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

FORM 10-QSB

(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
ACT
For the transition period from to
------- --------

Commission file number 000-28469

PET QUARTERS, INC.

(Exact name of small business issuer as specified in its charter)

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

720 E. Front Street, Lonoke, Arkansas 72086
(Address of principal executive offices)

(501) 676-9222
(Issuer's telephone number)

N/A
(Former name, former address and former fiscal year,
if changed since last report)

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Check whether the registrant filed all documents and reports required to be
filed by Section l2, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [ ] No [ ]

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 19,894,129

Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]

PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

The accompanying balance sheets of Pet Quarters, Inc. and Subsidiaries at
September 30, 2000 and June 30, 2000, the statements of operations and cash
flows for the three months ended September 30, 2000 and 1999 have been prepared
by the Company's management and they do not include all information and notes to
the financial statements necessary for a complete presentation of the financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles. In the opinion of management, all adjustments
considered necessary for a fair presentation of the results of operations and
financial position have been included and all such adjustments are of a normal
recurring nature.

Operating results for the quarter ended September 30, 2000 are not necessarily
indicative of the results that can be expected for the year ending June 30,
2001.

PET QUARTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30 JUNE 30
2000 2000
------------ ------------
(UNAUDITED)

ASSETS
Current assets:
Cash $ 211,439 $ 164,128
Accounts receivable 163,158 175,608
Inventories 1,517,685 1,674,002
Deferred advertising costs 462,202 637,425
Land and building held for sale 500,000 500,000
Prepaid expenses and other current assets 150,585 151,177
------------ ------------
Total current assets 3,005,069 3,302,340

Property, plant and equipment:
Land -- --
Buildings and improvements 33,600 33,600
Furniture and equipment 597,447 596,038
------------ ------------
631,047 629,638
Less accumulated depreciation (144,485) (115,767)
------------ ------------
486,562 513,871
Goodwill, net of accumulated amortization of
$3,308,823 and $2,162,156 at September 30
and June 30, 2000 16,149,783 17,524,514
Intangible assets, net of accumulated amortization 513,662 506,227
------------ ------------
Total assets $ 20,155,076 $ 21,846,952
============ ============

See Notes to Condensed Consolidated Financial Statements

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SEPTEMBER 30 JUNE 30
2000 2000
------------ ------------
(UNAUDITED)

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,537,801 $ 2,904,205
Accrued expenses 712,308 546,412
Convertible debenture, net of discount 1,000,000 950,000
Short-term notes payable 745,000 --
Note payable to related party 495,178 615,178
Current portion of long-term notes and capital leases payable -- 125,763
------------ ------------
Total current liabilities 5,490,287 5,141,558

Long-term portion of notes and capital leases payable -- 260,936
------------ ------------
Total liabilities 5,490,287 5,402,494

Stockholders' equity:
Common stock, $.001 par value per share, 40,000,000 shares
authorized; 19,857,648 and 18,147,783 shares issued and
outstanding at September 30 and June 30, 2000 19,858 18,148
Convertible preferred stock, $.001 par value per share,
10,000,000 shares authorized; 34,642 shares issued
and outstanding at September 30 and June 30, 2000 35 35
Additional paid-in capital 34,423,950 33,109,661
Accumulated deficit (19,763,257) (16,586,531)
------------ ------------
14,680,586 16,541,313
Less unamortized stock compensation (15,797) (96,855)
------------ ------------
Total stockholders' equity 14,664,789 16,444,458
------------ ------------
Total liabilities and stockholders' equity $ 20,155,076 $ 21,846,952
============ ============

See Notes to Condensed Consolidated Financial Statements

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PET QUARTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

THREE MONTHS ENDED SEPTEMBER 30,

2000 1999
------------ ------------

Sales $ 3,973,334 $ 2,510,752
Cost of sales 2,816,009 1,678,207
------------ ------------
1,157,325 832,545
Operating expenses and costs:
Selling 848,354 375,449
Administrative and general 1,969,431 642,206
Depreciation and amortization 1,430,276 311,963
------------ ------------
4,248,061 1,329,618
------------ ------------
Loss from operations (3,090,736) (497,073)

Other income (expense):
Interest expense (91,174) (111,615)
Bridge loan origination fee (651,671)
Interest income 5,184 --
------------ ------------
(85,990) (763,287)
------------ ------------
Loss before income tax benefit (3,176,726) (1,260,360)

Income tax benefit -- --
------------ ------------
Net loss $ (3,176,726) $ (1,260,360)
============ ============

Net loss per common share:
Basic $ (0.17) $ (0.12)
Diluted $ (0.17) $ (0.12)

Basic Shares 18,582,182 10,701,162
Diluted Shares 18,582,182 10,701,162

See Notes to Condensed Consolidated Financial Statements

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PET QUARTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

THREE MONTHS ENDED SEPTEMBER 30

2000 1999
------------ ------------

OPERATING ACTIVITIES
Net (loss) $ (3,176,726) $ (1,260,360)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation 44,670 34,854
Amortization of goodwill 1,374,731 277,109
Amortization of loan origination fee -- 651,671
Amortization of stock compensation 81,058 67,629
expense
Stock issued for services 266,000 18,420
Changes in operating assets and liabilities,
net of acquisition:
Accounts receivable 12,450 (39,102)
Inventories 156,317 68,410
Prepaid expenses and other assets 152,427 (179,480)
Accounts payable (411,404) (27,388)
Accrued expenses 165,896 177,672
------------ ------------
Net cash used in operating activities (1,334,581) (210,565)

INVESTING ACTIVITIES
Acquisition of Humboldt, net of cash -- (4,448,454)
Purchases of property, plant, and equipment (1,409) (34,924)
------------ ------------
Net cash used in investing activities (1,409) (4,483,378)

FINANCING ACTIVITIES
Proceeds from issuance of common stock 1,100,000 --
Proceeds net of payments from notes payable
and bridge loan 283,301 4,807,763
Net cash provided by financing activities 1,383,301 4,807,763
------------ ------------
Net increase (decrease) in cash 47,311 113,820
Cash at beginning of period 164,128 37,726
------------ ------------
Cash at end of period $ 211,439 $ 151,546
============ ============

Shares issued for the acquisition of Humboldt
Industries -- 4,600,000

See Notes to Condensed Consolidated Financial Statements

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND NATURE OF BUSINESS

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

THE COMPANY HAS SOLD COMMON STOCK IN OFFERINGS THAT WERE EXEMPT FROM
REGISTRATION WITH THE SECURITIES AND EXCHANGE COMMISSION ("SEC"). THE COMPANY'S
COMMON STOCK IS CURRENTLY TRADED ON THE OTC BULLETIN BOARD.

BASIS OF PRESENTATION

We have prepared the accompanying condensed consolidated financial statements in
accordance with generally accepted accounting principles for interim financial
statements and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, these financial statements do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. The interim financial information is
unaudited, but reflects all adjustments consisting only of normal recurring
accruals which are, in our opinion, necessary for a fair presentation of the
results of operations for the interim periods. Our operating results for the
interim periods are not necessarily indicative of the results that may be
expected for us for the entire year because of seasonal and short-term
variations. For further information, you should refer to the consolidated
financial statements and related footnotes included in our Annual Report on Form
10-K for the year ended June 30, 2000.

CONSOLIDATION

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

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

INVENTORIES

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

PROPERTY, PLANT, AND EQUIPMENT

Property, plant and equipment are recorded at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the
depreciable assets, which range from five years for furniture and equipment. The
land and building in Lonoke, Arkansas is being held for sale, and the building
is not currently being depreciated.

INCOME TAXES

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

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STOCK-BASED COMPENSATION

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

GOODWILL

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

INTANGIBLE ASSETS

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

CONCENTRATION OF CREDIT RISK

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

REVENUE RECOGNITION

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

SHIPPING AND HANDLING

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

IMPAIRMENT OF ASSETS

The Company accounts for any impairment of its long-lived assets using Statement
of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
Under SFAS No. 121, impairment losses are recognized when information indicates
the carrying amount of long-lived assets, identifiable intangibles and goodwill
related to those assets will not be recovered through future operations or sale.

USE OF ESTIMATES

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

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NOTE 2. EARNINGS PER SHARE

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

Three Months Ended
September 30,
2000 1999
------------ ------------

Numerator:
Net loss and numerator for basic
and diluted loss per share $ (3,176,726) $ (1,260,360)
============ ============

Denominator:
Denominator for basic earning
per share -- weighted-average
shares 18,582,182 10,701,162
============ ============

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

Denominator for diluted earnings
per share -- adjusted 18,582,182 10,701,162
============ ============
weighted-average

Basic loss per share $ (0.17) $ (0.12)
============ ============

Diluted loss per share $ (0.17) $ (0.12)
============ ============

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

NOTE 3. STOCK-BASED COMPENSATION

The Company's Board of Directors has given approval to the establishment of a
Management Incentive Plan under which shares of the Company's stock are granted
to employees. The shares are restricted for one year following the date of
grant.

NOTE 4. ACQUISITIONS

HUMBOLDT AND MAPLEWOOD

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

WELLSTONE ACQUISITION CORPORATION

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

The acquisition was made pursuant to rule 12g-3(a) of the General Rules and
Regulations of the Securities and Exchange Commission. This rule allows
nonreporting entities to acquire fully reporting entities and thereby become
fully reporting. The Company made this acquisition in order to become fully
reporting. It was subsequently determined that the Company could not utilize

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rule 12g-3(a) to become fully reporting. The Company had not identified an
alternative use for Wellstone and has therefore expensed the entire cost of
$782,453 during the quarter ended March 31, 2000 as a component of general and
administrative expense.

WERPETS.COM

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

CHARTENDURE

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

ALLPETS.COM

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

NOTE 5. STOCKHOLDERS' EQUITY

PREFERRED STOCK

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

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

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

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

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

A preferred stock deemed dividend in the amount of $3.4 million was recorded for
the quarter ended June 30, 2000 to reflect the intrinsic value of the beneficial
conversion feature available to preferred shareholders and the fair value of the
associated warrants at the date of issuance.

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STOCK PURCHASE WARRANTS

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

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

On May 2, 2000 the Company issued warrants to purchase 54,237 shares of common
stock at an purchase price of $2.03 in conjunction with the $1 million
Convertible Debenture. The warrants are immediately exercisable and will expire
three years from the date of issuance. The fair value of these warrants was
accounted for as a discount on the debt issued and is being amortized as
interest expense over the term of the agreement.

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

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NOTE 6. NOTES AND CAPITAL LEASES PAYABLE

SEPTEMBER 30
2000 JUNE 30
(Unaudited) 2000
------------ ------------

Unsecured note payable to Pine Tree Management Corporation with variable
interest of prime minus 1% (8.5% at June 30, 2000), interest payable
quarterly beginning September 10, 1999 with $45,000 principal payment due
September 15, 2000 and 2001 $ 45,000 $ 90,000
Capital lease payable to a leasing company due in monthly installments of $5,096
until May 2003 with no stated interest rate. The lease is
guaranteed by a stockholder -0- 153,147
Capital lease payable to a leasing company due in monthly installments of
$3,332 until December 2004 with no stated interest rate. The lease is
guaranteed by a stockholder -0- 143,552
------------ ------------
45,000 386,669
Less current portion 125,763
------------ ------------
$ 45,000 $ 260,936
============ ============

The Company has a $950,000 line of credit agreement, which expires October 10,
2000. At September 30, 2000 there was $700,000 outstanding under this agreement.
On October 10, 2000, the Company extended its line of credit agreement to
January 10, 2001. At September 30, 2000, the Company had $495,178 in related
party debt as compared to $615,178 as of June 30, 2000.

NOTE 7. CONVERTIBLE DEBENTURE

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

In conjunction with this debenture, the Company initially issued stock purchase
warrants for the purchase of up to 54,237 shares of common stock at an exercise
price of $2.03 per share. Accordingly, $60,000 of the proceeds from the lender
has been allocated to the warrants, based on their estimated fair market value
at issuance. The beneficial conversion feature and stock purchase warrants have
been accounted for as a debt discount on the convertible debentures. The debt
discount is being amortized over the term of the convertible debenture and is
recognized in the Statement of Operations as additional interest expense. In
November 2000, this convertible debenture was extended to May 5, 2001 and its
conversion price was lowered to $1.00. At the same time, 130,000 other warrants
provided to the lender were reduced to $1.00 from $4.65.

NOTE 8. EQUITY LINE OF CREDIT AGREEMENT

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

Through September 30, 2000, the Company had issued 750,000 of shares of common
stock pursuant to this agreement.

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

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

NOTE 9. OPERATING SEGMENTS

Prior to the purchase of Humboldt Industries effective August 1, 1999, the
Company operated in one segment - internet sales of pet supplies. Beginning
August 1, 1999, the Company began, through the purchase of Humboldt Industries,
a catalog segment. Information on the operating segments for the three months
ended September 30, 2000 and 1999 is as follows:

THREE MONTHS ENDED
SEPTEMBER 30,
2000 1999
------------ ------------

Net Sales:
Internet $ 307,625 $ 70,655
Catalog 3,665,709 2,440,097
------------ ------------
Total $ 3,973,334 $ 2,510,752
============ ============

Loss from operations:
Internet $ (2,042,931) $ (338,937)
Catalog (1,047,805) 158,136)
------------ ------------
Total $ (3,090,736) $ (497,073)
============ ============

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

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

MANAGEMENT'S DISCUSSION AND ANALYSIS

The following discussion and analysis contains some forward-looking statements,
which are based upon our plans, goals, and objectives for Pet Quarters, Inc. and
its management. Such statements are subject to various risks and uncertainties,
including our inability to secure ongoing financing. The most important risk
concerns the cash to operate the businesses of Pet Quarters, Inc. We have
additional loans, some of which are demand loans, which could require additional
infusions of capital. Our longer-term development plans also require additional
capital for completion. Consequently, the reader should consider that such
uncertainties and risks may cause actual results to vary materially from the
stated plans, goals, and objectives outlined below. Unless otherwise indicated,
this discussion covers the period beginning on July 1, 2000 and concluding on
September 30, 2000.

Assets: The total assets as of September 30, 2000 were $20,155,076 as compared
to $21,846,952 as of June 30, 2000. This is an 8% decrease, which reflects the
goodwill that was amortized during the quarter. We had current assets of
$3,005,069 including cash of $211,439, inventories of $1,517,685, prepaid
expenses of $462,202 and land and building held for sale of $500,000 as of
September 30, 2000 as compared to current assets of $3,302,340 including cash of
$164,128, inventories of $1,674,002, prepaid expense of $637,425 and building
and land held for sale of $500,000 as of June 30, 2000. We have listed the
facility in Lonoke, Arkansas for $650,000. The purchase of Humboldt Industries
eliminated the original purpose of the facility, and the Company is prepared to
sell the Lonoke facility.

Goodwill, net of accumulated amortization, was $16,149,783 as of September 30,
2000 as compared to $17,524,514 as of June 30, 2000. The reduction in goodwill
reflects the quarterly amortization of goodwill resulting from the purchase of
Humboldt Industries, WeRPets.com, Chartendure Ltd., and AllPets.com. We are
amortizing these acquisitions on schedules that vary between two and five years.

Intangible assets in the amount of $513,662 as of September 30, 2000 include
capitalized costs associated with our website as compared to $506,227 as of June
30, 2000. We anticipate website design and development costs will continue and
will be capitalized in conformity with Statement of Position (SOP 98-1).

Liabilities and stockholders equity:

Liabilities: Total liabilities of $5,490,287 are reflected as of September 30,
2000 as compared to total liabilities as of $5,402,494 as of June 30, 2000.

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Current liabilities: Current liabilities include accounts payable of $2,537,801
as of September 30, 2000 as compared to $2,904,205 as of June 30, 2000. Accrued
expenses of $712,308 as of September 30, 2000 compared with $546,412 as of June
30, 2000. We had notes payable totaling $2,240,178 for the quarter ended
September 30, 2000 including notes payable to related parties and a $1,000,000
debenture which has been extended to May 5, 2001. This compares to $1,951,877 in
notes and capital leases payable as of June 30, 2000. Related party notes in the
amount of $329,989 are secured with the facility in Lonoke, Arkansas.

Stockholders equity: Common shares increased from 18,147,783 as of June 30, 2000
to 19,857,648 as of September 30, 2000. Most of the increase is the result of
the issuance of an additional 694,184 shares under the terms of a prior stock
issuance in February, 2000, and the result of 750,000 shares issued pursuant to
a "put" arrangement and the release of 238,095 shares which were held in escrow
from a February, 2000 agreement. Both of these transactions have been described
in prior Company filings. Total shareholder equity was $14,664,789 as compared
to $16,444,458 as of June 30, 2000. Total liabilities and stockholder's equity
was $20,155,076 on September 30, 2000 as compared to $21,846,952 on June 30,
2000.

Liquidity and Capital Resources: Recently, we obtained additional loans to
provide for our cash deficiency. We believe accessing the capital markets
through our equity line of credit will be necessary to fund operations over the
near-term.

Sales: Sales increased to $3,973, 334 for the quarter ended September 30, 2000
from $2,510,752 for the quarter ended September 30, 1999. This is a 58%
increase. This resulted from the fact that the quarter ended in 1999 included
two months of sales from the purchase of Humboldt Industries, and the internet
sales for the September 2000 quarter was $307,625 as compared to $70,655 for the
September 1999 quarter.

Cost of Sales: Cost of sales increased from $2,816,009 as of September 30, 2000
as compared to $1,678,207 as of September 30, 1999. This is a 68% increase and
is the result of the increase in sales described above and our free shipping
policy on orders placed online.

Gross margin: Our gross margins declined to 29% for the quarter ended September
30, 2000 as compared to 33% for the same period in 1999. The lower margins are a
direct result of increasing online sales. We believe gross margins will be
stable throughout the year.

Selling expenses: Selling expenses of $848,354 for the quarter ended September
30, 2000 compare with $375,449 for the quarter ended September 30, 1999. The
majority of the selling expenses were attributed to the cost of the catalogs.

Administrative and general expenses increased to $1,969,431 during the quarter
ended September 30, 2000 as compared to $642,206 for the quarter ended September
30, 1999. This increase can be partially attributed to the purchases of Humboldt
Industries, WeRPets.com, Chartendure Ltd., and AllPets.com. Additionally,
amortization from stock and option grants and expenses from day-to-day
operations of our business are included in the total. Recently, we have reduced
payroll expenses and believe other reductions will occur during the remainder of
the fiscal year.

Depreciation and amortization expenses for the quarter were $1,430,276 as
compared to $311,963 in the quarter ended September 30, 2000. These items
include amortizations of Humboldt Industries, WeRPets.com, Chartendure, Ltd.,
and AllPets.com. The amortizations are expected to continue for two to four more
years.

Interest expense was $91,174 for the quarter ended September 30, 2000 as
compared to $111,616 for the same period in 1999. Interest expense was reduced
after the Sun Valley Trust note was retired in May 2000.

Income tax benefit: We currently have substantial net operating losses (NOL'S)
from inception through September 30, 2000. At this time, no income tax benefit
has been recognized.

Net loss: We had a $3,176,726 loss for the quarter as compared to $1,260,360
loss for the quarter ended September 30, 1999. Non-cash items include the
goodwill amortization of Humboldt Industries, WeRPets.com, Chartendure Ltd., and
AllPets.com, depreciation expense, and stock compensation expense.

Recent Events: Several of our online competitors have announced they are ending
operations. Management believes the online customers of these companies will
search for an alternate provider of online pet supplies and accessories. We are
actively pursuing these new customers, however there is no assurance that we
will be successful in these efforts.

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14

PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

Pet Quarters is not currently involved in litigation other than matters
which are routine and incidental to the business.

ITEM 2. CHANGES IN SECURITIES.

a) There have been no material changes defining the rights of any class of
registered securities. The Company did renegotiate on November 3, 2000 the terms
of a convertible debenture to extend the payment date until May 5, 2001 and
consequently reduce the exercise price of warrants held by the owner of the
debenture.

b) Common stock issued by the Company during the first period was as
follows:

(1) 238,095 shares issued pursuant to a February 23, 2000 agreement.

(2) 27,586 shares issued for services.

(3) 694,184 shares issued pursuant to a repricing arrangement from a
February 23, 2000 agreement.

(4) 750,000 shares issued through our equity line of credit.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None

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

The Company has not submitted any matters to the stockholders during this
period.

ITEM 5. SUBSEQUENT EVENTS.

(1) In November, the Company re-listed the facility in Arkansas for sale for
$650,000.

(2) On November 3, 2000, the Company negotiated a six-month extension with
AMRO International to May 5, 2001 for the convertible debenture. The Company
reduced its warrant and exercise price on the debenture to $1.00. Additionally,
AMRO has received 130,000 warrants from a prior financing at $4.65. These
warrants were reduced to $1.00.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

Exhibit No. Description

10.1 Pet Quarters, Inc. Management Incentive Plan

10.2 Pet Quarters, Inc. Employee Equity Participation Incentive
Plan

10.3 Agreement between Pet Quarters, Inc. and Aries Equity Corp.

27.1 Financial Data Schedule

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15

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

PET QUARTERS, INC. (Registrant)

Date November 13, 2000 /s/ Steve Dempsey
------------------ --------------------------------------
Steve Dempsey, President

Date November 13, 2000 /s/ Gregg Rollins
------------------ --------------------------------------
Gregg Rollins, Chief Financial Officer

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INDEX TO EXHIBITS

EXHIBIT
NUMBER DESCRIPTION
------- -----------

10.1 Pet Quarters, Inc. Management Incentive Plan

10.2 Pet Quarters, Inc. Employee Equity Participation Incentive Plan

10.3 Agreement between Pet Quarters, Inc. and Aries Equity Corp.

27.1 Financial Data Schedule