are comparable to those in the Delaware Law and which
are currently applicable to the Company.

SHAREHOLDER WRITTEN CONSENTS. The Oklahoma Act contains provisions which
restrict the ability of shareholders of publicly-held, Oklahoma-incorporated
corporations to act by shareholder consent. For Oklahoma corporations which are
not publicly-held, any action required or permitted to be taken by shareholders
may be effected by written consent executed by holders of stock having not less
than the minimum number of shares required to approve such action, which in most
instances would be no more than a majority of the outstanding shares. Under the
Act, actions by written shareholder consent require unanimous approval for
publicly-held corporations (such as New PalWeb would be) unless the
corporation's certificate of incorporation provides otherwise. This unanimous
consent requirement is intended effectively to preclude action by shareholder
written consent for publicly-held corporations and to require any shareholder
vote to be taken at a meeting only after proper notice and appropriate
disclosure. However, because this requirement places restrictions on
shareholders or small groups of shareholders owning a majority of the
outstanding voting power, it may have the effect of discouraging potential
acquirors from making offers to purchase New PalWeb Common Stock which some
shareholders might perceive to be in their best interest. Because of the
potential anti-takeover effect of the unanimous consent requirement and the fact
that the reincorporation proposal is not intended to alter in any material
respect existing rights of shareholders under Delaware Law, the Board of
Directors has included a provision in the New Certificate of Incorporation which
provides that the unanimous shareholder consent requirement will not be
applicable to New PalWeb.

SHAREHOLDERS' RIGHT TO CALL MEETINGS. The Company's current Bylaws contain
a provision which permits the holders of at least ten percent of the shares
entitled to vote on a matter to call a special meeting of shareholders to
address the matter. No similar provision is contained in the Oklahoma Act, the
New Bylaws or the New Certificate of Incorporation.

SHARE ACQUISITION. The Oklahoma Act contains provisions which enable a
corporation to acquire all or part of the outstanding shares of another
corporation if the board of directors of each corporation adopts and
shareholders holding a majority of the outstanding voting stock of the
corporation to be acquired approve an agreement of acquisition. The Delaware Law
does not contain similar provisions. Under the Oklahoma law, the board of the
corporation to be acquired must submit the agreement of acquisition to all
shareholders entitled to vote and must give notice of the meeting at which the
vote will be taken to all holders of stock, whether voting or nonvoting. Whether
or not entitled to vote by the provisions of the corporation's certificate of
incorporation, the holders of all outstanding shares of a class of stock to be
acquired are entitled to vote as a class upon the agreement of acquisition.
Dissenters to such an agreement of acquisition who have followed specified
procedures are entitled to a district court appraisal of the fair value of their
shares.

ADVANCE NOTICE OF SHAREHOLDER PROPOSAL. Under the New Bylaws, at a meeting
of shareholders, only business properly brought before the meeting may be
conducted. Nominations for the election of directors may be made by the Board of
Directors or by any shareholder entitled to vote for the election of directors.
Other matters to be properly brought before the meeting must be: (i) specified
in the notice of meeting (or any supplement thereto) given by or at the
direction of the Board of Directors; (ii) otherwise properly brought before the
meeting by or at the direction of the Board of Directors; or (iii) otherwise
properly brought before the meeting by a shareholder who shall have given a
written notice of his or her intent to make a nomination or to bring any other
matter before the meeting to the secretary of New PalWeb not more than 150 days
and not less than 90 days in advance of the annual meeting, or, in the event of
a special meeting of shareholders, not later than the close of the fifteenth day
following the day on which notice of the meeting is first mailed to
shareholders. The Company's current Bylaws do not contain similar provisions.

POSSIBLE DISADVANTAGE OF THE REINCORPORATED PROPOSAL

Despite the belief of the Board of Directors that the Reincorporation
Proposal is in the best interests of the Company and its shareholders,
shareholders should be aware that many provisions in the Act have not yet
received extensive scrutiny and interpretation by the Oklahoma courts. The
Delaware Law is widely regarded as the most extensive and well-defined body of
corporate law in the United States. Because of Delaware's prominence as a state
of incorporation for many major publicly-held corporations, both the legislature
and courts in Delaware have demonstrated an ability and willingness to act
quickly and effectively to meet changing business needs. Furthermore, Delaware
corporations are often guided by the extensive body of court decisions
interpreting Delaware's corporate law, and the Delaware Chancery Court is a
specialized court of original jurisdiction which adjudicates corporate disputes.
There is no assurance that the Oklahoma Legislature will continue to conform the
Act to future changes in the Delaware Law, and it is likely that the Oklahoma
courts will not be as efficient or adept as the Delaware courts in interpreting
the Act because of the fewer number of disputes and the absence of a specialized
corporate court. However, the Board of Directors of the Company believes that
these potential disadvantages are outweighed by the possibility that Oklahoma
courts represent a more convenient (and possibly more favorable) forum for
litigating corporate disputes than the Delaware courts.

The Act is consistent with the trend in the United States to create a more
uniform body of law among the states regarding corporate governance. The
Oklahoma Legislature has responded to the needs of corporations organized under
the laws of Oklahoma through numerous amendments to the Act since its enactment,
including amendments to the Act to conform to changes made to the Delaware Law.
The Board of Directors believes the Act will provide New PalWeb with a
comprehensive, and flexible legal structure under which to operate.

TAX CONSEQUENCES

The Company has not received a tax opinion from its counsel but believes
that the proposed Merger will be a tax-free reorganization under the Internal
Revenue Code of 1986, as

amended. Accordingly, (i) no gain or loss will be recognized for federal income
tax purposes by the shareholders of the Company as a result of the Merger and
(ii) the basis and holding period for the stock of New PalWeb received by the
shareholders of the Company will be the same as the basis and holding period of
the stock of the Company exchanged therefor. The Merger will have no federal
income tax effect on the Company. State, local or foreign income tax
consequences to shareholders may vary from the federal tax consequences
described above, and shareholders should consult their own tax advisors as to
the effect of the reincorporation proposal under applicable state, local or
foreign income tax laws.

ACCOUNTING CONSEQUENCES

The Merger will not result in any material financial accounting
consequences. The existing assets and liabilities of the Company will continue
to be reported at their historical amounts on the books of New PalWeb.

REGULATORY APPROVALS

There are no regulatory approvals required in connection with the
Reincorporation Proposal.

ABANDONMENT

Notwithstanding a favorable vote of the shareholders, the Company reserves
the right by action of the Board of Directors to abandon the proposed
reincorporation prior to the Effective Date of the Merger if it determines that
such abandonment is in the best interests of the Company. The Board of Directors
has made no determination as to any circumstances which may prompt a decision to
abandon the proposed reincorporation.

VOTE REQUIRED

Pursuant to the Delaware Law, the affirmative vote of the holders of a
majority of the outstanding shares of the Company's Common Stock and Convertible
Preferred Stock, voting together as a single class, is required for approval of
the Merger to effectuate the reincorporation of the Company in Oklahoma. Under
the Shareholders Agreement, by virtue of WCC's designation of two-thirds of the
Company's Board, WCC's approval of the Reincorporation Proposal is also
required. A vote of approval of the Reincorporation Proposal will constitute
specific approval of the Plan of Reincorporation, and of all other transactions
and proceedings relating to the Merger, including the assumption by New PalWeb
of the Company's Stock Plan, and the obligations of the Company under such plan,
the changes in capitalization and the grant of authority to the Board to effect
a reverse stock split. WCC's designated Board members have approved the
Reincorporation Proposal. In addition, all Board members, who collectively own
or have the right to vote approximately 40.8% of the existing outstanding Common
Stock and Convertible Preferred Stock, intend to vote in favor of the
Reincorporation Proposal, and the Company anticipates that Bill J. English, as
trustee, will vote up to 14.8% of the existing outstanding Common Stock and
Convertible Preferred Stock in favor of the Reincorporation Proposal (depending
on the number of shares voted against the proposal), which would be a total of
up to 55.7% of the existing outstanding Common Stock and Convertible Preferred
Stock voted in favor of the Reincorporation Proposal.

NO APPRAISAL RIGHTS

Under applicable provisions of the Delaware Law, there are no dissenting
shareholder appraisal rights available in connection with the Reincorporation
Proposal.

CONSEQUENCES OF NON-APPROVAL OF MERGER

If the Reincorporation Proposal is not approved, the Company will remain a
Delaware corporation. The authorized capitalization of the Company and the par
value of the Common Stock of the Company will remain unchanged. Grantees of
options to date under the Company's Stock Plan will be unable to exercise such
options. The Company will have insufficient authorized shares of its Common
Stock for issuance in the event that all holders of the Company's Warrants elect
to purchase Common Stock and all holders of the Company's Convertible Preferred
Stock and 2001 Preferred Stock become entitled or elect to convert their shares
into Common Stock. The Company believes that prospects for additional
capitalization and financing necessary to the Company's viability and ultimate
success will become increasingly weak, and the market value of the Company's
Common Stock and its shareholders' investments will likely decline.

THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE REINCORPORATION PROPOSAL AND
THE MERGER WHICH WILL EFFECTUATE THE REINCORPORATION PROPOSAL AND UNANIMOUSLY
RECOMMENDS A VOTE "FOR" APPROVAL OF THE REINCORPORATION PROPOSAL.

EXECUTIVE COMPENSATION AND OTHER MATTERS

EXECUTIVE COMPENSATION

Other than Mr. Paul Kruger, the Company Chairman and President, no other
executive officers receive a salary as a part of executive compensation. The
following table sets forth the compensation paid to named executive officers
during fiscal years ending May 31, 2000 and 2001.

SUMMARY COMPENSATION TABLE

ANNUAL COMPENSATION LONG-TERM COMPENSATION
NAME AND FISCAL YEAR ------------------- SECURITIES UNDERLYING
PRINCIPAL POSITION ENDING MAY 31 SALARY BONUS OPTIONS/SARS(#)
------------------ ------------- --------- ----- ---------------
Paul A. Kruger, 2001 $12,000 -0- 2,500,000
Chairman of the 2000 $ 6,000(1) -0- -0-
Board and President

(1) Mr. Kruger was first placed on the payroll of the Company on December 1,
1999.

The following table contains information concerning the grant of stock
options during the fiscal year ended May 31, 2001, under the Company's Stock
Plan to named executive officers.

OPTION/SAR GRANTS IN LAST FISCAL YEAR

(INDIVIDUAL GRANTS)

NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS/ EXERCISE
UNDERLYING SARS GRANTED TO OR BASE
OPTIONS/SARS EMPLOYEES PRICE EXPIRATION
NAME GRANTED (#)(1) IN FISCAL YEAR ($/SH) DATE
-------------- -------------- --------------- -------- -----------
Paul A. Kruger 2,500,000 28% $0.04(1) May 11, 2011(2)

(1) All options granted to Paul A. Kruger during fiscal year 2001 were granted
under the Company's Stock Plan. Exercise price of options must be paid in
cash, by tender of shares of Common Stock (valued at fair market value at
the date of exercise), by surrender of a portion of the option, or by a
combination of such means of payment. The exercise price of such options is
equal to 100% of the market price per share of the Common Stock on the date
of grant.

(2) The options granted to Mr. Kruger were made fully vested and immediately
exercisable as of the date of the grant, except that such options may not
be exercised unless and until the Company's certificate of incorporation is
amended to reduce the par value of the Company's Common Stock below $0.04
per share. The options expire if not exercised 10 years after the date of
grant.

The following table provides information with respect to named executive
officers concerning the exercise of options during the fiscal year ended May 31,
2001, and unexercised options held as of May 31, 2001.

AGGREGATE OPTION/SAR EXERCISES IN THE LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
SHARES OPTIONS/SARS OPTIONS/SARS
ACQUIRED AT FY-END (#) AT FY-END ($)
ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
-------------- ----------- ----------- ---------------- --------------
Paul A. Kruger -0- N/A 2,500,000/-0-(1) $87,500/-0-(2)

(1) None of these options are exercisable unless and until the shareholders of
the Company amend the certificate of incorporation of the Company to reduce
the par value of the Common Stock of the Company.

(2) Value of unexercised in-the-money options at May 31, 2001, is calculated
based on the fair market value of the Common Stock on May 31, 2001, of
$0.075 per share less the option exercise price.

INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON

Mr. Paul A. Kruger may have an interest in connection with "Proposal Two,
Approval of the Stock Option Plan" due to his ownership of options as further
described in "Security Ownership of Certain Beneficial Owners and Management."
If the Stock Plan is not approved, Mr. Kruger's options will not qualify as
incentive options for purposes of Section 422 of the Code, but they will remain
outstanding.

Messrs. Paul A. Kruger, Lyle W. Miller, Warren F. Kruger and William W.
Pritchard may have certain interests in connection with the proposed
modification of the capital structure of the Company as described under
"Proposal Three, Approval of the Merger of the Company with PalWeb Oklahoma
Corporation, an Oklahoma Corporation, For the Purpose of Redomiciling the
Company to the State of Oklahoma" due to their ownership of options, 2001
Preferred Stock and/or Warrants as further described in "Security Ownership of
Certain Beneficial Owners and Management," of which the options and Warrants
cannot be exercised and the 2001 Preferred Stock cannot be converted unless the
capital structure of the Company is modified to increase the outstanding shares
of Common Stock and/or to reduce the par value of the Common Stock.

Messrs. Paul A. Kruger, Warren F. Kruger, William W. Pritchard, Bradley C.
Shoup and Bryan R. Kirchmer may have certain interests in connection with the
proposed modification of the capital structure of the Company as described under
"Proposal Three, Approval of the Merger of the Company with PalWeb Oklahoma
Corporation, an Oklahoma Corporation, For the Purpose of Redomiciling the
Company to the State of Oklahoma" by virtue of their ownership interests in
Westgate. Westgate owns 2001 Preferred Stock and/or Warrants as further
described in "Security Ownership of Certain Beneficial Owners and Management,"
of which the Warrants cannot be exercised and the 2001 Preferred Stock cannot be
converted unless the capital structure of the Company is modified to increase
the outstanding shares of Common Stock and/or to reduce the par value of the
Common Stock.

RELATED PARTY TRANSACTIONS

ISSUANCES OF SECURITIES

On January 10, 2000, the Company issued the following number of shares of
unregistered Common Stock to the following parties as consideration for the
cancellation of the debt set forth opposite of such parties' names:

NO. OF SHARES
ISSUED IN
DEBT OWED CANCELLATION
NAME BY THE COMPANY OF SUCH DEBT
----------------- -------------- ------------
Hildalgo Trading Company, LC $701,000 7,010,000
Onward, L.L.C. 312,429 3,124,786
Paul A. Kruger 174,000 1,740,000

Hildalgo and Onward are wholly owned by Paul A. Kruger. At the date of this
transaction, the market price of the Company's Common Stock was $0.09 per share.

Also on January 10, 2000, the Company issued 3,500,210 shares of
unregistered Common Stock of the Company to Hildalgo as consideration for
consulting services provided to the Company by Hildalgo having a value of
$350,021.

For information on the issuance of 2001 Preferred Stock and Warrants on
January 4, 2002 to affiliates of Paul A. Kruger, Warren Kruger and William W.
Pritchard, see "Change in Control."

PACECO FINANCIAL SERVICES, INC.

On April 3, 2000, the Company acquired Paceco Financial Services, Inc.
("PFS") by means of a merger of PFS's parent company, Pace Holding, Inc., into a
wholly owned subsidiary of the Company, PP Financial, Inc. In the acquisition,
the Company issued 50 million shares of its Common Stock in exchange for all the
outstanding stock of Pace Holding and PFS became an indirect wholly owned
subsidiary of the Company. All of the outstanding stock of Pace Holding was
owned by Paul Kruger, the Chairman and Chief Executive Officer of the Company.
PFS, in addition to its other assets, owned 43.5 million shares of the Company's
Common Stock, which by virtue of the acquisition, were treated as treasury stock
on the Company's records and, accordingly, the acquisition resulted in the
issuance of an additional 6.5 million shares of the Company's Common Stock.

The 50 million shares of the Company's Common Stock that the Company
exchanged for all of the outstanding stock of Pace Holding was authorized and
approved by the directors of the Company other than Mr. Kruger, Mark R. Kidd and
Lyle W. Miller. The 6.5 million incremental shares of the Company's Common Stock
that were issued in the acquisition of Pace Holding represented the value
attributable to Paceco's business, other than the ownership of the Company
Common Stock.

PFS has been in business since 1952 and is engaged in the business of
making consumer and small business loans primarily in Oklahoma and is regulated
as an "investment certificate issuer" by the Oklahoma Department of Securities
("ODS"). The Company acquired PFS with the intent of using PFS to finance large
purchases of pallets. However, PFS encountered regulatory difficulties with the
ODS, and, as a result of these difficulties, PFS has not engaged in any pallet
financing activities as of January 4, 2002.

The Company entered into a negotiated arrangement with the Oklahoma
Department of Securities in late 2000 whereby a plan (the "Plan") was devised
for redeeming depositors' passbook savings accounts and time certificates
(collectively referred to herein as "Deposits") of PFS. In general, the Plan
provided a method for redeeming the outstanding Deposits through the transfer of
43,500,000 shares of the Company Common Stock owned by PFS ("PFS Shares") to an
independent trustee and the sale of the PFS Shares by the trustee on or before
December 31, 2004 either through open market or private sales or by exercise of
an option to put the shares to Paul A. Kruger with the net sales proceeds being
used to redeem the Deposits. Pursuant to that

certain put agreement (the "Put Agreement") by and between Paul Kruger, Bill J.
English, as Trustee (the "Trustee"), and PFS dated December 20, 2000, the
percentage of PFS shares to be purchased by Mr. Kruger shall be the difference
between the amount payable to Deposit holders each year (20% of account balances
outstanding on December 1, 2000; 25% of account balances outstanding on January
1, 2001; 331/3% of account balances outstanding on January 1, 2002; 50% of
account balances outstanding on January 1, 2003; and 100% of account balances
outstanding on January 1, 2004, or such other amount as shall cause the account
balances to equal zero at December 31, 2004) and the amount distributed to
Deposit holders each year from sources other than the put, as a percentage of
the outstanding account balances.

In accordance with the Put Agreement and the Plan, on December 20, 2001,
PFS made a payment of $357,000 to the Trustee, and Paul A. Kruger purchased
8,850,000 shares of the PFS shares from the Trustee for $1,000,000 in order to
redeem 331/3% of account balances outstanding as of January 1, 2002. This is the
first time that any PFS Shares have been put to Mr. Kruger. Accordingly, as of
December 20, 2001, there were 34,650,000 PFS Shares held by the Trustee.

OFFICE SHARING ARRANGEMENT

In April of 2001, the Company entered into an agreement with Foresight,
Inc., a company of which Messrs. Paul Kruger and Lyle W. Miller are on the Board
of Directors and that is a wholly owned subsidiary of a publicly-held company of
which Paul Kruger beneficially owns in excess of 10%, whereby Foresight agreed
to make a portion of its leased premises in Norman, Oklahoma, available to one
full-time employee of the Company, provide the services of a part-time employee
of Foresight, and pay the Company's expenses in connection with normal office
usage for telephone, fax, copying, postage and other expenses in exchange for
the sum of $3,000 per month. The agreement was effective as of January 1, 2001
and may be terminated by either party at any time upon 30 days written notice.

ADVANCES AND LOANS

As of January 4, 2002, Paul A. Kruger's affiliated entities had loaned the
Company approximately $1,226,282, pursuant to various notes with face amounts
aggregating a total of $2,000,000. These loans were made from approximately June
of 2000 through December of 2001. The maturity dates of all of these notes was
January 15, 2002, and the notes accumulated interest at the rate of 12% per
year. These loans were secured by substantially all of the assets of the Company
and PPP, including equipment, furniture, fixtures, inventory, accounts
receivables and patents. As described above, on January 4, 2002, the principal
amounts of these loans were converted into 2001 Preferred Stock and Warrants.
Also on January 4, 2002, the Company paid the interest accrued on these loans in
the amount of $174,608.

Beginning on March 1, 2001, the Company began to receive financing in the
form of loans from Yorktown Management and Financial Services, LLC,
("Yorktown"), which is principally owned by Warren F. Kruger. Through January 4,
2002, Yorktown had advanced a total of $5,214,297 pursuant to various notes
bearing interest at 12% and maturing on January 15,

2002. These notes were secured, subordinate to the lien described above, by
substantially all of the assets of the Company and PPP, including equipment,
furniture, fixtures, inventory, accounts receivables and patents. The Company
has used and continues to use the proceeds principally for the acquisition of a
new production line of manufacturing equipment. The Company also used $300,000
of these proceeds to settle certain litigation involving Ralph Curton, Jr. For
more information regarding the litigation with Ralph Curton, Jr. and the
subsequent settlement, see the Company's Form 10-KSB. As described above, on
January 4, 2002, the principal amounts of these loans were converted into 2001
Preferred Stock and Warrants. Also on January 4, 2002, the Company paid the
interest accrued on these loans in the amount of $92,204.

LEASE AGREEMENT

From June of 2000 through January 2002, the Company occupied its Dallas
facility under a lease with Onward, an affiliate of Paul A. Kruger. As of
January 4, 2002, this facility was transferred to the Company in connection with
the private placement described above. During the year ended May 31, 2001, the
Company paid rent to Mr. Kruger of $ 163,380.

SECTION 16(A) BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, officers and persons who beneficially own more than 10% of the
Company's Common Stock to file with the Securities and Exchange Commission and
the American Stock Exchange initial reports of ownership and reports of changes
in ownership of Common Stock of the Company. Officers, directors and greater
than 10% beneficial owners are required by regulation to furnish to the Company
copies of all Section 16(a) reports they file.

Based solely on review of the copies of such reports furnished to the
Company and written representations that no other reports were required during
fiscal 2001, to the Company's knowledge, all Section 16(a) filing requirements
applicable to its officers, directors and greater than 10% beneficial owners
during fiscal 2001 were complied with on a timely basis, except as follows:

NUMBER OF TRANSACTIONS
NUMBER OF NOT REPORTED
NAME LATE REPORTS ON A TIMELY BASIS
------------ ------------ -----------------------
Mark R. Kidd 2 2
Paul A. Kruger 1 1
Lyle W. Miller 1 1

VOTING AT ANNUAL MEETING

The director nominees receiving a plurality of the votes of the holders of
Common Stock and Convertible Preferred Stock voting together as a single class
will be elected as directors. The affirmative vote of the holders of a majority
of the shares of Common Stock and Convertible Preferred Stock which are present
in person or represented by proxy at the Annual Meeting is required to approve
the Stock Plan. The affirmative vote of the holders of a majority of the
outstanding shares of Common Stock and Convertible Preferred Stock is required
to approve the Reincorporation Proposal. Any other matters properly brought
before the Annual Meeting will be decided by a majority of the votes cast on the
matter, unless otherwise required by law.

Because directors are elected by a plurality vote rather than a majority of
the shares entitled to vote or a majority of the shares present in person or
represented by proxy at the Annual Meeting, proxies marked "withhold authority"
with respect to any one or more nominees will not affect the outcome of the
nominee's election unless the nominee receives no affirmative votes or unless
other candidates are nominated for election as directors. However, because
shares represented by proxies that are marked "abstain" with regard to the
proposal to approve the Stock Plan will be counted for the purpose of
determining the number of shares represented by proxy at the Annual Meeting,
such proxies marked "abstain" will have the same effect as if the shares
represented thereby were voted against the proposal. Similarly, shares
represented by proxies that are marked "abstain" with regard to the
Reincorporation Proposal will not be voted in favor of the proposal, and,
therefore, will have the same effect as if the shares represented thereby were
voted against the proposal.

Shares represented by proxies returned by brokers where the broker's
discretionary authority is limited by stock exchange rules will be treated as
represented at the Annual Meeting only as to such matter or matters voted on in
the proxy. Shares represented by limited proxies will be treated as represented
at the meeting only as to such matter or matters for which authority is granted
in the limited proxy.

INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

The Board of Directors has selected Hulme Rahhal Henderson, Inc. to serve
as the Company's independent certified public accountants for the fiscal year
ending May 31, 2002. Hulme Rahhal Henderson, Inc. has been the auditor of the
Company's financial statements since May 5, 1999. Representatives of Hulme
Rahhal Henderson, Inc. are expected to be present at the Annual Meeting, with
the opportunity to make a statement if they desire to do so, and will be
available to respond to appropriate questions.

PROPOSALS OF SHAREHOLDERS

The Board of Directors will consider proposals of shareholders intended to
be presented for action at annual meetings of shareholders. According to the
rules of the Securities and Exchange Commission, such proposals shall be
included in the Company's Proxy Statement if they are received in a timely
manner and if certain requirements are met. For a shareholder

proposal to be included in the Company's Proxy Statement relating to the 2003
Annual Meeting of Shareholders, a written proposal complying with the
requirements established by the Securities and Exchange Commission, including
Rule 14a-8 under the Securities Exchange Act of 1934, must be received no later
than November 25, 2002. In addition, shareholders are notified that the deadline
for providing the Company timely notice of any shareholder proposal to be
submitted outside of the Rule 14a-8 process for consideration at the 2003 Annual
Meeting of Shareholders is February 8, 2003. As to all such matters of which the
Company does not have notice as of February 8, 2003, discretionary authority to
vote on such matters will be granted to the persons designated in the proxies
solicited by the Company relating to the 2003 Annual Meeting. All shareholder
proposals should be delivered to PalWeb Corporation, 1607 West Commerce Street,
Dallas, Texas 75208

OTHER MATTERS

The Company does not know of any matters to be presented for action at the
Annual Meeting other than those listed in the Notice of Meeting and referred to
herein.

COPIES OF THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION MAY BE OBTAINED, WITHOUT CHARGE TO
SHAREHOLDERS, BY WRITING ARLIN PLENDER, INVESTOR RELATIONS AT PALWEB
CORPORATION, 1607 WEST COMMERCE STREET, DALLAS, TEXAS 75208.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This Information Statement, including Appendix A, contains forward-looking
statements regarding potential future events and developments affecting the
business of the Company. Such statements relate to, among other things: future
operations of the Company, the development of distribution channels and product
sales and the introduction of new products into the market. Forward-looking
statements may be indicated by the words expects, estimates, anticipates,
intends, predicts, believes, or other similar expressions. Forward-looking
statements appear in a number of places in this Information Statement, including
Appendix A, and may address the intent, belief, or current expectations of the
Company and its Board of Directors and management with respect to the Company
and its business. The forward-looking statements are subject to various risks
and uncertainties described in this Information Statement, including Appendix A.
For these reasons, the Company's actual results may vary materially from the
forward-looking statements.

APPENDIX A
----------

FINANCIAL INFORMATION

Certain financial information about PalWeb Corporation, a Delaware
corporation ("PalWeb"), required by the Securities and Exchange Commission
("SEC") to be distributed to shareholders as an annual report is set forth
below. The financial statements were originally filed with the SEC on September
13, 2001, as part of PalWeb's Annual Report on Form 10-KSB for the fiscal year
ended May 31, 2001 (the "Form 10-KSB"), and the other information contained in
this Appendix A is substantially similar to disclosures made in the Form 10-KSB.
PalWeb also filed with the SEC Quarterly Reports on Form 10-QSB for the
quarterly periods ending August 31, 2001, and November 30, 2001. Such Forms
10-QSB were filed on October 15, 2001, and January 14, 2002, respectively.
Copies of such Forms 10-QSB and other reports filed by PalWeb may be found at
the SEC's website located at http://www.sec.gov. You are encouraged to review
the financial information set forth below together with subsequent information
filed by PalWeb with the SEC and other publicly available information.

A-1

FINANCIAL STATEMENTS

INDEPENDENT AUDITOR'S REPORT

Board of Directors
PalWeb Corporation
Dallas, Texas

We have audited the accompanying consolidated balance sheet of PalWeb
Corporation and its subsidiaries as of May 31, 2001, and the related
consolidated statements of operations, stockholders' deficiency, and cash flows
for the years ended May 31, 2001 and 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material aspects, the financial position of PalWeb Corporation and its
subsidiaries as of May 31, 2001, and the results of their operations and their
cash flows for the years ended May 31, 2001 and 2000, in conformity with U.S.
generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company is in the development
stage and has suffered significant losses from operations. Substantial
additional funding will be required to implement its business plan and to attain
profitable operations. The lack of adequate funding to maintain working capital
and stockholders' deficits at May 31, 2001, raises substantial doubt about its
ability to continue as a going concern. In addition, PalWeb has a wholly owned
subsidiary which issues thrift accounts and savings certificates to investors.
The subsidiary does not have sufficient assets to liquidate investors' thrift
accounts and savings certificates. Management's plans in regard to these matters
are described in Note 2. The financial statements do not include any adjustments
that might result from the outcome of these uncertainties.

HULME RAHHAL HENDERSON, INC.

August 15, 2001
Ardmore, Oklahoma

A-2

PALWEB CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
MAY 31, 2001

ASSETS
------
MANUFACTURING:
Current Assets:
Cash $ 10,923
Accounts receivable 72,788
Inventory (Note 4) 142,689
Prepaid Expenses 95,000
----------
Total current assets 321,400

Property, Plant and Equipment, net
of accumulated depreciation (Note 6) 2,325,483

Other Assets (Note 7) 76,031
----------

TOTAL MANUFACTURING ASSETS 2,722,914
----------

FINANCE:
Cash 69,546
Loans receivable, net of allowance for
doubtful accounts (Note 5) 814,349
----------

TOTAL FINANCE ASSETS 883,895
----------

TOTAL ASSETS $3,606,809
==========

The accompanying notes are an integral part
of this consolidated financial statement.

A-3

PALWEB CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
MAY 31, 2001

LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------

MANUFACTURING:
Current Liabilities:
Note payable (Note 8) $ 1,536,559
Note payable - related party (Note 8) 947,200
Accounts payable 1,705,033
Accrued interest payable 118,031
------------

Total current liabilities 4,306,823

Deferred Income (Note 12) 707,044
------------

TOTAL MANUFACTURING LIABILITIES 5,013,867
------------

FINANCE:
Thrift accounts and time certificates (Note 9) 5,107,257
Accrued interest payable 204,061
Notes payable (Note 8) 171,836
------------

TOTAL FINANCE LIABILITIES 5,483,154
------------

COMMITMENT AND CONTINGENCY (Notes 18 and 19)

STOCKHOLDERS' DEFICIENCY (Notes 13 and 14):
Preferred stock, $.0001 par, 20,000,000 shares
authorized, 2,525,000 shares outstanding 253
Common stock, $.10 par value, 250,000,000
authorized, 231,928,244 shares outstanding 23,192,825
Additional paid-in capital 9,725,686
Deficit accumulated during development stage (35,258,710)
------------
(2,339,946)
Treasury stock, 43,500,000 shares common, at cost (4,550,266)
------------
TOTAL STOCKHOLDERS' DEFICIENCY (6,890,212)
------------

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 3,606,809
============

The accompanying notes are an integral part
of this consolidated financial statement.

A-4

PALWEB CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS

From Inception
Year Ended May 31, (November 20,
------------------------------ 1995) to
2001 2000 May 31, 2001
------------ ------------ ------------

MANUFACTURING:
Sales $ 89,211 $ 14,013 $ 195,918

Expenses:
Research and development 95,000 -- 501,943
Salaries and benefits 307,085 357,226 1,658,417
General and administrative expenses 907,940 1,949,987 9,665,648
Depreciation expense 204,584 204,805 818,503
Impairment -- -- 3,456,231
Interest expense 300,451 188,822 952,464
------------ ------------ ------------
Total expenses 1,815,060 2,700,840 17,053,206
------------ ------------ ------------
Other income (expense):
Gain on settlement of contracts
and liabilities 1,541,783 57,479 1,599,262
Other -- (4,877) 272,308
------------ ------------ ------------
Total other income (expense) 1,541,783 52,602 1,871,570
------------ ------------ ------------
LOSS FROM MANUFACTURING OPERATIONS (184,066) (2,634,225) (14,985,718)

FINANCE:
Revenues -
Interest and fees on loans 177,580 68,906 246,486
Other income 3,988 1,004 4,992
Gain (loss) on sale of assets 18,615 (1,250) 17,365
------------ ------------ ------------
Total Revenues 200,183 68,660 268,843
------------ ------------ ------------
Expenses -
Interest on thrift accounts and
time certificates 319,381 72,514 391,895
Interest on notes payable 17,366 3,293 20,659
Salaries and benefits 40,311 16,864 57,175
Other operating expenses 235,794 141,871 377,665
Provision for credit losses 173,426 180,000 353,426
Depreciation and amortization 782,398 105,910 888,308
------------ ------------ ------------
Total expenses 1,568,676 520,452 2,089,128
------------ ------------ ------------
LOSS FROM FINANCE OPERATIONS (1,368,493) (451,792) (1,820,285)
------------ ------------ ------------
LOSS FROM TOTAL OPERATIONS, BEFORE
DISCONTINUED AND EXTRAORDINARY ITEMS (1,552,559) (3,086,017) (16,806,003)

INCOME (LOSS) FROM DISCONTINUED OPERATIONS 73,838 (9,425) (792,648)

EXTRAORDINARY GAIN -- -- 68,616
------------ ------------ ------------
NET LOSS $ (1,478,721) $ (3,095,442) $(17,530,035)
============ ============ ============

A-5

PALWEB CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS - CONTINUED

LOSS PER COMMON SHARE:
Loss before discontinued operation $ (0.01) (0.02)
Loss from discontinued operation -- --
------------ ------------

Loss per common share $ (0.01) $ (0.02)
============ ============

WEIGHTED AVERAGE SHARES OUTSTANDING 198,293,000 207,608,000
============ ============

The accompanying notes are an integral part
of this consolidated financial statement.

A-6

PALWEB CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY

Preferred Stock Common Stock Additional Total
---------------------------- ---------------------------- Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Deficiency
------------ ------------ ------------ ------------ ------------ ------------ ------------

BALANCES,
May 31, 1999 880,000 88 217,981,046 21,798,105 2,027,465 (27,391,427) (3,565,769)

Issuance of stock
for services 125,000 13 14,625,210 1,462,521 18,737 -- 1,481,271

Contribution of debt
to capital -- -- -- -- 189,000 -- 189,000

Stock issued in
satisfaction of debt 3,963,890 396 12,334,790 1,233,479 627,538 -- 1,861,413

Default judgement on
related party debt -- -- -- -- 1,619,422 -- 1,619,422

Preferred stock
converted to common (2,193,890) (219) 2,193,890 219,389 (219,170) -- --

Cancellation of
common stock -- -- (54,856,692) (5,485,669) 5,485,669 -- --

Stock issued in
acquisition -- -- 50,000,000 5,000,000 -- (3,293,120) 1,706,880

Net loss -- -- -- -- -- (3,095,442) (3,095,442)
------------ ------------ ------------ ------------ ------------ ------------ ------------

BALANCES,
May 31, 2000 2,775,000 278 242,278,244 24,227,825 9,748,661 (33,779,989) 196,775

Stock issued in
satisfaction of debt -- -- 100,000 10,000 2,000 -- 12,000

Preferred stock
converted to common (250,000) (25) 250,000 25,000 (24,975) -- --

Cancellation of
common stock -- -- (10,700,000) (1,070,000) -- -- (1,070,000)

Net loss -- -- -- -- -- (1,478,721) (1,478,721)
------------ ------------ ------------ ------------ ------------ ------------ ------------
BALANCES,
May 31, 2001 2,525,000 253 231,928,244 $ 23,192,825 $ 9,725,686 $(35,258,710) $ (2,339,946)
============ ============ ============ ============ ============ ============ ============

The accompanying notes are an integral part
of this consolidated financial statement.

A-7

PALWEB CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS

From Inception
Year Ended May 31, (November 20,
------------------------------ 1995) to
2001 2000 May 31, 2001
------------ ------------ ------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,478,721) $ (3,095,442) $(17,530,035)
Adjustments to reconcile net loss to
cash used by operating activities:
Depreciation and amortization 1,001,348 315,509 1,756,771
Extraordinary gain on debt retirement -- -- (68,616)
Consulting services paid by
issuance of common stock (1,070,000) 1,481,271 5,646,271
Impairment of investment -- -- 3,145,000
Loss (gain) of disposition of property (31,099) 4,877 285,009
Provision for credit losses 173,426 180,000 353,426
Changes in accounts receivable (71,988) (800) (72,788)
Changes in inventory (128,966) (3,785) (142,689)
Changes in other assets 58,918 (78,303) (105,222)
Changes in payable - related party -- 707,909 2,930,901
Changes in accounts payable
and accrued expenses 1,121,869 201,882 3,165,615
Increase in customer deposits -- -- 300,000
------------ ------------ ------------
Net cash provided by (used)
operating activities (425,213) (286,882) (336,357)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,804,231) (233,049) (5,252,853)
Decrease in loans receivable 1,380,379 89,483 1,469,862
Net liabilities from acquisition
of finance and real estate -- 230,724 230,724
Proceeds from sale of equipment 1,362,000 19,461 1,456,456
Proceeds from lease finance obligation -- -- 149,517
------------ ------------ ------------
Net cash provided by (used)
investing activities 938,148 106,619 (1,946,294)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes and advances payable 1,898,759 452,500 3,365,066
Payments on notes payable (1,042,875) (9,355) (1,291,980)
Decrease in savings certificates (1,556,232) 4,290 (1,551,942)
Proceeds from mortgage payable - related party -- -- 1,350,000
Proceeds from issuance of common stock -- -- 491,976
------------ ------------ ------------
Net cash provided (used) by
financing activities (700,348) 447,435 2,363,120
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH (187,413) 267,172 80,469
CASH, beginning of period 267,882 710 --
------------ ------------ ------------
CASH, end of period $ 80,469 $ 267,882 $ 80,469
============ ============ ============
SUPPLEMENTAL INFORMATION (Note 16)

The accompanying notes are an integral part
of this consolidated financial statement.

A-8

PALWEB CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

Effective December 12, 1997, PalWeb Corporation ("PalWeb"), formerly
Cabec Energy Corporation, was acquired in a reverse acquisition by the
stockholders of Plastic Pallet Production, Inc.("PPP") whereby the
stockholders of PPP became majority owners of PalWeb. Pursuant to the
agreement, PalWeb exchanged its common stock for the outstanding common
stock of PPP and the assets and liabilities of PalWeb and its
subsidiaries as of the effective date were to be transferred into a new
company whose stock was to be distributed to the stockholders of
PalWeb, other than the new stockholders resulting from the PPP stock
transfer. This latter distribution was effected November 10, 1998.

The business of PalWeb as of December 12, 1997 was principally involved
in energy services. Since the disposition of the energy services net
assets was approved at the time of approval of the PPP stock exchange,
these net assets were accounted for as discontinued operations.
Further, the distribution effected as of November 10, 1998 is accounted
for as a spin off in accordance with APB Opinion No. 29, "Accounting
for Nonmonetary Transactions."

PalWeb is principally engaged in the manufacture and marketing of
plastic pallets and the related injection molding equipment necessary
to produce plastic pallets. In addition, PalWeb is engaged in consumer
loans through its indirect subsidiary, Paceco Financial Services, Inc.
("PFS").

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts
of PalWeb and its subsidiaries. All material intercompany accounts and
transactions have been eliminated.

DEVELOPMENT STAGE COMPANY

PPP from its inception, November 20, 1995, has pursued the development
of a plastic pallet which will compete with traditional wood pallets.
Additionally, PPP has designed an injection molding machine which it
anticipates can be built and operated more economically than
competitive equipment. At May 31, 2001, a prototype model of the
injection molding machine is in operation and producing plastic pallets
for sale. Further, PalWeb is constructing an injection molding facility
which will substantially increase PalWeb's productive capacity.
However, PalWeb will retain its development stage status until it is
capable of generating sufficient sales to maintain its operations.

STATEMENT OF CASH FLOWS

PalWeb considers all short-term investments with an original maturity
of three months or less to be cash equivalents.

USE OF ESTIMATES

The preparation of PalWeb's financial statements in conformity with
U.S. generally accepted accounting principles requires PalWeb's
management to make estimates and assumptions that affect the amounts
reported
A-9

PALWEB CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

in these financial statements and accompanying notes. Actual results
could differ materially from those estimates.

INVENTORY

Inventory consists of finished pallets and is stated at the lower of
cost (first-in, first-out) or market value.

LOANS AND ALLOWANCE FOR CREDIT LOSSES

Installment loans are stated at the amount of unpaid principal and
interest, reduced by unearned interest and an allowance for credit
losses. Interest income is recognized when earned except where serious
doubt exists as to the ultimate collectibility of the interest in which
case no accrual of interest is made. At May 31, 2001, substantially all
of the loans receivable are on a nonaccrual basis.

PFS performs ongoing credit valuations of customers and generally
requires collateralization of the loan. The allowance for credit losses
is maintained at a level adequate to absorb probable losses. Management
determines the adequacy of the allowance based upon reviews of the
installment loans, recent loss experience, current economic conditions,
the risk characteristics of the various categories of loans, and other
pertinent factors. Loans deemed uncollectible are charged to the
allowance. Provisions for credit losses and recoveries on loans
previously charged off are added to the allowance.

PROPERTY, PLANT AND EQUIPMENT

PalWeb's property, plant and equipment is stated at cost. Depreciation
expense is computed on the straight-line method over the estimated
useful lives, as follows:

Manufacturing:
Plant building 20 years
Plant improvements 7 years
Production machinery equipment 5-10 years
Office equipment & furniture & fixtures 3-5 years

Upon sale, retirement or other disposal, the related costs and
accumulated depreciation of items of property, plant or equipment are
removed from the related accounts and any gain or loss is recognized.
When events or changes in circumstances indicate that assets may be
impaired, an evaluation is performed comparing the estimated future
undiscounted cash flows associated with the asset to the assets
carrying amount. If the asset carrying amount exceeds the cash flows, a
write-down to market value or discounted cash flow value is required.

INVESTMENT IN VIMONTA AG

PalWeb's 20% ownership in Vimonta AG is carried on the cost basis of
accounting since management has no board representation, financial
information or other influence on the operation of Vimonta AG. The
asset is valued at $5,000 included in other assets in the manufacturing
segment.
A-10

PALWEB CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

PATENTS

Amortization expense for the costs incurred by PalWeb to obtain the
patents on the modular pallet system and accessories is computed on the
straight-line method over the estimated life of 17 years.

GOODWILL

The excess of cost over the value of net assets acquired (goodwill) is
being amortized on a straight-line basis over thirty months, except
that during fiscal year 2001, management recognized an impairment to
its goodwill and incurred an additional charge of $333,480 to fully
amortize the balance of its goodwill.

STOCK OPTIONS

PalWeb applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES, and relate interpretations, in
accounting for its stock options. As such, compensation expense would
be recorded on the date of grant only if the current market price of
the underlying stock exceeded the exercise price. SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, established accounting and
disclosure requirements for stock-based employee compensation plans. As
allowed by SFAS No. 123, PalWeb has elected to continue to apply the
intrinsic value-based method of accounting under APB No. 25, and has
adopted the disclosure requirements of SFAS No. 123 as reflected in
Note 14.

RECOGNITION OF REVENUES

Revenue is recognized when the product is shipped.

INCOME TAXES

PalWeb accounts for income taxes under the liability method, which
requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred
tax assets and liabilities are determined based in the difference
between the financial statements and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.

RESEARCH AND DEVELOPMENT COSTS

Research and Development costs are charged to operations in the period
incurred.

LOSS PER SHARE

Loss per share is computed based on weighted average number of shares
outstanding. Convertible preferred stock and stock options are not
considered as their effect is antidilutive.

A-11

PALWEB CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

RECENT PRONONUCEMENTS

Recent pronouncements issued by the Financial Accounting Standards
Board include SFAS No. 138, ACCOUNTING FOR CERTAIN DERIVATIVE
INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES, SFAS No. 139, RESCISSION OF
FASB STATEMENT NO. 53 AND AMENDMENTS TO FASB STATEMENTS NO. 63, 89, AND
121, SFAS No. 140, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL
ASSETS AND EXTINGUISHMENT OF LIABILITIES, and SFAS No. 141, BUSINESS
COMBINATIONS, and SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS.
The implementation of these standards are not expected to have a
material effect on PalWeb's consolidated financial statements.

NOTE 2. CONTINUATION AS A GOING CONCERN

The accompanying financial statements have been prepared assuming that
PalWeb will continue as a going concern. PalWeb is in the development
stage and has suffered significant losses from operations. To date,
PalWeb has received substantial advances from investors but will
require additional substantial funding in order to implement its
business plan and have an opportunity to achieve profitable operations.
Management has been successful in financing its operations through
short-term loans from an individual and advances and loans from its
principal stockholder and officer. Management continues to seek
long-term and/or permanent financing through pursuit of a private
placement of securities. Neither the receipt of additional funding in
adequate amounts nor the successful implementation of its business plan
can be assured. The combination of these factors raise substantial
doubt about PalWeb's ability to continue as a going concern. It is
management's opinion that the funding required to reach necessary
production levels will be obtained and, based upon expressions of
interest from potential customers, PalWeb will obtain adequate sales to
reach a profitable status, and will continue as a going concern.

Effective October 5, 2001, PFS notified its investment certificate
holders that it was suspending redemptions of depositors' passbook
savings accounts and time certificates. PFS has appointed a trustee to
oversee a plan to liquidate the investment and savings certificates
over a four year period ending December 31,2004. To facilitate the
liquidation, PFS will be required to liquidate substantially all of its
assets, including common stock holdings of PalWeb. As of May 31, 2001,
there would not be sufficient funds to fully redeem the certificates;
however, if necessary, the trustee can "put" certain shares to Paul
Kruger, Chairman and CEO, and Mr. Kruger would agree to purchase ths
shares at a price sufficient to effect the liquidation throughout the
period of liquidation. At May 31, 2001, PFS had assets and liabilities
as follows:

Liquid assets:
Cash $ 70,000
Loans receivable, net
of allowance for losses 814,000
PalWeb common stock, 43,500,000
shares at seven cents per share 3,050,000
-----------
3,934,000
-----------
A-12

PALWEB CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2. CONTINUATION AS A GOING CONCERN - continued

Liabilities:
Thrift accounts and
time certificates 5,107,000
Accrued liabilities 204,000
Notes payable 172,000
-----------
5,483,000
-----------
Deficit $(1,549,000)
===========

NOTE 3. SEGMENT OF BUSINESS

The Company's business has two reportable segments - manufacturing, and
finance. The manufacturing segment is the production of plastic pallets
and the finance segment is the business of lending money. Both segments
are individually presented in the accompanying financial statements.
The accounting policies are the same as those described in the summary
of significant accounting policies. Intersegment transactions are not
significant.

NOTE 4. INVENTORY

Inventory at May 31, 2001 consists of:

Raw materials $ 31,793
Finished goods 110,896
-----------
Total inventory $ 142,689
===========

NOTE 5. LOANS RECEIVABLE

Loans for finance and real estate at May 31, 2001 consist of the
following:

Installment loans $ 1,249,924
Unearned interest (10,207)
Allowance for credit losses (425,368)
-----------
$ 814,349
===========

Changes in the allowance for credit losses for the year ended May 31,
2001 are as follows:

Balance, beginning of year $ 489,847
Provision 173,426
Loans charged-off (237,905)
Recoveries --
-----------
Balance, end of period $ 425,368
===========

At May 31, 2001, substantially all loans are on a nonaccrual basis.

A-13

PALWEB CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5. LOANS RECEIVABLE - continued

The installment loans, in order to reduce credit risk, are secured by
various forms of collateral, including first mortgages on real estate,
liens on personal property, savings deposits, etc. In the event of
default by the borrower, the Company would incur a loss to the extent
that the value of the collateral is less than the outstanding balance
of the loan.

NOTE 6. PROPERTY, PLANT AND EQUIPMENT

A summary of the property, plant and equipment is as follows:

Manufacturing:
Production machinery and equipment, including
construction in progress of $1,643,624 $ 2,602,718
Furniture and fixtures 127,936
-----------
2,730,654
Less: accumulated depreciation (405,171)
-----------
$ 2,325,483
===========

Depreciation expense for the years ended May 31, 2001 and 2000 is
$353,609 and $210,031, respectively.

NOTE 7. OTHER ASSETS

For the manufacturing segment, at May 31, 2001, other assets consist of:

Patents, net of accumulated
amortization of $11,213 $ 60,431
Deposits and other 15,600
-----------
Total Other Assets $ 76,031
===========

NOTE 8. NOTES PAYABLE

A summary of the notes and advances payable as of May 31, 2001 are as
follows:

Manufacturing:
Note payable to Yorktown Management and
Financial Services, LLC, interest at
12%, due October 15, 2001 $ 1,536,559

Note payable to Hidalgo Trading Company,
LLC, Interest at 12%, due June 1, 2001 $ 947,200

A-14

PALWEB CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8. NOTES PAYABLE - continued

Finance:
Note payable to bank, prime interest rate
(6.75% at 5/31/01),due September, 2000 $ 171,836

Maturities of notes payable for years ended May 31 is as follows:

2002 $2,503,630
2003 21,789
2004 22,743
2005 107,433

The note payable to Yorktown Management and Financial Services, LLC is
a line of credit totaling $3,000,000, 12% interest, due October 15,
2001. Effective June 1, 2001, the note payable to Hildago Trading
Company, LLC, a company owned by Mr. Paul Kruger, Chairman and CEO, was
renewed and extended into a line of credit totaling $2,000,000, 12%
interest, due October 15, 2001. Both the Yorktown and Hidalgo notes are
secured by PalWeb's equipment, inventory and accounts receivable.

NOTE 9. THRIFT ACCOUNTS AND TIME CERTIFICATES

As discussed in Note 2, PFS has suspended redemption of thrift and time
certificates and will redeem the accounts annually over four years in
substantially equal installments with the last installment to be made
in December, 2004. As the time certificates mature, PFS will accrue
interest at the passbook rate of 6%. At May 31, 2001, the thrift and
time certificates total $5,107,257 and accrued interest totals
$204,061.

NOTE 10. RELATED PARTY TRANSACTIONS

In September 1999, PalWeb obtained a $20,000,000 default judgement
against a stockholder/investor. Additionally, the judgement canceled
41,443,308 shares of common stock held by the investor. The investor
has four years from the date of judgement to file an action seeking to
set aside the judgement. The cancellation of the common stock was
accounted for as a contribution to additional paid in capital.

In March 2000, PalWeb obtained a default judgement against certain
related parties, Chartex AG and New Inter HKB AG, causing the
cancellation of 13,413,384 shares of common stock and advances from
related party in the amount of $1,619,422. The cancellations were
recorded as a contribution to additional paid in capital.

During fiscal year 2000, the chairman and principal stockholder
received 11,874,790 shares of common stock in exchange for debt in the
amount of $1,187,479. The exchange ratio was based on fair value of the
common stock. In addition, the individual received 3,625,210 shares of
common stock in exchange for services totaling $362,521. The value of
the services is based on the fair value of the common stock. Also, the
chairman and principal stockholder received 50,000,000 shares of common
stock in exchange for the outstanding common stock of Pace Holding,
Inc. and its subsidiary, PFS.

A-15

PALWEB CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10. RELATED PARTY TRANSACTIONS - continued

PalWeb leases commercial space from Onward, LLC, owned by Mr. Paul
Kruger, chairman and CEO. Total rentals paid to these entities were
$199,380 and $153,820 in fiscal years 2001 and 2000, respectively. At
May 31, 2001, prepaid rent in the amount of $95,000 had also been paid
to these entities.

Mr. Kruger provides working capital to the company under a note as
described in Note 8. The outstanding balances of the note and accrued
interest payable at May 31 2001 are $947,200 and $98,994, respectively.

In December, 2000, the real estate segment was sold to Mr. Paul Kruger
for appraised value of $1,352,000. A gain of $31,099 was recognized.

NOTE 11. FEDERAL INCOME TAXES

Deferred taxes as of May 31, 2001 are as follows:

Net operating loss $ 4,421,443
Loss on impairment of investment 1,151,070
Stock based compensation 34,447
Allowance for credit losses 161,640
-----------
5,768,600
Less: Valuation allowance (5,768,600)
-----------
Total $ --
===========

Management has provided a valuation allowance for the full amount of
the deferred tax asset as PalWeb has yet to progress beyond the
development stage of its operations. While management projects that the
products being developed will be profitable and the deferred asset will
ultimately be realized, PalWeb has not yet reached such stage in its
development to place reasonable reliability on product acceptance and
marketability

The net change in deferred taxes is as follows:

Year Ended May 31,
----------------------------
2001 2000
----------- -----------
Net operating loss $ 326,925 $ 1,001,163
Accrued liabilities (41,800) 41,800
Allowance for credit losses 93,240 68,400
Gain on sale of plant for tax
purposes (160,681) --
Stock based compensation 34,447 --
Change in Valuation allowance (252,131) (1,111,363)
----------- -----------
Tax Benefit $ -- $ --
=========== ===========

A-16

PALWEB CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11. FEDERAL INCOME TAXES - continued

PalWeb's effective tax rate differs from the federal statutory rate as
follows:
Year Ended May 31,
----------------------------
2001 2000
----------- -----------
Tax benefit using statutory tax rate $ 534,419 $ 1,052,450
Effect of state tax rates 47,155 97,475
Net change in valuation allowance (252,131) (1,111,163)
Amortization of goodwill (244,059) --
Other deductions (85,384) (38,762)
----------- -----------
Tax benefit, per financial statements $ -- $ --
=========== ===========

PalWeb has a net operating loss (NOL) for Federal income tax purposes
as of May 31, 2000 of $11,086,000 as follows:

Year of
Amount Expiration
---------- ----------
$1,290,000 2012
1,291,000 2018
5,871,000 2019
2,634,000 2020
883,000 2021

NOTE 12. DEFERRED INCOME

In April 1999, an entity owned by Mr. Paul Kruger, chairman and CEO,
acquired PalWeb's plant in Dallas, with a three year option, expiring
April 2002, to purchase the property. Due to the existence of the
option to repurchase the property, the transaction had been accounted
for as a financing arrangement whereby the plant and related mortgage
debt assumed by the buyer was maintained as an asset and depreciated
and liability, respectively, for financial statement purposes.
Effective May 1, 2001, PalWeb entered into a new lease with the entity
and the option was cancelled. Accordingly, the asset and related
liability were removed from the financial statements and the gain from
the transaction is deferred to be amortized over the estimated use of
the property. Since the transaction is with a related party, the
amortization of the gain will be to additional paid in capital.

NOTE 13. STOCKHOLDERS' EQUITY

Reference is made to Note 9, regarding certain stock transactions with
related parties.

PalWeb issued 12,334,790 shares of common stock and 3,963,890 shares of
preferred stock in fiscal year 2000 to retire certain liabilities.

In fiscal year 2000, PalWeb entered into consulting agreements with
certain consultants in exchange for 11,000,000 shares of PalWeb common
stock valued at $1,100,000. In fiscal year 2001, management and the

A-17

PALWEB CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13. STOCKHOLDERS' EQUITY - continued

consultants agreed to terminate the agreements and cancel the shares
previously issued. As of May 31, 2001, the consultants have returned
10,700,000 shares. Management recorded a $175,000 charge to income in
the first quarter of fiscal year 2001 resulting from penalty for
failure to perform certain requirements under the agreements. The
settlement released both parties from further liability including the
penalty. A credit of $1,275,000 was recorded as gain on settlement on
contracts and liabilities.

During 2001, PalWeb issued 100,000 shares of common stock to a creditor
in settlement of $12,000 of accounts payable.

Preferred stock is convertible into common stock at a ratio of one to
one. Preferred stock outstanding at May 31, 2001 totals 2,525,000
shares.

NOTE 14. STOCK OPTIONS

Effective May 1, 2001, PalWeb issued options to certain employees to
purchase 9,500,000 shares of its common stock at $0.04 per share. The
options are vested immediately and exercisable for a period of ten
years. PalWeb applies APB Opinion No. 25 in accounting for its stock
options and, accordingly, no compensation cost has been recognized for
its stock options in the financial statements. Had PalWeb determined
compensation cost at the grant date based on fair value under SFAS No.
123, PalWeb's net loss would have been increased to the pro forma
amount indicated below:

Net loss, as reported $(1,478,721)

Net loss, pro forma $(1,571,821)

The fair value of the options used to compute the compensation cost is
estimated using the Black-Scholes option pricing model using the
following assumptions:

Dividend Yield None
Expected Volatility 1.47
Risk Free Interest Rate 5%
Expected Holding Period 5 years

Following is a summary of option activity for the year ended May 31,
2001:
Shares Exercise
(000's) Price
------ ------
Options outstanding at May 31, 2000 -- $ --
Granted 9,500 .04
------ ------
Options outstanding at May 31, 2001 9,500 .04

The options are currently not exercisable since the exercise price of
$0.04 is less than the common stock's par value of $0.10. Management
anticipates proposing a change in the common stock's par value and
expects to receive shareholder approval. Once the par value is
appropriately reduced, all outstanding options will be exercisable.

A-18

PALWEB CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15. FINANCIAL INSTRUMENTS

PalWeb's financial instruments consist principally of accounts payable,
accrued liabilities and notes and mortgages payable. Management
estimates the market value of the notes and mortgage payable based on
expected cash flows and believes these market values approximate
carrying values at May 31, 2001 and 2000.

NOTE 16. DISCONTINUED OPERATIONS

As discussed in Note 9, PalWeb sold its real estate segment for
$1,352,000. Information relating to operations discontinued in 2001 and
2000 is as follows:
2001 2000
----------- -----------
Rental Income $ 110,040 $ 28,114
Income (loss) from operations 42,739 (9,425)
Gain on disposal 31,099 --

NOTE 17. SUPPLEMENTAL INFORMATION OF CASH FLOWS

Non-cash investing and financing activities for the year ended May 31,
are as follows:
2001 2000
----------- -----------
Common stock issuances in exchange for
(cancellations):
Consulting services (1,070,000) 1,481,271
Retirement of debt through
issuance of common stock 12,000 1,861,413
Acquisition of Pace Holding, Inc. -- 1,706,880

Elimination of related party debt
through default judgement -- 1,619,422

Conversion of preferred stock 25,000 239,389

Contribution of related party debt
to paid in capital -- 189,000

Reduction of debt and accrued interest
through foreclosure, negotiated settle-
ment or issuance of common stock 471,783 --

Interest paid 341,908 53,347

NOTE 18. LEASE AGREEMENT

PalWeb leases commercial space from Onward, LLC, owned by Mr. Paul
Kruger, chairman and CEO. The lease dated May 1, 2001, provides for a
triple-net lease at the rate of $258,750 per year and is for one year
with four one-year renewals.

A-19

PALWEB CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 18. LEASE AGREEMENT - continued

Rental expense on operating leases totaled $199,380 and $153,830 for
2001 and 2000, respectively.

NOTE 19. REGULATORY REQUIREMENTS

PFS is regulated by the Oklahoma Department of Securities. Under the
Oklahoma Securities Act, PFS is required to maintain stockholder's
equity, which is defined as stockholder's equity plus the allowance for
credit losses and valuation allowances, if any, equal to at least 10
percent of thrift accounts, time certificates, and accrued interest
payable thereon. As of May 31, 2001, PFS is not in compliance with the
Act as it pertains to the stockholder's equity requirement. As
discussed in Note 2, PFS has implemented a plan to liquidate the
investment and savings certificates. PFS will redeem the securities
over a four-year period ending December, 2004. A trustee has been
appointed to oversee the redemption which requires liquidating
substantially all of PFS' assets including its 43,500,000 shares of
PalWeb common stock. If necessary, the trustee can "put" certain shares
to Paul Kruger, Chairman and CEO, and Mr. Kruger would agree to
purchase ths shares at a price sufficient to effect the liquidation
throughout the period of liquidation.

NOTE 20. PROPOSED STOCK OFFERING

In May, 2001, PalWeb signed a letter of intent for a private placement
of 500,000 shares of convertible preferred stock and warrants to
purchase 150,000,000 shares of common stock for a total of $5,500,000.
The letter of intent is with Westgate Capital Company, L.L.C., a Tulsa,
Oklahoma based private investment group ("Westgate") and Hidalgo
Trading Company, LLC, which is 100% owned by the Company's Chief
Executive Officer, Paul Kruger. Of the total $5.5 million
consideration, $1 million will be provided by Hidalgo through
conversion of existing secured indebtedness of PalWeb and $4 million
will be provided in cash from an investment fund managed by Westgate.
One of the principals of Westgate is Warren Kruger, the bother of Paul
Kruger. Proceeds will be used to construct pallet production equipment,
repay current liabilities and for working capital. Under the terms of
the proposed investment, each share of the convertible preferred stock
will be convertible into 350 shares of common stock of the Company or a
total of 175,000,000 shares, which is an effective conversion price of
$0.0286 per share. Holders of the preferred stock will also be entitled
to cumulative dividends of 12% per annum, $1.20 per share, or a total
of $600,000. The warrants will be exercisable at a price of $0.10 per
share for a period of four years and all but 25% of the warrants will
be callable by PalWeb if common stock trades at prices of $0.15, $0.20
and $0.25 per share, respectively. Closing of the proposed investment
is subject to Westgate obtaining the necessary financing agreements and
customary closing conditions and is expected to occur in one or more
tranches within 120 days. Hidalgo is not required to convert its
secured debt unless the entire $4 million in cash equity is raised.
There is no assurance that this private placement will close. The
issuance of the convertible preferred stock will necessitate an
adjustment to PalWeb's authorized common stock to accommodate the
conversion provision.

A-20

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

RISK FACTORS
------------

PALWEB IS A DEVELOPMENT STAGE COMPANY AND MAY NOT ACHIEVE PROFITABILITY.

PalWeb was incorporated on February 24, 1969. From April 1993 to December
1997, PalWeb was primarily engaged in various businesses, including the business
of exploration, production, and development of oil and gas properties in the
continental United States and the operation of related service business. In
December 1997, PalWeb acquired all of the issued and outstanding stock of
Plastic Pallet Production, Inc. and its principal business changed to selling
plastic pallets and plastic injection molding machines. As of May 31, 2001,
PalWeb was using a prototype plastic injection molding machine to produce
plastic pallets. PalWeb is in the process of building a fully operational
plastic injection molding machine. PalWeb is in the development stage, it has
incurred significant losses from operations and there is no assurance that it
will achieve profitability or obtain funds to finance continued operations.

PALWEB HAS LIMITED EXPERIENCE IN MANUFACTURING AND MARKETING.

PalWeb's business strategy relies primarily on its success in manufacturing
and marketing, an area in which PalWeb has limited experience. The success of
its business strategy should be considered in light of the risks, expenses and
difficulties frequently encountered in entering into industries characterized by
intense competition. There can be no assurance that PalWeb will be able to
manufacture or market its products or proposed products, maintain or expand its
market share or achieve commercial revenues from its products or proposed
products in the future. In addition, certain aspects of PalWeb's business
strategy can only be implemented if PalWeb successfully secures additional
capital. Some of the foregoing factors are not within PalWeb's control, and
there can be no assurance that PalWeb will be able to implement its business
strategy, or that PalWeb's business strategy will result in profitability.

PALWEB'S BUSINESS COULD BE AFFECTED BY CHANGES IN AVAILABILITY OF RAW MATERIALS.

PalWeb uses a proprietary mix of raw materials to produce its plastic
pallets. Such raw materials are generally readily available and some may be
obtained from recycled plastic containers. At the present time, these materials
are being purchased from local suppliers. The availability of PalWeb's raw
materials could change at any time for various reasons. For example, the market
demand for PalWeb's raw materials could suddenly increase or the rate at which
plastic materials are recycled could decrease, affecting both availability and
price. Additionally, the laws and regulations governing the production of
plastics and the recycling of plastic containers could change and, as a result,
affect the supply of PalWeb's raw materials. Any interruption in the supply of
raw materials or components could have a material adverse effect on PalWeb.
Furthermore, certain potential alternative suppliers may have pre-existing
exclusive
A-21

relationships with competitors of PalWeb and others that may preclude PalWeb
from obtaining its raw materials from such suppliers.

THE MARKET MAY NOT ACCEPT PALWEB'S PRODUCTS.

Any unexpected developmental, regulatory or manufacturing problems could
delay the commercialization of PalWeb's proposed products and may have a
material adverse effect on PalWeb and its prospects. In addition, the market
acceptance of any of PalWeb's plastic pallets will be substantially dependent on
the ability of PalWeb to demonstrate to the business community the capabilities
and benefits of PalWeb's plastic pallets as well as to sell commercial
quantities of the plastic pallets at acceptable prices. There can be no
assurance that PalWeb will be able to gain market acceptance for its plastic
pallets.

PALWEB MAY NOT BE ABLE TO SECURE ADDITIONAL FINANCING NECESSARY TO SUSTAIN AND
GROW ITS OPERATIONS.

PalWeb's financial statements have been qualified on a going concern basis
principally due to lack of long term financing to achieve its goal of producing
and marketing plastic pallets to compete with wood pallets. PalWeb has funded
its operations to date primarily through equity and debt financings. PalWeb may
need additional debt or capital in order to begin generating a sufficient cash
flow to sustain operations for the foreseeable future. PalWeb will need to raise
substantial additional funds to continue to fund operating expenses or its
expansion strategy. There can be no assurance that additional financing will be
available, or, if available, that such financing will be on terms favorable to
PalWeb. Failure to obtain such additional financing would have a material
adverse effect on PalWeb.

PALWEB'S BUSINESS COULD BE AFFECTED BY COMPETITION AND RAPID TECHNOLOGICAL
CHANGE.

PalWeb currently faces competition from many companies that produce wooden
pallets at prices that are substantially lower than the prices PalWeb charges
for its plastic pallets. It is anticipated that the plastic pallet industry will
be subject to intense competition and rapid technological change. PalWeb could
potentially face competition from recycling and plastics companies, many of
which have substantially greater financial and other resources than PalWeb and,
therefore, are able to spend more than PalWeb in areas such as product
development, manufacturing and marketing. Although a company with greater
resources will not necessarily be able to bring a new product to market before
its smaller competitors, substantial resources enable a company to support many
new products simultaneously, thereby improving the likelihood of at least some
of its new products being among the first to make it to market. PalWeb's
revenues and profitability could be adversely affected by technological change.
Competitors may develop products that render PalWeb's products or proposed
products uneconomical or result in products being commercialized that may be
superior to PalWeb's products. In addition, alternatives to plastic pallets
could be developed, which would have a material adverse effect on PalWeb.

PALWEB MAY NOT BE ABLE TO EFFECTIVELY PROTECT ITS PATENTS AND PROPRIETARY
RIGHTS.

PalWeb relies on a combination of patents and trade secrets to protect its
proprietary technology, rights and know-how. There can be no assurance that such
patent rights will not be infringed upon, that PalWeb's trade secrets will not
otherwise become known to or independently developed by competitors, that
non-disclosure agreements will not be breached, or that PalWeb would have
adequate remedies for any such infringement or breach. Litigation may be
necessary to enforce proprietary rights of PalWeb or to defend PalWeb against
third-party claims of infringement. Such litigation could result in substantial
cost to, and a diversion of effort by, PalWeb and its management and may have a
material adverse effect on PalWeb. PalWeb's success and potential competitive
advantage is dependent upon its ability to exploit the technology under these
patents. There can be no assurance that PalWeb will be able to exploit the
technology covered by these patents or that it will be able to do so
exclusively.
A-22

Although PalWeb is not aware of any claim against it for infringement,
there can be no assurances that parties will not bring claims against PalWeb for
infringement in the future. PalWeb's ability to commercialize its products and
proposed products depends, in part, on its ability to avoid claims for
infringement brought by other parties. Laws regarding the enforceability of
intellectual property vary from jurisdiction to jurisdiction. There can be no
assurance that intellectual property issues will be uniformly resolved, or that
local laws will provide PalWeb with consistent rights and benefits. In addition,
there can be no assurance that competitors will not be issued patents that may
prevent the manufacturing or marketing of PalWeb's products or proposed
products.

PALWEB'S BUSINESS COULD BE AFFECTED BY NEW LEGISLATION REGARDING ENVIRONMENTAL
MATTERS.

The business operations of PalWeb are subject to extensive and changing
federal, state and local environmental laws and regulations pertaining to the
discharge of materials into the environment, the handling and disposition of
wastes (including solid and hazardous wastes) or otherwise relating to the
protection of the environment. As is the case with manufacturers in general, if
a release of hazardous substances occurs on or from PalWeb's properties or any
associated off-site disposal location, or if contamination from prior activities
is discovered at any of PalWeb's properties, PalWeb may be held liable. No
assurances can be given that additional environmental issues will not require
future expenditures.

Both the plastics industry, in general, and PalWeb are subject to existing
and potential federal, state, local and foreign legislation designed to reduce
solid wastes by requiring, among other things, plastics to be degradable in
landfills, minimum levels of recycled content, various recycling requirements,
disposal fees and limits on the use of plastic products. In addition, various
consumer and special interest groups have lobbied from time to time for the
implementation of these and other such similar measures. Although PalWeb
believes that the legislation promulgated to date and such initiatives to date
have not had a material adverse effect on PalWeb, there can be no assurance that
any such future legislative or regulatory efforts or future initiatives would
not have a material adverse effect on PalWeb.

PALWEB'S BUSINESS WILL BE SUBJECT TO POTENTIAL PRODUCT LIABILITY CLAIMS.

The testing, manufacturing and marketing of PalWeb's products and proposed
products involve the inherent risks of product liability claims or similar legal
theories against PalWeb, some of which may cause PalWeb to incur significant
defense costs. Although PalWeb currently maintains product liability insurance
coverage that it believes is adequate, there can be no assurance that the
coverage limits of its insurance are adequate or that all such claims will be
covered by insurance. In addition, these policies generally must be renewed
every year. While PalWeb has been able to obtain product liability insurance in
the past, there can be no assurance it will be able to obtain insurance in the
future on its products or proposed products. Product liability insurance varies
in cost, is difficult to obtain and may not be available in the future on terms
acceptable to PalWeb, if at all. A successful product liability claim or other
judgment against PalWeb in excess of its insurance coverage could have a
material adverse effect upon PalWeb.

PALWEB CURRENTLY DEPENDS ON CERTAIN KEY PERSONNEL.

PalWeb is dependent on the experience, abilities and continued services of
its current management personnel. In particular, Mr. Kruger, its Chairman of the
Board and President, has played a significant role in the development and
management of PalWeb. The loss or reduction of services of Mr. Kruger or any
other key employee could have a material adverse effect on PalWeb. There is no
assurance that additional managerial assistance will not be required.

PALWEB'S STOCK TRADES IN A LIMITED PUBLIC MARKET, IS SUBJECT TO PRICE VOLATILITY
AND THERE CAN BE NO ASSURANCE THAT AN ACTIVE TRADING MARKET WILL BE SUSTAINED.

There has been a limited public trading market for PalWeb's Common Stock
and there can be no assurance that an active trading market will be sustained.
There can be no assurance that the Common Stock will trade at or above any

A-23

particular price in the public market, if at all. The trading price of the
Common Stock could be subject to significant fluctuations in response to
variations in quarterly operating results or even mild expressions of interest
on a given day. Accordingly, the Common Stock should be expected to experience
substantial price changes in short periods of time. Even if PalWeb is performing
according to its plan and there is no legitimate company-specific financial
basis for this volatility, it must still be expected that substantial percentage
price swings will occur in PalWeb's securities for the foreseeable future.

CERTAIN RESTRICTED SHARES OF PALWEB WILL BE ELIGIBLE FOR SALE IN THE FUTURE AND
CERTAIN SHARES OF FREE TRADING COMMON STOCK ARE HELD IN TRUST FOR THE BENEFIT OF
THE DEPOSIT HOLDERS OF ONE OF PALWEB'S INDIRECT WHOLLY OWNED SUBSIDIARIES AND
ARE LIKELY TO BE SOLD IN THE FUTURE, BOTH OF WHICH COULD AFFECT THE PREVAILING
MARKET PRICE OF PALWEB'S COMMON STOCK.

Certain of the outstanding shares of Common Stock are restricted securities
under Rule 144 of the Securities Act, and (except for shares purchased by
affiliates of PalWeb as such term is defined in Rule 144) would be eligible for
sale as the applicable holding periods expire. In the future, these shares may
be sold only pursuant to a registration statement under the Securities Act or an
applicable exemption, including pursuant to Rule 144. Under Rule 144, a person
who has owned Common Stock for at least one year may, under certain
circumstances, sell within any three- month period a number of shares of Common
Stock that does not exceed the greater of 1% of the then outstanding shares of
Common Stock or the average weekly trading volume during the four calendar weeks
prior to such sale. A person who is not deemed to have been an affiliate of
PalWeb at any time during the three months preceding a sale, and who has
beneficially owned the restricted securities for the last two years is entitled
to sell all such shares without regard to the volume limitations, current public
information requirements, manner of sale provisions and notice requirements. In
addition, approximately 43,500,000 free trading shares are held in trust for the
benefit of the deposit holders of one of PalWeb's indirect wholly owned
subsidiaries and are likely to be sold in the future. Sales or the expectation
of sales of a substantial number of shares of Common Stock in the public market
by selling stockholders could adversely affect the prevailing market price of
the Common Stock, possibly having a depressive effect on any trading market for
the Common Stock, and may impair PalWeb's ability to raise capital at that time
through additional sale of its equity securities.

PALWEB DOES NOT EXPECT TO DECLARE OR PAY ANY DIVIDENDS IN THE FORESEEABLE
FUTURE.

PalWeb has not declared or paid any dividends on its Common Stock. PalWeb
currently intends to retain future earnings to fund the development and growth
of its businesses, to repay indebtedness and for general corporate purposes,
and, therefore, does not anticipate paying any cash dividends in the foreseeable
future.

PALWEB'S COMMON STOCK MAY BE SUBJECT TO SECONDARY TRADING RESTRICTIONS RELATED
TO PENNY STOCKS.

Certain transactions involving the purchase or sale of Common Stock of
PalWeb may be affected by a Securities and Exchange Commission rule for penny
stocks that imposes additional sales practice burdens and requirements upon
broker-dealers that purchase or sell such securities. For transactions covered
by this penny stock rule, broker-dealers must make certain disclosures to
purchasers prior to the purchase or sale. Consequently, the penny stock rule may
impede the ability of broker-dealers to purchase or sell PalWeb's securities for
their customers and the ability of persons now owning or subsequently acquiring
PalWeb's securities to resell such securities.

THE RESULTS OF PENDING LITIGATION AGAINST PALWEB MAY HAVE AN ADVERSE AFFECT ON
ITS FINANCIAL CONDITION OR BUSINESS PROSPECTS.

PalWeb is a party to a pending legal proceeding that involves claims or
potential claims against PalWeb and if resolved unfavorably to PalWeb could have
an adverse affect on PalWeb's financial condition or other effects on PalWeb.
There is no assurance this proceeding will be resolved favorably.

A-24

RESULTS OF OPERATIONS
---------------------

GENERAL TO ALL PERIODS

PalWeb is in the development stage, it has incurred significant losses from
operations and there is no assurance that it will achieve profitability or
obtain funds to finance continued operations.

PalWeb's primary business is the manufacturing and selling of plastic
pallets referred herein as manufacturing. It also indirectly owns a subsidiary
finance company, Paceco Financial Services, Inc. (PFS), acquired in April 2000,
which was previously engaged in consumer and small business lending and real
estate activities. As described below, the finance activities have been
curtailed until PFS is able to repay outstanding investment certificate
liabilities and in December 2000, the real estate activities were discontinued.

As of May 31, 2001, production of plastic pallets utilizing prototype
production equipment is approximately 800 pallets per month and the current
production capacity of the prototype machine is approximately 4,000 pallets per
month. The recent hiring of two additional employees will enable PalWeb to
increase production to approximately 2,000 pallets per month. Production levels
of approximately 4,000 pallets per month can be attained by adding approximately
two more shifts. Based on current demand, management anticipates that it will
produce about 800 pallets per month using existing personnel. Management will
continue to increase production to achieve capacity as it receives orders for
pallets that justify higher production levels. There is no assurance that the
Company will receive orders for pallets that justify any significant increase to
the Company's current production level.

Sales for fiscal year 2002 using existing production equipment are expected
to total approximately 2,000 pallets per quarter. However, see discussion under
Prospects for Future regarding acquisition of a new production line. Inventory
levels at May 31, 2001 include approximately 1,800 stackable and 2,000 rackable
pallets. As of May 31, 2001, PalWeb's sales team consists of one full-time sales
agent who will be paid a set amount per month for a period of approximately
three months, at which time the sales agent will be paid commissions only.
PalWeb's marketing efforts have generated several leads with customers who are
considering sizable orders of pallets. There is no assurance that PalWeb will
secure any sizable orders of pallets or, if it does, that PalWeb will be able to
manufacture the pallets necessary to fill such orders.

PalWeb has an EZ Pay Plan whereby certain qualified purchasers are able to
purchase pallets in quantities of 1,000 pallets or more by financing the
purchase of such pallets. Under the terms of the EZ Pay Plan, purchasers will
pay $19 down and make payments of $19 in each of two subsequent years. The total
sales price under the EZ Pay Plan of $57 factors in an interest rate of
approximately 12% per year. After paying for the pallets in full, the purchaser
may sell the pallets back to PalWeb for $19. PalWeb intends to resell these
pallets on a used basis with a markup or to recycle the pallets to defray the
cost of the raw materials of the pallets it later produces. As of May 31, 2001,
PalWeb has not sold any pallets through the EZ Pay Plan.

For all periods presented, PalWeb's effective tax rate is 0%. PalWeb has
generated net operating losses since inception, which would normally reflect a
tax benefit in the statement of operations and a deferred asset on the balance
sheet. However, because of the current uncertainty as to PalWeb's ability to
achieve profitability, a valuation reserve has been established which offsets
the amount of any tax benefit available for each period presented in the
consolidated statement of operations.

The consolidated statements include PalWeb Corporation and its wholly-owned
active subsidiaries Plastic Pallet Production, Inc. (PPP) and PFS. PPP
represents the manufacturing segment of PalWeb and PFS represents the financial
segment.
A-25

DISCONTINUED OPERATIONS

In December, 2000, PFS sold its real estate operations at appraised values
to Onward, L.L.C., a company 100% owned by Mr. Paul Kruger, Chairman and
President of PalWeb. The sales price was approximately $1,352,000 in cash and
resulted in a gain of approximately $33,000. This sale was accomplished in
connection with the plan to redeem all of PFS's investment certificates to
enable PFS to fund a portion of the required payments to depositors in 2000. See
Liquidity and Capital Resources. During the nine month period ended February 28,
2001, the real estate segment had revenues of $110,440 and a gain from
disposition of assets of $31,099 for total income of $73,838.

YEAR ENDED MAY 31, 2001 COMPARED TO YEAR ENDED MAY 31, 2000

MANUFACTURING

During fiscal year 2001, PalWeb sold approximately 900 rackable pallets and
1,500 stackable pallets, generating revenues of $89,211. The stackable pallet
sells for about one-half of the rackable pallet. However, sales revenues
remained insufficient to cover material and operating costs. There were sales of
$14,013 and approximately 325 pallets for the comparable period in the prior
year.

During 2001, research and development consists of $95,000 paid to an
independent laboratory. The expense is for the development of a patented formula
for fire retardation in plastic pallets.

Salaries and benefits were $307,085 in 2001 compared to $357,226 in 2000
for a decrease of $50,141. This decrease is due to the resignation of the former
President of PPP and to capitalization of a portion labor costs to inventory.

The general and administrative expenses decreased $1,042,047 from
$1,949,987 in 2000 to $907,940 in 2001. This decrease is primarily due to
reduction of consulting costs which were $1,489,000 in 2000.

Interest expense increased $111,629 from $188,822 in 2000 to $300,451 in
2001. The increase is due to the increase in notes payable to fund current
operations and deposits to purchase production equipment.

During 2001, PalWeb recorded a gain on settlement of contracts and
liabilities in the amount of $1,541,783. This gain results from $1,275,000 for
cancellation of a consulting contract, $152,500 for settlement of notes payable
to Ralph Curton and $114,283 from settlement of certain accounts payable. In
2000, PalWeb entered into a consulting agreement with Crescent Road Corporation
and Consolidated Capital Group. The consultants received 11,000,000 shares of
common stock for their services valued at $1,100,000 plus a penalty of $175,000
for failure to provide tradeable common stock. During 2001, the contract was
terminated by mutual agreement, the common shares were returned and cancelled
except for 300,000 shares yet to be returned, and a release of all remaining
claims.

The loss from the manufacturing segment in 2001 and 2000 was $184,066 and
$2,634,225, respectively. The decrease from fiscal 2000 to 2001 of $2,450,159 is
primarily due to the reasons discussed above.

FINANCE

The finance segment was acquired April 3, 2000 and the operating results
for 2000 includes two months of operations. Accordingly, 2001 results of
operations are not comparable to 2000. The finance segment reported revenues of
$200,183 in 2001 and a net loss of $1,368,493. Interest expense on thrift
certificates was $319,381 in 2001. This loss resulted from, among other things,
noncash depreciation and amortization charges of $782,398 including an
additional charge of $426,980 to recognize impairment of goodwill and costs
associated with the closing of the Company's

A-26

Duncan, Oklahoma facility. Management also increased the allowance for doubtful
accounts by $173,426. PalWeb expects that the finance segment will continue to
record losses until the repayment of the outstanding thrift certificates.

COMBINED

PalWeb incurred net losses of $1,478,721, or $0.01 per share, and
$3,095,442, or $0.02 per share, for 2001 and 2000, respectively. The decrease in
the net loss of $1,616,721 resulted from the reasons described above.

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

Currently, PalWeb's management projects that the sale of approximately
4,000 pallets per month are necessary to break even. Sales at this level will
provide revenues of approximately $200,000 and will provide sufficient cash flow
to sustain manufacturing operations which includes cash operating expenses for
labor, recurring overhead, and interest of approximately $100,000 per month and
material costs of approximately 50% of sales or $100,000. There is no assurance
that this sales level will be achieved. Until sales reach this level, PalWeb
will remain dependent on outside sources of cash to fund its operations as its
sales revenues will be insufficient to meet current liabilities.

Due to its development stage status, PalWeb has had difficulty in obtaining
financing from third parties and PalWeb's attempts for bank financing have all
been contingent on personal guarantees from its Chairman, Chief Executive
Officer and principal shareholder, Mr. Paul Kruger. Accordingly, Mr. Kruger has
elected to provide financing direct from his affiliated entities and has
requested and received security equivalent to that which a bank would require.

As of May 31, 2001, Mr. Kruger's affiliated entities had loaned PalWeb
approximately $947,200, pursuant to various notes with face amounts aggregating
a total of $1,150,000. Mr. Kruger is not obligated to make further advances
under these notes. All of these notes are due on October 15, 2001 and currently
bear interest at the rate of 12% per year. Loans totaling $750,000 bore interest
at 18% annually until December 1, 2000, when the rate was reduced to 12%. The
notes had accrued interest owing as of February 28, 2001 in the amount of
approximately $99,000 which had not been paid and is included in accrued
liabilities. These loans are secured by substantially all of the assets of
PalWeb and PPP, including equipment, furniture, fixtures, inventory, accounts
receivables and patents.

Effective March 1, 2001, PalWeb entered into a $250,000 line of credit with
Yorktown Management and Financial Services, LLC, for a six month term at 12%
interest, of which all $250,000 is outstanding at May 31, 2001. An additional
line of credit was provided on April 1, 2001 by Yorktown in the amount of
$2,750,000, 12% interest and maturing October 15, 2001, of which $1,536,559 was
outstanding at May 31, 2001. Yorktown is an entity principally owned by Mr.
Kruger's brother, Warren Kruger. This line of credit is secured, subordinate to
the lien described above, by substantially all of the assets of PalWeb and PPP,
including equipment, furniture, fixtures, inventory, accounts receivables and
patents. PalWeb is using the proceeds principally for the acquisition of a new
production line of manufacturing equipment and to retire the Curton note
payable.

On May 8, 2001, PalWeb announced that it had signed a letter of intent for
a private placement of 500,000 shares of convertible preferred stock and
warrants to purchase 150,000,000 shares of common stock for a total of
$5,500,000. The letter of intent is with Westgate Capital Company, L.L.C., a
Tulsa, Oklahoma based private investment group (Westgate) and Hidalgo Trading
Company, LLC, which is 100% owned by the Company's Chief Executive Officer, Paul
Kruger. Of the total $5.5 million consideration, $1 million will be provided by
Hidalgo through conversion of existing secured indebtedness of PalWeb and $4.5
million will be provided in cash from an investment fund managed by Westgate.
One of the principals of Westgate is Warren Kruger, the bother of Paul Kruger.
Proceeds will be used to construct pallet production equipment, repay loans made
by Yorktown as described above, repay other current liabilities, and for working
capital. Under the terms of the proposed investment, each share of the
convertible preferred stock will be convertible into 350 shares of common stock
of the Company or a total of 175,000,000 shares, which is an effective
conversion price of $0.0286 per share. Holders of the preferred stock will also
be entitled to cumulative dividends of

A-27

12% per annum, $1.20 per share, or a total of $600,000. The warrants will be
exercisable at a price of $0.10 per share for a period of four years and 25% of
the warrants will be callable by PalWeb if common stock trades at prices of
$0.15, $0.20 and $0.25 per share, respectively. Closing of the proposed
investment is subject to Westgate obtaining the necessary financing agreements
and customary closing conditions and is expected to occur in one or more
tranches during the second quarter of fiscal year 2002. Hidalgo is not required
to convert its secured debt unless the entire $4.5 million in cash equity is
raised. There is no assurance that this private placement will close. The
ability to convert the preferred stock and exercise the warrants described above
depends on PalWeb amending its certificate of incorporation to authorize
additional capital and to reduce the par value of its common stock.

PalWeb is dependent upon Mr. Kruger and Yorktown to provide and/or secure
additional financing and there is no assurance that either will do so. As such,
there is no assurance that funding will be available for PalWeb to continue
operations.

The Company had accumulated a working capital deficit of $3,988,000 at May
31, 2001 in connection with its manufacturing operations, which includes
$947,200 in loans due to Mr. Kruger or his affiliates, $1,536,559 in notes
payable to Yorktown, and $1,705,033 in accounts payable and accrued liabilities,
and approximately $118,000 of accrued interest owed to Mr. Kruger and Yorktown.
This deficit reflects the uncertain financial condition of the Company resulting
from its inability to obtain long term financing to progress beyond the
development stage. There is no assurance that the Company will secure such
financing.

PalWeb occupies its facility under an arrangement whereby the plant was
sold to Onward, LLC, an affiliate of Mr. Paul Kruger, and leased back with an
option to purchase. Effective May 1, 2001, Onward and PalWeb entered into a new
lease for a one year term with four one-year renewal options. The Board of
Directors also elected to terminate the option to purchase provision in the
original lease. Accordingly, the plant is no longer carried on the books of
PalWeb and the gain of $707,044 is deferred to be amortized to additional paid
in capital over the estimated period to utilize the facility.

As reported in prior Securities Exchange Commission filings, PalWeb's
indirect wholly owned subsidiary, PFS, has ceased issuing any new investments
certificates and is in the process of repaying depositor account balances. PFS
and Mr. Kruger have entered into certain agreements to provide for the ultimate
repayment of the investment certificates. In December 2000, PFS sold its real
estate holdings to Onward, L.L.C., a company 100% owned by Mr. Kruger, at
appraised value and the proceeds were distributed to security holders in
accordance with one of these agreements. In addition, PFS has placed its
43,500,000 shares of PalWeb common stock with an independent trustee who will
liquidate the stock over a four year period in an amount sufficient to
distribute the funds to certificate holders in repayment of the depositor
account balances. In December 2000, PFS made the first installment payment to
investment certificate holders in the amount of $1,316,000.

PalWeb has not entered into any conditions, commitments or requirements
with the Oklahoma Securities Department that would require it to fund or
otherwise be financially responsible for the liabilities of PFS. However, if PFS
is unable to make payment to investment certificate holders as described above,
it is possible that holders of investment certificates may assert claims against
PalWeb that it is liable for the liabilities of PFS under legal theories
relating to piercing the corporate veil or otherwise. In such event, PalWeb
might incur additional costs to contest such claims and could ultimately be
found to be liable. The effect of any such claims being made against PalWeb
could also have an adverse effect on the value of PalWeb's common stock and make
it even more difficult for PFS to fund the repayment of its investment
certificate liability from liquidation of the PalWeb common stock owned by it.
Accordingly, PalWeb may be adversely affected if PFS is unable to meet its
obligations.

A-28

PROSPECTS FOR FUTURE
--------------------

Management has initiated the construction and installation of a new
production line to manufacture plastic pallets at a cost of approximately
$4,700,000. Substantially all major components have been ordered and
installation is in process. The project is expected to be in operation during
the third quarter of fiscal year 2002. At August 10, 2001 PalWeb had placed
orders for production equipment totaling $3,755,000. Yorktown Management and
Financial Services, LLC, is providing the interim financing for these purchases,
as discussed above in Liquidity and Capital Resources. The new line will have
the capacity of producing about 40,000 pallets per month. Gravity Management, an
engineering firm in Tulsa, Oklahoma, has been engaged to engineer and oversee
the project. Bryan Kirchmer is the engineer in charge of the project. The United
States market for new pallets is, at a minimum, approximately 400,000,000
annually. Projected sales of 40,000 pallets per month, or 480,000 pallets per
year, is less than 1/10th of 1% of the total new pallet market, and it appears
that the market trend is moving toward the use and purchase of plastic pallets.

As discussed above in General to all Periods, management is currently
enhancing its marketing program in anticipation of this additional capability.
Efforts have included targeting major users of pallets and distributors.

In addition, PalWeb continues to test and improve its pallet with respect
to strength, durability and fire retardency. Verbal notification has been
received from the Virginia Polytech Institute & State University's (Virginia
Tech) Fastrack Evaluation that the pallet has successfully passed the Virginia
Tech Fastrack strength and durability test. The successful completion of this
test is a significant credential in marketing PalWeb's pallet. In addition,
PalWeb has embarked in developing its own patented formula for fire retardency.
Dr. James Pritchard, a respected technical advisor in the area of custom polymer
formulations, has been engaged to oversee this project. Preliminary tests are
being performed to qualify the product to meet the requirements of UL2335,
Classification Flammability of Plastic Pallets.

Management's goal is to attain profitability during the fourth quarter of
2002.

DESCRIPTION OF BUSINESS

PalWeb was incorporated in Delaware on February 24, 1969, under the name
Permaspray Manufacturing Corporation. It changed its name to Browning
Enterprises Inc. in April of 1982, and to Cabec Energy Corp. in June of 1993. It
became PalWeb Corporation in April of 1999. From April 1993 to December 1997,
PalWeb was engaged in various businesses, including the business of exploration,
production and development of oil and gas properties in the continental United
States and the operation of related service businesses. In December 1997, PalWeb
acquired all of the issued and outstanding stock of Plastic Pallet Production,
Inc., a Texas corporation ("PPP"), in exchange for a majority of the issued and
outstanding stock of PalWeb. Since the acquisition of PPP, PalWeb's primary
businesses have been (i) manufacturing and selling plastic pallets, and (ii) the
custom designing, manufacturing and selling of large plastic injection molding
machines and systems. PalWeb is currently a development stage company. As of May
31, 2001, PalWeb had not sold any plastic injection molding machines, and sales
of plastic pallets have been limited.

On April 3, 2000, PalWeb acquired Paceco Financial Services, Inc. ("PFS"),
by means of a merger of PFS's parent company, Pace Holding, Inc., into a wholly
owned subsidiary of PalWeb, PP Financial, Inc. Since 1952, PFS has been engaged
in the business of making consumer and small business loans, primarily in
Oklahoma. PFS is regulated as an "investment certificate issuer" by the Oklahoma
Department of Securities ("ODS"). PalWeb acquired PFS with the intent of using
PFS to finance large purchases of pallets. However, PFS encountered regulatory
difficulties with the ODS, and, as a result of these difficulties, PFS has not
engaged in any pallet financing activities.

A-29

MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

MARKET INFORMATION
------------------

From August 1999 through October 6, 1999, PalWeb's Common Stock traded on
the National Association of Securities Dealers Automatic Quotation (NASDAQ)
over-the-counter bulletin board system ("OTCBB"), with "PAEB" as its trading
symbol from August 1999 through September 13, 1999, and "PAEBE" as its trading
symbol from September 13, 1999, through October 6, 1999. The following table
sets forth the range of high and low bid prices for PalWeb's Common Stock during
the time periods indicated. Prices, as reported by NASDAQ, reflect quotations
between dealers without adjustment for retail mark-up, mark-down or commission
and may not represent actual transactions.

QUARTER ENDING HIGH BID LOW BID
-------------- -------- -------
Aug. 31, 1999 0.27 0.12
Nov. 30, 1999(1) 0.175 0.70

(1) Information presented for the period ended November 30, 1999, is high and
low bid prices until PalWeb was de- listed from the NASDAQ over-the-counter
bulletin board system on October 6, 1999.

On October 6, 1999, PalWeb's Common Stock was de-listed from the OTCBB.
From October 6, 1999, through February 1, 2001, PalWeb's common stock traded on
the NASDAQ over-the-counter pink sheet system, with "PAEB" as its trading
symbol. On February 2, 2001, PalWeb's common stock was re-listed on the OTCBB.
Since such time, PalWeb's common stock has traded on the OTCBB, with "PAEB" as
its trading symbol. The following table sets forth the range of high and low
prices at which PalWeb's common stock traded during the time periods indicated,
as reported by NASDAQ.

QUARTER ENDING HIGH LOW
-------------- -------- -------
Nov. 30, 1999(1) $0.16 $0.07
Feb. 29, 2000 0.25 0.02
May 31, 2000 0.285 0.06
Aug. 31, 2000 0.0825 0.011
Nov. 30, 2000 0.023 0.007
Feb. 29, 2001 0.075 0.005
May 31, 2001 0.08 0.02

(1) Information presented for the period ended November 30, 1999, is high and
low prices from the date when PalWeb was de-listed from the OTCBB (October 6,
1999) through the end of the quarter on November 30, 1999.

HOLDERS
-------

As of July 18, 2001, PalWeb had approximately 1,272 common shareholders of
record.

A-30

DIVIDENDS
---------

PalWeb paid no cash dividends to its common stockholders during the last
two fiscal years, and does not plan to pay any cash dividends in the near
future.

RECENT SALES OF UNREGISTERED SECURITIES
---------------------------------------

During the fiscal year ended May 31, 2001, PalWeb issued certain promissory
notes to Hildalgo Trading Company, L.C. with face amounts aggregating
$1,150,000, pursuant to which PalWeb had been loaned $947,200 as of May 31,
2001, and Yorktown Management and Financial Services, L.L.C. with face amounts
aggregating $3,000,000, pursuant to which PalWeb had been loaned $1,536,559 as
of May 31, 2001. For more information on these notes, please see "Liquidity and
Capital Resources."

In June 2000, PalWeb issued 250,000 shares of its Common Stock to in a
no-sale transaction upon the conversion of 250,000 shares of Convertible
Preferred Stock.

PalWeb relied on the exemption set forth in Section 4(2) of the Securities
Act of 1933, as amended, in connection with the issuances of the notes set forth
above. All parties listed above are sophisticated persons or entities. There was
no underwriting, and no commissions were paid to any party upon the issuance of
such notes.

A-31

APPENDIX B
----------

STOCK OPTION PLAN
OF
PALWEB CORPORATION
(EFFECTIVE MAY 11, 2001, AS AMENDED, JANUARY 7, 2002)

1. PURPOSE OF THE PLAN

This Stock Option Plan (the "Plan") is intended as an incentive to
managerial and other key employees of PalWeb Corporation (the "Company"), and
its subsidiaries. Its purposes are to retain employees with a high degree of
training, experience, and ability, to attract new employees whose services are
considered unusually valuable, to encourage the sense of proprietorship of such
persons, and to stimulate the active interest of such persons in the development
and financial success of the Company. Options granted under the Plan may be
either "incentive stock options" as provided by Section 422 of the Internal
Revenue Code of 1986, as amended, and as may be further amended from time to
time ( the "Internal Revenue Code" or "Code") or options which do not qualify as
incentive stock options.

2. ADMINISTRATION OF THE PLAN

(a) Administration. The Plan shall be administered by the Board of
Directors of the Company, or if the Board so authorizes, by a committee (the
"Committee") of the Board of Directors consisting of not less than two (2)
members of the Board of Directors. Unless the context otherwise requires,
references herein to the Committee shall be references to the Board of Directors
or the Committee. Members of the Committee shall serve at the pleasure of the
Board, and the Board may from time to time remove members from, or add members
to, the Committee. A majority of the members of the Committee shall constitute a
quorum for the transaction of business. Action approved in writing by a majority
of the members of the Committee then serving shall be fully effective as if the
action had been taken by unanimous vote at a meeting duly called and held.

(b) Authority. The Committee is authorized to construe and interpret the
Plan, to promulgate, amend and rescind rules and regulations relating to the
implementation of the Plan and to make all other determinations necessary or
advisable for the administration of the Plan. The Committee may designate
persons other than members of the Committee to carry out its responsibilities
under such conditions and limitations as it may prescribe, except that the
Committee may not delegate its authority with regard to selection for
participation of, and the granting of options to, persons subject to Sections
16(a) and 16(b) of the Exchange Act. Any determination, decision or action of
the Committee in connection with the construction, interpretation,
administration, or application of the Plan shall be final, conclusive and
binding upon all persons participating in the Plan and any person validly
claiming under or through persons participating in the Plan. The Company shall
effect the granting of options under the Plan in accordance with the
determinations made by the Committee, by execution of instruments in writing in
such form as approved by the Committee.

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3. DESIGNATION OF PARTICIPANTS

Persons eligible for options under the Plan shall consist of managerial and
other key employees of the Company and/or its subsidiaries who hold positions of
significant responsibilities or whose performance or potential contribution, in
the sole judgment of the Committee, will benefit the future success of the
Company. In addition, all Non-employee Directors of the Company shall be
eligible for options under the plan in accordance solely with the provisions of
Section 7 hereof.

4. SHARES SUBJECT TO THE PLAN

Subject to adjustment as provided in Paragraph 9 hereof, there shall be
subject to the Plan one hundred million (100,000,000) shares of common stock of
the Company, par value $0.10 per share. The shares subject to the Plan shall
consist of authorized but unissued shares or treasury shares held by the
Company. Any of such shares that may remain unsold and that are not subject to
outstanding options at the termination of the Plan shall cease to be subject to
the Plan. Should any option expire or be canceled prior to its exercise in full,
or a portion of an option is surrendered in payment for the exercise of an
option or satisfaction of any tax withholding obligations, the shares
theretofore subject to such options may again be subjected to an option under
the Plan. Any shares not subject to outstanding options at the expiration of the
Plan or at any time during the life of the Plan may be dedicated to other plans
that the Company may adopt and to the extent so dedicated, such shares shall not
be subject to this Plan.

5. OPTION PRICE

(a) Price. The purchase price for each share placed under option pursuant
to the Plan shall be determined by the Committee, but shall in no event be less
than 100% of the Fair Market Value (as defined below) of such share on the date
the option is granted.

(b) Fair Market Value. "Fair Market Value" means the average of the high
and low sales prices of the shares of Common Stock on any national securities
exchange on which the shares are listed on the day on which such value is to be
determined or, if no shares were traded on such day, on the next preceding day
on which shares were traded, as reported by such exchange, by National Quotation
Bureau, Inc. or other national quotation service. If the Common Stock is not
listed on a national securities exchange, Fair Market Value means the average of
the reported high and low sales prices of the shares of Common Stock in the
over-the-counter market on the date on which such value is to be determined as
reported by a widely followed quotation service such as Yahoo Finance, MSN
Investor, Raging Bull or similar sites, or, if such prices are not available,
the last sales price on such day or, if no shares were traded on such day, on
the next preceding day on which the shares were traded, as reported by the
National Association of Securities Dealers Automatic Quotation System (NASDAQ)
or other national quotation service. If at any time shares of Common Stock are
not traded on an exchange or in the over-the-counter market, Fair Market Value
shall be the value determined by the Committee, taking into consideration those
factors affecting or reflecting value that they deem appropriate. For purposes
of determining the purchase price of an incentive stock option, Fair Market
Value shall in any event be determined in accordance with Section 422 of the
Code.

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6. TERMS AND EXERCISE OF OPTIONS

(a) General. The Committee, in granting options hereunder, shall have
discretion to determine the times when, and the terms upon which, options shall
be exercisable, including such provisions as deemed advisable to permit
qualification as "incentive stock options" within the meaning of Section 422 of
the Internal Revenue Code, as the same may from time to time be amended for
options intended to qualify as such, and incentive stock options outstanding
under the Plan may be amended, if necessary, to permit such qualification. The
Committee shall designate at the time of granting of any option whether such
option or any portion thereof shall be an "incentive stock option." Each option
shall be evidenced by an agreement between the Company and the optionee
containing provisions consistent with this Plan and such other provisions as the
Committee may determine as provided herein. Unless otherwise determined by the
Committee at the time of grant, all options shall become exercisable at the rate
of 25% of the total shares subject to the option on each of the first four (4)
anniversary dates of the date of grant. The Committee shall also be entitled to
accelerate the date any outstanding option becomes exercisable at any time.

(b) Right to Exercise. If at the time of any exercise of an option either
(i) there are insufficient authorized shares or treasury shares of Common Stock
of the Company available for issuance upon the exercise of the option, or (ii)
the exercise price is less than the par value of the shares (if the only shares
available for exercise are authorized but unissued shares, as opposed to
treasury shares), the right of the optionee to exercise such option shall be
suspended and deferred until such time as either or both of such circumstances
shall have been cured prior to the time that any such option would otherwise
expire.

(C) Term. In the event of the death of an optionee while in the employ of
the Company, any unvested portion of the option as of the date of death shall be
vested as of the date of death and the option shall be exercisable in full by
the heirs or other legal representatives of the optionee within twelve (12)
months following the date of death. In the event of termination of employment
for any reason other than death or termination for cause (and except as
otherwise provided in subsection (e) below) such option shall be exercisable by
the employee or his legal representative within three (3) months of the date of
termination as to all then vested portions. In addition, the Committee may in
its sole discretion, approve acceleration of the vesting of any unvested
portions of the option. If an optionee's employment with the Company is
terminated for cause, the option shall terminate as of the date of such
termination of employment and the optionee shall have no further rights to
exercise any portion of the option. "Termination for cause" means any discharge
for violation of the policies and procedures of the Company or for other job
performance or conduct that is detrimental to the best interests of the Company,
as determined by the Committee in its sole discretion. Notwithstanding any of
the foregoing, in no event may an option be exercised more than ten (10) years
after the date of its grant.

(d) Method of Exercise. Options may be exercised, whether in whole or in
part, by written notification to the Company accompanied by cash or a certified
check for the aggregate purchase price of the number of shares being purchased,
or upon exercise of an option, the optionee shall be entitled (unless otherwise
provided in the agreement evidencing the option), without the requirement of

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further approval or other action by the Committee, to pay for the shares (i) by
tendering stock of the Company that has been owned by the optionee for at least
six (6) months with such stock to be valued at the Fair Market Value (as
determined under Section 5) on the date immediately preceding the date of
exercise or (ii) with a combination of cash and stock that has been owned by the
optionee for at least six (6) months as provided above.

In addition, upon exercise of an option, the optionee may, with the prior
approval of the Committee, pay for the shares (a) by tendering stock of the
Company already owned by the optionee but that has not been held by the optionee
for at least six (6) months with such stock to be valued at the Fair Market
Value (as determined under Section 5) on the date immediately preceding the date
of exercise, (b) surrendering a portion of the option with such surrendered
option to be valued based on the difference between the Fair Market Value (as
determined under Section 5) of the shares surrendered on the date immediately
preceding the date of exercise and the aggregate option purchase price of the
shares surrendered ("Surrender Value"), or (c) with a combination of cash, stock
of the Company that has not been held by the optionee for at least six (6)
months or surrender of options.

The Committee may also permit optionees, either on a selective or aggregate
basis, to simultaneously exercise options and sell the shares of common stock
thereby acquired, pursuant to a brokerage or similar arrangement, approved in
advanced by the Committee, and use the proceeds from such sale as payment of the
purchase price of the shares being acquired upon exercise of any option.

(e) Limitations Applicable To Incentive Options. To the extent the
aggregate Fair Market Value of stock (determined as of the date of grant) with
respect to which incentive stock options are exercisable for the first time by
any individual during any calendar year (under all Company plans) exceeds one
hundred thousand dollars ($100,000), such options shall be treated as options
that are not incentive stock options. Options intended to be incentive options
shall have such additional terms and provisions as required by the Internal
Revenue Code.

The grant of any incentive stock options shall be subject to the Plan being
approved by the shareholders of the Company within twelve months after the Plan
is adopted by the Board. However, the failure of the shareholders of the Company
to approve the Plan shall only affect an option's status as an incentive stock
option and not the validity of any options granted under the Plan.

(f) Continued Service as a Director. Any provisions of the Plan to the
contrary notwithstanding, for purposes of Section 6(b) above, in the event an
optionee who is also a director of the Company ceases to be employed by the
Company but continues to serve as a director of the Company, the Committee, in
its sole discretion, may determine that all or a portion of such optionee's
options shall not expire three (3) months following the date of termination of
employment with the Company as is provided in Section 6(b) above, but instead
shall continue in full force and effect until the such optionee ceases to be a
director of the Company, but in no event beyond the stated expiration date of
the options as set forth in the applicable option agreement. Termination of any
such option in connection with the optionee's termination of service as a
director shall be in accordance with the provisions of Section 6(b) above;
provided, however, that (i) the terms "employ" and "employment"

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as used therein shall be replaced with the terms "service" and "service on the
Board of Directors," respectively, and (ii) the phrase "termination for cause"
shall mean any removal from the Board of Directors for cause in accordance with
applicable law and the Certificate of Incorporation and By- Laws of the Company.

7. NON-EMPLOYEE DIRECTOR OPTIONS

Notwithstanding anything elsewhere in the Plan to the contrary, each person
who is a member of the Board of Directors of the Company but who is not an
employee of the Company (a "Non- employee Director") shall be eligible for
grants of stock options under the Plan solely in accordance with the provisions
of this Section 7. The following provisions of this Section 7 shall apply to the
granting of stock options to Non-employee Directors:

(a) Exercise Price. The purchase price for each share placed under an
option for a Non- employee Director shall be equal to 100% of the Fair Market
Value of such share on the date the option is granted.

(b) Vesting and Term. Unless otherwise determined by the Committee at the
time of grant, all options shall become exercisable at the rate of 25% of the
total shares subject to the option on each of the first four (4) anniversary
dates of the date of grant. The Committee shall also be entitled to accelerate
the date any outstanding option becomes exercisable at any time. The period
during which a Non-employee Director option may be exercised shall be ten (10)
years from the date of grant, subject to earlier termination in accordance with
the provisions of Section 6(b) hereof; provided, however that (i) the terms
"employ" and "employment" as used therein shall be replaced with the terms
"service" and "service on the Board of Directors," respectively, and (ii) the
phrase "termination for cause" shall mean any removal from the Board of
Directors for cause in accordance with applicable law and the Certificate of
Incorporation and By-Laws of the Company.

(c) Method of Exercise. Options granted to Non-employee Directors may be
exercised in the manner provided in Section 6(d) hereof.

(d) Other Provisions. All options granted to Non-employee Directors shall
be subject to the other provisions of general applicability to options granted
under the Plan, including without limitation, the provisions of Section 8
("Assignability"), Section 9 ("Changes in Capitalization") and Section 10
("Change in Control") hereof.

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8. ASSIGNABILITY

During an optionee's lifetime, an option may be exercisable only by the
optionee and options granted under the Plan and the rights and privileges
conferred thereby shall not be subject to execution, attachment or similar
process and may not be transferred, assigned, pledged or hypothecated in any
manner (whether by operation of law or otherwise) other than by will or by the
applicable laws of descent and distribution. Notwithstanding the foregoing or
any other provisions of the Plan, to the extent permitted by applicable law, the
Committee may, in its sole discretion, permit recipients of options that do not
qualify as incentive stock options under Section 422 of the Internal Revenue
Code to transfer such non-incentive options by gift or other means pursuant to
which no consideration is given for such transfer. The Committee shall impose in
connection with any non-incentive options transferred pursuant to the foregoing
sentence such limitations and restrictions as it deems appropriate. Any other
attempt to transfer, assign, pledge, hypothecate or otherwise dispose of any
option under the Plan or of any right or privilege conferred thereby, contrary
to the provisions of the Plan, or the sale or levy or any attachment or similar
process upon the rights and privileges conferred thereby, shall be null and void
ab initio.

9. CHANGES IN CAPITALIZATION

(a) No Effect on Company Rights. Subject to the other provisions of this
Plan, the existence of the Plan and the options granted hereunder shall not
affect or restrict in any way the right or power of the Board or the
shareholders of the Company to make or authorize any adjustment,
recapitalization, reorganization or other change in the Company's capital
structure or its business, any merger or consolidation of the Company, any issue
of bonds, debentures, preferred or prior preference stocks ahead of or affecting
the Company's capital stock or the rights thereof, any issue of shares of Common
Stock or shares of any other class of capital stock or warrants or rights to
acquire such shares, the dissolution or liquidation of the Company or any sale
or transfer of all or any part of its assets or business, or any other corporate
act or proceeding.

(b) Changes in Capitalization; Reorganizations. In the event of any change
in capitalization affecting the common stock of the Company, such as a stock
dividend, stock split, recapitalization, merger, consolidation, split-up,
combination or exchange of shares or other form of reorganization, liquidation,
or any other change affecting the common stock (including a merger or
reorganization in which the Company is not the surviving entity or survives only
as a subsidiary of another entity) ("Change in Capitalization"), such
proportionate adjustments, shall be made with respect to the aggregate number
and type of securities for which options may be granted under the Plan, the
number and type of securities (including securities of a surviving or acquiring
entity or cash, property or other consideration) covered by each outstanding
option, and the exercise price of outstanding options, in each case to the end
that optionees shall be entitled upon exercise of options to receive the same
number and kind of stock, securities, cash, property or other consideration that
the optionee would have receive in connection with the Change in Capitalization
if such option had been exercised immediately preceding such Change in
Capitalization.

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(c) Other Distributions. The Committee may also make such adjustments in
the number of shares covered by, and the price or other value of any outstanding
options in the event of a spin-off or other distribution (other than normal cash
dividends) of Company assets to shareholders.

10. CHANGE IN CONTROL

(a) Effect on Options. In the event of a Change in Control (as defined
below) of the Company, in addition to any adjustments required by Section 9(b):

(i) all options outstanding on the date of such Change in Control
shall become immediately and fully exercisable, and

(ii) an optionee will be permitted to surrender for cancellation
within sixty (60) days after such Change in Control, any option or portion
of such option to the extent not yet exercised and the optionee will be
entitled to receive a cash payment in an amount equal to the excess, if
any, of (A) the Fair Market Value on the date preceding the date of
surrender, of the shares subject to the option or portion thereof
surrendered, over (B) the aggregate exercise price for the shares under the
option or portion thereof surrendered.

(b) Change in Control. A "Change in Control" of the Company shall mean the
occurrence after the effective date of the Plan of:

(i) An acquisition (other than directly from the Company) of any
voting securities of the Company (the "Voting Securities") by any "Person"
(as the term person is used for purposes of Section 13(d) or 14(d) of the
Exchange Act) immediately after which such Person has "Beneficial
Ownership" (within the meaning of Rule 13d-3 promulgated under the Exchange
Act) of fifty percent (50%) or more of the combined voting power of the
Company's then outstanding Voting Securities; provided, however, this
subsection (i) shall not apply to acquisitions of Voting Securities by Paul
Kruger or his affiliates.

(ii) The individuals who, as of the date of adoption of the Plan by
the Board, are members of the Board (the "Incumbent Board"), cease for any
reason to constitute at least two-thirds of the members of the Board;
provided, however, that if the election, or nomination for election by the
Company's common stockholders, of any new director was approved by a vote
of at least two-thirds of the Incumbent Board, such new director shall, for
purposes of this Plan, be considered as a member of the Incumbent Board;
provided further, however, that no individual shall be considered a member
of the Incumbent Board if such individual initially assumed office as a
result of either an actual or threatened 'election contest' (as described
in Rule 14A-11 promulgated under the Exchange Act) or other actual or
threatened solicitation of proxies or consents by or on behalf of a Person
other than the Board (a "Proxy Contest") including by reason of any
agreement intended to avoid or settle any Election Contest or Proxy
Contest; or

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(iii) The consummation of:

(A) A merger, consolidation or reorganization involving the
Company, unless

(1) the stockholders of the Company, immediately before such
merger, consolidation or reorganization, own, directly or
indirectly immediately following such merger, consolidation or
reorganization, at least sixty percent (60%) of the combined
voting power of the outstanding voting securities of the
corporation resulting from such merger or consolidation or
reorganization (the "Surviving Corporation") in substantially
the same proportion as their ownership of the Voting Securities
immediately before such merger, consolidation or reorganization,

(2) the individuals who were members of the Incumbent Board
immediately prior to the execution of the agreement providing
for such merger, consolidation or reorganization constitute at
least two-thirds of the members of the board of directors of the
Surviving Corporation, and

(3) no Person, other than the Company, any Subsidiary, any
employee benefit plan (or any trust forming a part thereof)
maintained by the Company, the Surviving Corporation, or any
Subsidiary or any Person who, immediately prior to such merger,
consolidation or reorganization had Beneficial Ownership of
fifty percent (50%) or more of the then outstanding Voting
Securities, has Beneficial Ownership of fifty percent (50%) or
more of the combined voting power of the Surviving Corporation's
then outstanding voting securities;

(B) A complete liquidation or dissolution of the Company; or

(C) An agreement for the sale or other disposition of all or
substantially all of the assets of the Company to any Person (other
than a transfer to a Subsidiary).

Notwithstanding the foregoing, a Change in Control shall not be deemed to
occur solely because any Person (the "Subject Person") acquired Beneficial
Ownership of more than the permitted amount of the outstanding Voting Securities
as a result of the acquisition of Voting Securities by the Company that, by
reducing the number of Voting Securities outstanding, increases the proportional
number of shares Beneficially Owned by the Subject Person, provided that if a
Change in Control would occur (but for the operation of this sentence) as a
result of the acquisition of Voting Securities by the Company, and after such
share acquisition by the Company, the Subject Person becomes the Beneficial
Owner of any additional Voting Securities which increases the percentage of the
then outstanding Voting Securities Beneficially Owned by the Subject Person,
then a Change in Control shall occur.

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11. EFFECTIVE AND EXPIRATION DATES OF PLAN

This Plan became effective as of May 11, 2001, the date of its approval by
the Board of Directors of the Company. No options shall be granted pursuant to
this Plan after May 11, 2011.

12. AMENDMENTS OR TERMINATION

The Committee may at any time amend, alter or discontinue the Plan in such
manner as it may deem advisable. Any such amendment or alteration may be
effected without the approval of the shareholders of the Company, except to the
extent such approval may be required by applicable laws or by the rules of any
securities exchange upon which the Company's outstanding shares are admitted to
listed trading.

No amendment, alteration or discontinuation of the Plan shall adversely
affect any stock option grants made prior to the time of such amendment,
alteration or discontinuation, except with the consent of the holder of the
affected options.

13. GOVERNMENTAL REGULATIONS

Notwithstanding any provision hereof, or any option granted hereunder, the
obligation of the Company to sell and deliver shares under any such option shall
be subject to all applicable laws, rules and regulations and to such approvals
by any governmental agencies or national securities exchange as may be required,
and the optionee shall agree that he will not exercise any option granted
hereunder, and that the Company will not be obligated to issue any shares under
any such option, if the exercise thereof or if the issuance of such shares shall
constitute a violation by the optionee or the Company of any applicable law or
regulation. If the shares of Common Stock have not been registered, the Company
may require that as a condition to exercise any option, the optionee execute an
investment letter. The Company shall be entitled to require as a condition to
the issuance of any shares of Common Stock upon exercise of an option that the
optionee remit an amount sufficient, in the Company's opinion, to satisfy all
FICA, federal, state or other withholding tax requirements related thereto.
Unless otherwise provided in the Agreement evidencing the option, an optionee
shall be entitled, without the requirement of further approval or other action
by the Committee, to satisfy such obligation in whole or in part (i) by
tendering stock of the Company already owned by the optionee with such stock to
be valued at the Fair Market Value (as determined under Section 5) on the date
immediately preceding the date of exercise of the options, (ii) by surrendering
a portion of his or her option with such surrendered option to be valued at the
Surrender Value (as determined under Section 6(c)), or (iii) by a combination of
cash, stock of the Company and surrender of options.

14. GOVERNING LAW

The Plan and all actions taken thereunder shall be governed by and
construed in accordance with the laws of the state of incorporation of the
company and applicable federal law.

15. SEVERABILITY

If any provision of this Plan is determined to be invalid or unenforceable
for any reason, the remaining provisions of the Plan shall remain in effect and
be interpreted to reasonably effect the intent of the Plan.

B-9