----

----

**SECURITIES& EXCHANGE COMMISSION****Washington, D.C. 20549**

**FORM10-QSB**

ý  **QUARTERLY REPORTPURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES        EXCHANGE ACT OF 1934**

**For thequarterly period ended June 30, 2001**

o  **TRANSITIONAL REPORTUNDER SECTION 13 OR 15(d) OF THE SECURITIES           EXCHANGE ACT OF 1934 (No FeeRequired)**

**CommissionFile No. 000-24551**
| **COMPOSITE SOLUTIONS, INC.**                   |
|-------------------------------------------------|
| ****                                            |
| (Name of Small  Business Issuer in its Charter) |

 

| **Florida**                                             | **65-0790758**     |
|---------------------------------------------------------|--------------------|
| ****                                                    | ****               |
| State  or other jurisdiction of                         | I.R.S. Employer    |
| incorporation  or organization                          | Identification No. |
|                                                    |               |
| **3252 Holiday Court, Suite 206, La Jolla, California** | **92122**          |
| ****                                                    | ****               |
| Address  of principal executive office                  | Zip Code           |

Issuer's telephone number: **(858) 459–4843**
|                                                         |
|--------------------------------------------------------------|
| **3655 Nobel Drive, Suite 440, San Diego, California 92122** |
| ****                                                         |
| Former  name and address, if changed since last report       |

Check whether the issuer has (1) filedall reports required by Section 13 or 15(d) of the Exchange Act during the past12 months, and (2) been subject to such filing requirements for the past ninety(90) days.    Yes  ý     No o

As of June 30, 2001, 14,741,215 shares ofCommon Stock were outstanding.

----

----

**PART 1 - FINANCIAL INFORMATION**

**Item 1. Financial Statements.**

             Thefollowing un-audited financial statements contain information regarding theresults of operation and balance sheet of Composite Solutions, Inc., a Floridacorporation, for the quarter ended June 30, 2001. Since the required review ofthese interim financial statements by an independent accountant is yet to becompleted, an amendment to this filing will follow as soon as the accountant'sreport is available.

The Company’s revenues for the quarterended June 30, 2001 were $10,400.

 

**INDEX TO FINANCIAL STATEMENTS**

 

| Balance Sheets                                      |   |
|-----------------------------------------------------|--------|
|                                                |   |
| Statements  of Operations                           |   |
|                                                |   |
| Statements  of Changes in Stockholders’ Equity |   |
|                                                |   |
| Statements  of Cash Flows                           |   |
|                                                |   |
| Notes  to Financial Statements                      |   |

 

**COMPOSITE SOLUTIONS, INC. ANDSUBSIDIARIES**(A Development Stage Company)**ConsolidatedBalance Sheets**

|                                     | **June 30,**                                                                                                                                                     |
|------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                     | **2001**                                                                                                                                                         |   | **2000** |   |
|                                     | ****                                                                                                                                                             | ** ** | **** | ** ** |
| **ASSETS**                               |
|                                     |                                                                                                                                                             |   |   |   |
| **Current assets**                       |                                                                                                                                                             |   |   |   |
|                                     | Cash                                                                                                                                                             | $ | 1,295 |   | $ | 68,808 |   |
|                                     | Accounts receivable, net of  allowance for doubtful accounts of $0 in 2001 and $0 in 2000                                                                        | - |   | 2,513 |   |
|                                     | Related party receivables                                                                                                                                        | - |   | 5,151 |   |
|                                     | Inventory                                                                                                                                                        | - |   | - |   |
|                                     | Prepaid expenses                                                                                                                                                 | 1,254 |   | 7,420 |   |
|                                     | Prepaid income taxes                                                                                                                                             | - |   | - |   |
|                                     |                                                                                                                                                                  |   |  |   |
|                                     | Total current assets                                                                                                                                             | 2,549 |   | 83,892 |   |
|                                     |                                                                                                                                                             |   |   |   |
| **Property, plant and equipment, net**   | 17,248                                                                                                                                                           |   | 21,172 |   |
|                                     |                                                                                                                                                             |   |   |   |
| **Other assets**                         |                                                                                                                                                             |   |   |   |
|                                     | Intangible assets                                                                                                                                                | 1,143,399 |   | 540,131 |   |
|                                     | Deposit                                                                                                                                                          | 20,845 |   | 8,627 |   |
|                                     |                                                                                                                                                                  |   |  |   |
|                                     | Total assets                                                                                                                                                     | $ | 1,184,041 |   | $ | 653,822 |   |
|                                     |                                                                                                                                                                  |   |  |   |
| **LIABILITIES AND SHAREHOLDERS' EQUITY** |
|                                     |                                                                                                                                                             |   |   |   |
| **Current liabilities**                  |                                                                                                                                                             |   |   |   |
|                                     | Accounts payable                                                                                                                                                 | 360,384 |   | 53,143 |   |
|                                     | Line of credit                                                                                                                                                   | 51,388 |   | - |   |
|                                     | Notes payable to officer                                                                                                                                         | 206,022 |   | - |   |
|                                     | Notes payable to Employees                                                                                                                                       | 31,009 |   | - |   |
|                                     | Accrued expenses                                                                                                                                                 | 12,471 |   | 16,930 |   |
|                                     | Income taxes payable                                                                                                                                             | - |   | 800 |   |
|                                     |                                                                                                                                                                  |   |  |   |
|                                     | Total current liabilities                                                                                                                                        | 661,274 |   | 70,873 |   |
|                                     |                                                                                                                                                             |   |   |   |
| **Long term obligations**                |                                                                                                                                                             |   |   |   |
|                                     | Convertible debenture                                                                                                                                            | - |   | - |   |
|                                     | Other long term obligations                                                                                                                                      | - |   | - |   |
|                                     |                                                                                                                                                                  |   |  |   |
|                                     | Total liabilities                                                                                                                                                | 661,274 |   | 70,873 |   |
|                                     |                                                                                                                                                             |   |   |   |
| **Shareholders' equity**                 |                                                                                                                                                             |   |   |   |
|                                     | Preferred stock; $0.0001 par  value; 10,000,000 shares authorized; 0 shares issued and outstanding                                                               | - |   | - |   |
|                                     | Common stock; $0.0001 par value;  50,000,000 shares authorized; 14,741,215 and 10,868,333 shares issued and  outstanding at June 30, 2001 and 2000, respectively | 1,477 |   | 1,087 |   |
|                                     | Additional paid in capital                                                                                                                                       | 3,150,419 |   | 1,765,202 |   |
|                                     | Accumulated deficit during the  development stage                                                                                                                | (2,629,129 | ) | (1,183,340 | ) |
|                                     |                                                                                                                                                                  |   |  |   |
|                                     | Total shareholders' equity                                                                                                                                       | 522,767 |   | 582,949 |   |
|                                     |                                                                                                                                                             |  |   |  |   |
|                                     | Total liabilities and  shareholders' equity                                                                                                                      | $ | 1,184,041 |   | $ | 653,822 |   |
|                                     |                                                                                                                                                                  |   |  |   |
|                                          |                                                                                                                                                                  |  |  |  |  |  |  |  |

Seeaccompanying notes.

**COMPOSITE SOLUTIONS, INC. ANDSUBSIDIARIES**(A Development Stage Company)**ConsolidatedStatements of Operations**

|                                         | **Three Months Ended**                 | **Nine Months Ended** | **October 20, 1997** |    |
|----------------------------------------------|----------------------------------------|-----------------------|----------------------|---------|
|                                         | **June 30,**                           | **June 30,**          | **(Inception) to**   |    |
|                                         | ****                                   | ****                  | **June 30,**         |    |
|                                         | **2001**                               |                  | **2000**             |    | **2001** |   | **2000** |   | **2001** |   |
|                                         |                                        |                  |                      |    |  |   |  |   |  |   |
| **Revenues**                                 | $                                      | 10,400                |                 | $       | 2,513 |   | $ | 52,402 |   | $ | 2,513 |   | $ | 55,290 |   |
| **Cost of sales**                            | 5,098                                  |                  | 1,439                |    | 21,449 |   | 1,439 |   | $ | 27,088 |   |
|                                         |                                        |                  |                      |    |  |   |  |   |  |   |
|                                         | Gross profit                           | 5,302                 |                 | 1,074   |   | 30,953 |   | 1,074 |   | 28,202 |   |
|                                         |                                   |                  |                 |    |   |   |   |   |   |   |
| **Expenses**                                 |                                   |                  |                 |    |   |   |   |   |   |   |
|                                         | Consulting fees                        | 102,133               |                 | 164,944 |   | 251,392 |   | 188,291 |   | $ | 607,477 |   |
|                                         | Depreciation and amortization          | 64,393                |                 | 2,459   |   | 172,733 |   | 4,925 |   | $ | 224,710 |   |
|                                         | General and administrative  expenses   | 52,236                |                 | 71,206  |   | 183,974 |   | 184,963 |   | $ | 610,625 |   |
|                                         | Organizational expenses                | -                     |                 | -       |   | - |   | - |   | $ | 514 |   |
|                                         | Professional fees - related party      | 1,397                 |                 | -       |   | 1,397 |   | - |   | $ | 27,281 |   |
|                                         | Professional fees - other              | 45,189                |                 | 17,435  |   | 132,639 |   | 33,232 |   | $ | 385,026 |   |
|                                         | Salaries                               | 59,469                |                 | 57,400  |   | 291,985 |   | 199,468 |   | $ | 866,584 |   |
|                                         |                                        |                  |                      |    |  |   |  |   |  |   |
|                                         | Total expenses                         | 324,817               |                 | 313,444 |   | 1,034,120 |   | 610,879 |   | 2,722,217 |   |
|                                         |                                        |                  |                      |    |  |   |  |   |  |   |
| Loss from operations                         | (319,515                               | )                     | (312,370             | )       | (1,003,167 | ) | (609,805 | ) | (2,694,015 | ) |
|                                         |                                   |                  |                 |    |   |   |   |   |   |   |
| **Other income (expense)**                   |                                   |                  |                 |    |   |   |   |   |   |   |
|                                         | Interest income                        | 1                     |                 | 386     |   | 3 |   | 2,376 |   | $ | 8,364 |   |
|                                         | Interest income - forgiveness of  debt | -                     |                 | -       |   | - |   | - |   | $ | 17,825 |   |
|                                         | Gain on forgiveness of debt            | -                     |                 | -       |   | 3,400 |   | - |   | $ | 8,261 |   |
|                                         | Interest expense                       | (6,674                | )                    | (115    | ) | (39,824 | ) | (261 | ) | $ | (65,167 | ) |
|                                         | Loss on forgiveness of debt            | -                     |                 | -       |   | - |   | - |   | $ | (11,021 | ) |
|                                         |                                        |                  |                      |    |  |   |  |   |  |   |
|                                         | Total other income (expense)           | (6,673                | )                    | 271     |   | (36,421 | ) | 2,115 |   | (41,738 | ) |
|                                         |                                        |                  |                      |    |  |   |  |   |  |   |
| Loss before provision  for income taxes      | (326,188                               | )                     | (312,099             | )       | (1,039,588 | ) | (607,690 | ) | (2,735,753 | ) |
|                                         |                                   |                  |                 |    |   |   |   |   |   |   |
| Provision for income  taxes                  | -                                      |                  | 800                  |    | - |   | 800 |   | $ | 2,400 |   |
|                                         |                                        |                  |                      |    |  |   |  |   |  |   |
| Loss from continuing  operations             | (326,188                               | )                     | (312,899             | )       | (1,039,588 | ) | (608,490 | ) | (2,738,153 | ) |
|                                         |                                   |                  |                 |    |   |   |   |   |   |   |
| Gain or (loss) from  discontinued operations | (93,266                                | )                     | -                    |    | (93,266 | ) | - |   | $ | (72,459 | ) |
|                                         |                                   |                  |                 |    |   |   |   |   |   |   |
| Gain on disposal of  discontinued operations | 181,484                                |                  | -                    |    | 181,484 |   | - |   | $ | 181,484 |   |
|                                         |                                        |                  |                      |    |  |   |  |   |  |   |
| **Net loss**                                 | $                                      | (237,970              | )                    | $       | (312,899 | ) | $ | (951,370 | ) | $ | (608,490 | ) | $ | (2,629,128 | ) |
|                                         |                                        |                  |                      |    |  |   |  |   |  |   |
| Basic net loss per  share                    | $                                      | (0.02                 | )                    | $       | (0.03 | ) | $ | (0.07 | ) | $ | (0.06 | ) | $ | (0.17 | ) |
|                                         |                                        |                  |                      |    |  |   |  |   |  |   |
| Weighted average  number of shares           | 13,650,234                             |                  | 10,783,333           |    | 13,650,234 |   | 10,783,333 |   | 15,795,234 |   |
|                                         |                                        |                  |                      |    |  |   |  |   |  |   |
|                                              |                                        |                       |                      |         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

Seeaccompanying notes.

**COMPOSITE SOLUTIONS, INC. ANDSUBSIDIARIES**(A Development Stage Company)**Consolidated Statements of Changes in Shareholders' Equity**

|                                             |             |       |           |       |                |       | **Deficit**       |       |       |       |
|--------------------------------------------------|------------------|------------|----------------|------------|---------------------|------------|-------------------|------------|------------|------------|
|                                             |             |       |           |       |                |       | **Accumulated**   |       |       |       |
|                                             | **Common Stock** |       |           |       | **During the**      |       | **Total**         |       |
|                                             | ****             |       | **Additional** |       | **Development**     |       | **Shareholders'** |       |
|                                             | **Shares**       |       | **Amount**     |       | **Paid in Capital** |       | **Stage**         |       | **Equity** |       |
|                                             | ****             | ** ** | ****           | ** ** | ****                | ** ** | ****              | ** ** | ****       | ** ** |
| **Balance, October 20, 1997 (inception)**        | -                |       | $              | -          |                | $          | -                 |       | $          | -          |   | $ | - |   |
|                                             |             |       |           |       |                |       |              |       |       |       |
| Common stock issued in  exchange for services    | 15,233,910       |       | 1,521          |       | (2,120              | )          | -                 |       | (599       | )          |
| Common Stock issued  for cash                    | 5,962,500        |       | 599            |       | 18,335              |       | -                 |       | 18,934     |       |
| Common stock contributed                         | (7,896,410       | )          | (790           | )          | 790                 |       | -                 |       | -          |       |
| Pre-acquisition income                           | -                |       | -              |       | -                   |       | 47                |       | 47         |       |
| Common stock issued in  acquisition              | 1,000,000        |       | 100            |       | 47                  |       | (47               | )          | 100        |       |
| Common stock issued  for payment of note payable | 200,000          |       | 20             |       | 999,980             |       | -                 |       | 1,000,000  |       |
|                                             |             |       |           |       |                |       |              |       |       |       |
| Net loss                                         | -                |       | -              |       | -                   |       | (587,043          | )          | (587,043   | )          |
|                                             |                  |       |                |       |                     |       |                   |       |            |       |
| **Balance, September 30, 1999**                  | 14,500,000       |       | 1,450          |       | 1,017,032           |       | (587,043          | )          | 431,439    |       |
|                                             |             |       |           |       |                |       |              |       |       |       |
| Common stock surrendered                         | (4,300,000       | )          | (430           | )          | 430                 |       | -                 |       | -          |       |
| Common Stock issued for cash                     | 320,000          |       | 32             |       | 319,968             |       | -                 |       | 320,000    |       |
| Common Stock issued for cash                     | 105,000          |       | 11             |       | 104,989             |       | -                 |       | 105,000    |       |
| Common Stock issued for cash                     | 83,333           |       | 8              |       | 124,992             |       | -                 |       | 125,000    |       |
| Common Stock issued for cash                     | 160,000          |       | 16             |       | 209,984             |       | -                 |       | 210,000    |       |
|                                             |             |       |           |       |                |       |              |       |       |       |
| Net loss                                         | -                |       | -              |       | -                   |       | (608,490          | )          | (608,490   | )          |
|                                             |                  |       |                |       |                     |       |                   |       |            |       |
| **Balance, June 30, 2000**                       | 10,868,333       |       | 1,087          |       | 1,777,395           |       | (1,195,533        | )          | 582,949    |       |
|                                             |             |       |           |       |                |       |              |       |       |       |
| Pre-acquisition income                           |             |       |           |       |                |       | 50,877            |       | 50,877     |       |
| Common stock issued in acquisitions              | 1,103,371        |       | 110            |       | 808,668             |       | (50,877           | )          | 757,901    |       |
| Common stock issued in exchange for services     | 300,000          |       | 30             |       | 173,970             |       | -                 |       | 174,000    |       |
| Common stock issued for finder's fee             | 100,000          |       | 10             |       | (10                 | )          | -                 |       | -          |       |
|                                             |             |       |           |       |                |       |              |       |       |       |
| Net loss                                         | -                |       | -              |       | -                   |       | (482,225          | )          | (482,225   | )          |
|                                             |                  |       |                |       |                     |       |                   |       |            |       |
| **Balance, September 30, 2000**                  | 12,371,704       |       | 1,237          |       | 2,760,023           |       | (1,677,758        | )          | 1,083,502  |       |
|                                             |             |       |           |       |                |       |              |       |       |       |
| Common Stock issued for compensation             | 931,688          |       | 93             |       | 140,287             |       | -                 |       | 140,380    |       |
| Common Stock issued for cash                     | 850,000          |       | 86             |       | 294,914             |       | -                 |       | 295,000    |       |
| Common stock issued for finder's fee             | 200,000          |       | 20             |       | (20                 | )          | -                 |       | -          |       |
| Comon stock returned in sale of subsidiary       | (150,000         | )          | (15            | )          | (93,735             | )          | -                 |       | (93,750    | )          |
| Common stock issued in exchange for services     | 537,823          |       | 56             |       | 48,950              |       | -                 |       | 49,006     |       |
|                                             |             |       |           |       |                |       |              |       |       |       |
| Net loss                                         | -                |       | -              |       | -                   |       | (951,370          | )          | (951,370   | )          |
|                                             |                  |       |                |       |                     |       |                   |       |            |       |
| **Balance, June 30, 2001**                       | 14,741,215       |       | $              | 1,477      |                | $          | 3,150,419         |       | $          | (2,629,128 | ) | $ | 522,768 |   |
|                                             |                  |       |                |       |                     |       |                   |       |            |       |

Seeaccompanying notes.

**COMPOSITE SOLUTIONS, INC. ANDSUBSIDIARIES**(A Development Stage Company)**ConsolidatedStatements of Cash Flows**

|                                            | **Nine Months Ended  June**                             |     | **October 20, 1997  (Inception) to** |     |
|-------------------------------------------------|---------------------------------------------------------|----------|--------------------------------------|----------|
|                                            | ****                                                    |     | **June 30,**                         |     |
|                                            | **2001**                                                |     | **2000**                             |     | **2001** |   |
|                                            |                                                         |     |                                      |     |  |   |
| **Cash flows from operating activities**        |                                                    |     |                                 |     |   |   |
| Net loss                                        | $                                                       | (951,370 | )                                    | $        | (608,490 | ) | $ | (2,629,128 | ) |
| Adjustments to  reconcile net loss to           |                                                    |     |                                 |     |   |   |
| net cash used in  operating activities:         |                                                    |     |                                 |     |   |   |
|                                            | Depreciation and amortization                           | 179,497  |                                 | 4,925    |   | 231,744 |   |
|                                            | Common stock issued in exchange  for compensation       | 140,380  |                                 | -        |   | 317,015 |   |
|                                            | Common stock issued in exchange  for services           | 49,006   |                                 | -        |   | 49,106 |   |
|                                            | Common stock issued in lieu of  cash                    | -        |                                 | -        |   | - |   |
|                                            | Pre-acquisition income                                  | -        |                                 | -        |   | 47 |   |
|                                            | Gain on disposal of subsidiary                          | (181,484 | )                                    | (181,484 | ) |   |   |
| (Increase) decrease in  operating assets        |                                                    |     |                                 |     |   |   |
|                                            | Accounts receivable                                     | 26,130   |                                 | (2,513   | ) | 41,970 |   |
|                                            | Related party receivable                                | 12,251   |                                 | (5,151   | ) | 12,251 |   |
|                                            | Inventory                                               | 251      |                                 | -        |   | (1,804 | ) |
|                                            | Prepaid expenses                                        | 315      |                                 | (3,194   | ) | (1,054 | ) |
|                                            | Deposit                                                 | (14,622  | )                                    | (8,627   | ) | (22,299 | ) |
| Increase (decrease) in  operating liabilities   |                                                    |     |                                 |     |   |   |
|                                            | Accounts payable                                        | 195,430  |                                 | (51,260  | ) | 336,379 |   |
|                                            | Accrued expenses                                        | 27,581   |                                 | (1,069   | ) | 37,213 |   |
|                                            | Income taxes payable                                    | (3,200   | )                                    | 800      |   | 3,152 |   |
|                                            |                                                         |     |                                      |     |  |   |
|                                            | Net cash used in operating  activities                  | (519,835 | )                                    | (674,579 | ) | (1,806,892 | ) |
|                                            |                                                    |     |                                 |     |   |   |
| **Cash flows from investing activities**        |                                                    |     |                                 |     |   |   |
|                                            | Purchase of property, plant and  equipment              | (1,956   | )                                    | (12,954  | ) | (29,660 | ) |
|                                            | Acquisition of intangible assets                        | (14,038  | )                                    | (12,470  | ) | (558,598 | ) |
|                                            | Loans made to related party                             | -        |                                 | -        |   | (10,000 | ) |
|                                            | Repayments of loans to related  party                   | -        |                                 | -        |   | 10,000 |   |
|                                            | Acquisition of subsidiaries                             | -        |                                 | -        |   | (500,000 | ) |
|                                            | Gain on sale of Subsidiary                              | -        |                                 |     |   | 17,261 |   |
|                                            | Cash of acquired and disposed of  subsidiaries          | (12,628  | )                                    | -        |   | (12,628 | ) |
|                                            |                                                         |     |                                      |     |  |   |
|                                            | Net cash used in investing  activities                  | (28,622  | )                                    | (25,424  | ) | (1,083,625 | ) |
|                                            |                                                    |     |                                 |     |   |   |
| **Cash flows from financing activities**        |                                                    |     |                                 |     |   |   |
|                                            | Bank overdraft                                          | (1,214   | )                                    | -        |   | - |   |
|                                            | Increase (decrease) in line of  credit                  | (106     | )                                    | -        |   | 654 |   |
|                                            | Proceeds from note payable to  officer                  | 210,628  |                                 | -        |   | 237,128 |   |
|                                            | Payments of note payable to  officer                    | (30,496  | )                                    | -        |   | (32,180 | ) |
|                                            | Proceeds from convertible  debenture                    | -        |                                 | -        |   | 500,000 |   |
|                                            | Proceeds from notes payable                             | 51,009   |                                 | -        |   | 1,115,509 |   |
|                                            | Proceeds from issuance of common  stock, net            | 295,000  |                                 | 760,000  |   | 1,070,700 |   |
|                                            |                                                         |     |                                      |     |  |   |
|                                            | Net cash provided by financing  activities              | 524,821  |                                 | 760,000  |   | 2,891,811 |   |
|                                            |                                                         |     |                                      |     |  |   |
| Net increase in cash                            | (23,635                                                 | )        | 59,997                               |     | 1,295 |   |
|                                            |                                                    |     |                                 |     |   |   |
| Cash, beginning of  period                      | 24,930                                                  |     | 8,811                                |     | - |   |
|                                            |                                                         |     |                                      |     |  |   |
| Cash, end of period                             | $                                                       | 1,295    |                                 | $        | 68,808 |   | $ | 1,295 |   |
|                                            |                                                         |     |                                      |     |  |   |
| **Supplementary disclosures**                   |                                                    |     |                                 |     |   |   |
|                                            | Interest paid                                           | $        | 1,184                                |     | $ | 243 |   | $ | 3,873 |   |
|                                            | Income taxes paid                                       | $        | 3,200                                |     | $ | - |   | $ | 6,400 |   |
|                                            |                                                    |     |                                 |     |   |   |
| **Non-cash financing and investing activities** |                                                    |     |                                 |     |   |   |
|                                            | Note payable paid by issuance of  common stock          | $        | -                                    |     | $ | - |   | $ | 1,000,000 |   |
|                                            | Investment in subsidiary                                | $        | -                                    |     | $ | - |   | $ | 796,732 |   |
|                                            | Interest on note payable                                | $        | -                                    |     | $ | - |   | $ | 17,825 |   |
|                                            | Forgiveness of interest on note  payable                | $        | -                                    |     | $ | - |   | $ | (17,825 | ) |
|                                            | Release of notes and debenture  from sale of subsidiary | $        | 564,500                              |     |   |   |   | $ | 564,500 |   |
|                                                 |                                                         |          |                                      |          |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

Seeaccompanying notes.

**COMPOSITE SOLUTIONS, INC. ANDSUBSIDIARIES**(A Development Stage Company)**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

**TheCompany**

CompositeSolutions, Inc. (the “Company”), formerly JS Business Works, Inc., wasincorporated in the state of Florida on October 20, 1997.  The Company has two wholly ownedsubsidiaries: Composite Solutions, Inc., incorporated in the state of Nevada onDecember 8, 1998, Trans-Science Corporation, incorporated in the state ofCalifornia on September 15, 1980. Composite Solutions Inc. and subsidiarieswere organized to develop, manufacture and market high technology products andprocesses in key areas of existing and new construction.

TheCompany is in the development stage and its efforts through June 30, 2001 havebeen principally devoted to raising additional capital and negotiating withpotential key personnel and leasing facilities.  There is no assurance that any benefit will result from suchactivities.  The Company will continueto incur expenses and losses as it pursues its development efforts.

**Basisof Presentation**

Theconsolidated financial statements include the accounts of the Company and itswholly owned subsidiaries.  Allsignificant inter-company transactions have been eliminated in consolidation.

**Start-upCosts**

Costsof start-up activities, including organization costs, are expensed as incurred,in accordance with Statement of Position (SOP) 98-5.

**Advertising**

Advertisingcosts are charged to expense as incurred.

**Property,Plant and Equipment**

Property,plant and equipment are recorded at cost less depreciation. Depreciation isaccounted for on the straight-line and accelerated methods based on the estimateduseful lives of the related assets.** **Bettermentsand large renewals, which extend the life of an asset, are capitalized;whereas, repairs and maintenance, which do not increase the useful lives ofproperty and equipment are charged to operations as incurred.

**IntangibleAssets**

Otherassets include intangibles such as licensed technology, computer software andgoodwill.  Intangible assets arerecorded at historical cost less amortization. Goodwill is amortized on the straight-line method based on an estimateduseful life of five years.  Otherintangibles are amortized on the straight-line method beginning on the date theassets are placed in service, over their estimated useful lives.  The cost of software has been capitalized inaccordance with SFAS 86, *Accounting for the Costs of Computer Software to BeSold, Leased, or Otherwise Marketed*and amortization is accountedfor at the greater of a ratio equal to current revenue divided by estimatedfuture gross revenue or on the straight-line method over a period of fiveyears.

**RevenueRecognition**

Revenuesderived from contracts are accounted for on the percentage-of-completion methodof accounting.  Revenue is recognizedbased on a ratio of the actual cost of work performed to a current estimate ofthe total cost to complete a respective contract.

Expectedprofits realized on contracts are based on the difference between estimates oftotal contract revenues and costs of completion.  These estimates are reviewed and revised periodically throughoutthe contract term, and adjustments to profits resulting from such revisions arerecorded in the accounting period in which the revisions are made.  Profits are recognized as the contract phaseof the work is completed.  Losses oncontracts are recorded in full as they are identified.

**IncomeTaxes**

TheCompany accounts for income taxes under SFAS 109, *Accounting for Income Taxes.* This statement requires anasset and liability approach to account for income taxes.  The Company provides deferred income taxesfor temporary differences that will result in taxable or deductible amounts infuture years based on the reporting of certain costs in different periods forfinancial and income tax purposes.

**Use ofEstimates**

Thepresentation of financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities, disclosure ofcontingent assets and liabilities at the date of the financial statements, andthe reported amounts of revenues and expenses during the periodspresented.  Actual results may differsignificantly from those estimates.

**Stock-BasedCompensation**

Inaccordance with the provisions of SFAS 123, the Company follows the intrinsicvalue based method of accounting as prescribed by APB 25, *Accounting for Stock Issued to Employees*,for its stock-based compensation.

**NOTE 2– ACQUISITIONS**

OnJune 17, 1999 the Company entered into a Share Exchange Agreement.  On June 30, 1999 according to the terms ofthe agreement, the Company issued 1,000,000 shares of its common stock for allof the shares of the outstanding stock of Composite Solutions, Inc. (the“Subsidiary”), a Nevada corporation. The exchange of shares has been accounted for as a reverse merger, underthe purchase method of accounting. Accordingly, the combination of Company and the Subsidiary is recordedas a recapitalization of the shareholders’ equity of the Subsidiary, thesurviving corporation, and for accounting purposes the financial statementspresented are those of the Subsidiary.

OnJune 23, 2000 the Company entered into a Share Exchange Agreement withTrans-Science Corporation, a California corporation, a company under commoncontrol.  On July 7, 2000 the Companycompleted its acquisition.  Theacquisition, recorded under the purchase method of accounting, included thepurchase of all of the outstanding shares of common stock of Trans-ScienceCorporation in exchange for 953,371 shares of the Company’s common stock at$0.75 per share which resulted in a purchase price of $715,028. The liabilitiesassumed were in excess of the historical cost of the assets acquired at thedate of acquisition and the total amount of the purchase price was recorded asgoodwill and is being amortized over five years using the straight-line method.

OnAugust 16, 2000 the Company entered into a Share Exchange Agreement withPenultimo, Inc. dba Anchor Reinforcements. On August 31, 2000 the Company completed the acquisition.  The acquisition, recorded under the purchasemethod of accounting, included the purchase of all of the outstanding shares ofcommon stock of Penultimo, Inc. in exchange for 150,000 shares of the Company’scommon stock at $0.625 per share plus $500,000 in cash which resulted in atotal purchase price of $593,750.  Aportion of the purchase price has been allocated to assets acquired andliabilities assumed based on estimated fair market value at the date ofacquisition while the balance of $291,050 was recorded as goodwill and is being amortized over five yearsusing the straight-line method.

OnJune 30, 2001 the Company entered into a Stock Purchase Settlement Agreement tosell its 100% interest of Penultimo Inc. The sale resulted in the return of150,000 shares of the Company’s common stock, and release of all debentures andnotes payable, plus related accrued interests, a total of $597,096. There werealso two other related Notes Payable, totaling $64,000, plus interest whichwere forgiven. In additional, all inter-company receivables and payables werereleased, and goodwill, assets, and liabilities related to Penultimo, Inc. werewritten off. All goodwill, assets, and liabilities related to AnchorReinforcements were written off. The sale resulted in a gain in the amount of$181,484, which was recognized during the six months ended March 31, 2001.

**NOTE 3– PROPERTY, PLANT AND EQUIPMENT**

Property,plant and equipment consist of the following at June 30, 2001 and 2000:

|                            |   | 2001     |   | 2000   |   |
|---------------------------------|--------|----------|--------|--------|--------|
|                            |   |          |   |        |   |
| Leasehold improvements          |   | $        | 1,407  |   | $      | — |   |
| Office furniture and  equipment |   | 195,594  |   | 27,752 |   |
| Machinery                       |   | —   |   | — |   |
|                            |   |          |   |        |   |
|                            |   | 197,001  |   | 27,752 |   |
| Less accumulated  depreciation  |   | (179,753 | )      | (6,580 | )      |
|                            |   |          |   |        |   |
|                            |   | $        | 17,248 |   | $      | 21,172 |   |
|                            |   |          |   |        |   |

Depreciationexpense for the three months ended June 30, 2001, and 2000 was $4,809 and $818,respectively and $23,684 for the period October 27, 1997 (inception) to June30, 2001.

**NOTE 4 - INTANGIBLE ASSETS**

InApril 1999 the Company entered into a license agreement with the Regents of theUniversity of California San Diego (UCSD) for a license under patent rights tomake, use, sell, offer for sale, import licensed products, practice licensedmethods, and to use certain technology. A license fee of $40,000 was paid upon executionof the agreement.  Under the terms of the agreement, theCompany must pay to the licensor a royalty of 1.5% on net sales of the licensedproducts.  The Company must also pay forone half of all past and future patent costs. Payments under the license agreement totaled $0 and $54  for the three months ended June30, 2001 and2000, respectively and $54,836 for the period October 20, 1997 (inception) toJune 30, 2001.  In addition, the Companyis obligated to pay certain fees and royalties for any executed sub-licensearrangements.  At June 30, 2001 this intangibleasset has not been placed in service. Accordingly, there were no sucharrangements and no amortization expense has been incurred during the periodOctober 20, 1997 (inception) to June 30, 2001.

InAugust 1999 the Company entered into a second license agreement with UCSD for alicense under patent rights to make, use, sell, offer for sale, import licensedproducts, to practice licensed methods, and to use certain technology.  A license fee in the amount of $5,000 waspaid upon execution of the agreement. Under the terms of the agreement, the Company must pay to the licensor aroyalty of 1.5% on net sales of licensed products and certain fees androyalties for any executed sub-license agreements.  In addition, the Company is obligated to pay for one-half of allpast and future patent costs.  Therewere payments of $11,224 made under the license agreement for the three monthsended June 30, 2001 and 2000, respectively and $44,578 for the period October20, 1997 (inception) to June 30, 2001.

AtJune 30, 2001 and 2000 there were past and future patent costs payable asfollows:

|                               |   | 2001   |   | 2000   |   |
|------------------------------------|--------|--------|--------|--------|--------|
|                               |   |        |   |        |   |
| Included in accounts  payable      |   | $      | 14,038 |   | $      | 14,631 |   |
| Included in long-term  obligations |   | — |   | — |   |
|                               |   |        |   |        |   |
|                               |   | $      | 14,038 |   | $      | 14,631 |   |
|                               |   |        |   |        |   |
|                                    |        |        |        |        |        |  |  |  |  |  |  |  |

 

In January 1999 the Company acquiredcertain intangible assets from Trans-Science Corporation, a company undercommon control and subsequently acquired on July 7, 2000. Fire test dataconcerning overlay systems in the form of technical reports prepared by an independentlaboratory in New York performed prior to the Company’s inception was purchasedfor cash in the amount of $13,979 from Trans-Science Corporation at itscost.  At June 30, 2001 these intangibleassets were not placed in service. Accordingly, there was no amortization expense incurred during theperiod October 20, 1997 (inception) to June 30, 2001.

InJanuary 1999 Trans-Science Corporation sold, assigned and transferred all ofits rights, title and interest in the Earthquake Retrofit Design Software tothe Company for cash in the amount of $330,000.   In addition, during the year ended September 30, 1999, theCompany paid Trans-Science Corporation $90,000 for upgrade services on thissoftware.  At march31, 2001 thisintangible asset was not placed in service. Accordingly, there was no amortization expense incurred during theperiod October 20, 1997 (inception) to June 30, 2001.

OnJuly 7, 2000 the Company acquired 100% of the outstanding shares of commonstock of Trans-Science Corporation, a company under common control through July7, 2000.  The Company recorded goodwillin the amount of $715,028 representing the excess of the cost to acquireTrans-Science Corporation over the historical cost of the net assets acquired.

OnAugust 31, 2000 the Company acquired 100% of the outstanding shares of commonstock of Penultimo, Inc. dba Anchor Reinforcements.  The Company recorded goodwill in the amount of $291,050representing the excess of the cost to acquire Penultimo, Inc. over the sum ofthe amounts assigned to identifiable net assets acquired. On June 30, 2001 theCompany sold 100% of its holdings in Penultimo, Inc. and wrote-off its relatedgoodwill account.

Amortizationexpense for the three months ended June 30, 2001 and 2000 was $59,584 and $0,respectively and $215,341 for the period October 27, 1997 (inception) to June30, 2001.

**NOTE 5 - CAPITALIZATION**

**PreferredStock**

TheCompany has authorized the issuance of ten million (10,000,000) shares ofpreferred stock, having one hundredth of a cent ($.0001) par value pershare.  The Board of Directors of theCompany has discretion to determine the rights, preferences and privileges ofthis preferred stock.  There are noshares of preferred stock issued and outstanding at June 30, 2001 and 2000,respectively.

**CommonStock**

TheCompany has authorized fifty million (50,000,000) shares of common stock,having one hundredth of a cent ($0.0001) par value per share.   On October 21, 1997 the Company issued1,601,000 shares to its President for the value of services rendered inconnection with the organization of the Company.** **In April 1998 the Company issued 646,000 shares of commonstock under Regulation D offerings in exchange for $18,934 in cash, net ofoffering costs.  Also in April 1998 theCompany issued 49,500 shares to its Executive Vice Presidentforthe net value of services rendered of $2,378. On June 25, 1999 the Company completed a 9.229876 shares for 1 shareforward split.  Retroactive effect tothis split has been given in the accompanying financial statements.   On June 25, 1999 the Company received7,896,410 shares contributed back to the Company.  On June 30, 1999 the Company issued 1,000,000 shares to acquire100% of the issued and outstanding common stock of the Composite Solutions,Inc., a Nevada corporation.  On June 30, 1999 the Company issued 200,000 shares in settlementof a note payable with a principal balance of $1,000,000 and accrued interestof $17,825.

InDecember 1999, a trustee shareholder surrendered 4,300,000 shares, which havebeen canceled.  During the periodDecember 1999 to June 2000 the Company issued 668,333 shares of common stockunder a private placement in exchange for $760,000 in cash, net of offeringcosts.  On July 7, 2000 the Companyissued 953,371 shares of common stock valued at $715,028 in exchange for 100%of the outstanding shares of common stock of Trans-Science Corporation.  On August 31, 2000 the Company issued150,000 shares of common stock valued at $93,750 plus $500,000 in cash inexchange for 100% of the outstanding shares of common stock of Penultimo, Inc.dba Anchor Reinforcements.  On September15, 2000 the Company issued 100,000 shares of common stock as finder’sfees.  On September 28, 2000 the Companyissued 300,000 shares of common stock valued at $174,000 in exchange forservices.  During the nine months endedJune 30, 2001 the Company issued shares of common stock in non-cashtransactions as follows:  931,688 sharesas compensation valued at $140,380, 537,823 shares in exchange for servicesvalued at $48,950 and 200,000 shares as finders’ fees.  The Company issued additional shares ofcommon stock in cash transactions: 850,000 shares for cash in the amount of $295,000.  In connection with the sale of AnchorReinforcements, 150,000 shares of stock valued at $93,750 were returned.

**StockIncentive Plan**

OnDecember 1, 2000 the Company and subsidiaries’ Board of Directors adopted the2000 Stock Incentive Plan pursuant to which incentive stock options ornon-statutory stock options to purchase up to 1,000,000 shares of common stockmay be granted to employees, directors and consultants.  Stock options may be exercisable up to tenyears from the grant date.  Stockoptions vest over service periods that range from zero to five years.  Vesting period commences April 2001.

|                           | Exercise  Price |         | Number  of  Shares |    | Vested  Shares |   |
|--------------------------------|-----------------|--------------|--------------------|---------|----------------|--------|
|                           |                 |         |                    |    |                |   |
| Outstanding, October  20, 1997 |            |         | —             |    | —         |   |
|                           | Granted         | $.40  - $.50 |               | 120,000 |           | — |   |
|                           | Fair  Value     |         |               |    |           |   |
|                           | Exercised       |         |               | —  |           | — |   |
|                           | Cancelled       |         |               | —  |           | — |   |
|                           |            |         |                    |    |                |   |
| Outstanding, June 30,  2001    |            |         | 120,000            |    | —         |   |
|                           |            |         |                    |    |                |   |

TheCompany accounts for stock-based compensation using the intrinsic value methodprescribed by Accounting Principles Board Opinion No. 25, "Accounting forStock Issued to Employees," under which no compensation cost for stock optionsis recognized for the stock options awards granted at or above fair marketvalue.  For the three months ended June30, 2001, the Company did not recognize any compensation expense.

**NOTE 6 – LINE OF CREDIT**

TheCompany has a business secured open line of credit with a bank in the amount of$50,000. The line of credit bears interest at the prime rate, as published inthe *WallStreet Journal*, plus 2.5% (9.5% at June 30, 2001).  At June 30, 2001 there was a balance due inthe amount of $51,388.

**NOTE 7 – NOTES PAYABLE**

OnSeptember 19, 2000 the Company entered into a demand note payable in the amountof $44,500, with interest at 12% per annum. At March 31,2001, the note was released in accordance with the saleagreement of Penultimo, Inc.

OnAugust 29, 2000 the Company entered into a demand note payable in the amount of$20,000, with interest at 12% per annum. At March 31,2001, the note was released in accordance with the saleagreement of Penultimo, Inc.

**NOTE 8 – LONG TERM OBLIGATIONS**

**ConvertibleDebenture**

OnAugust 17, 2000 the Company issued an 8% convertible debenture note in theamount of $500,000, which is due on August 17, 2003.  Interest at the rate of 8% per annum is due on January 1 and July1 each year until the principal amount of the note is paid in full.  Interest is convertible into shares ofcommon stock at the lesser of the principal conversion price or eighty percent(80%) of the average closing bid price of the Company’s common stock for thefive (5) trading days immediately prior to the interest due date.  Principal is convertible into restricted andunrestricted shares of common stock at seventy-five cents ($.75) for eachrestricted share of common stock plus the issuance of one unrestricted share ofcommon stock for each two dollars ($2) converted.  After June 30, 2001 the Company could redeem all or a portion ofthe note by paying all unpaid principal and interest, or force conversion atthe effective conversion price, subject to the performance of the Company’scommon stock.  There is no beneficialconversion feature.  At June 30, 2001this Convertible Debenture was released as part of the sale of AnchorReinforcements.

**NOTE 9 - COMMITMENTS**

TheCompany and subsidiaries lease certain offices, facilities and equipment undernon-cancelable operating leases.  Thelease terms end between November 2002 and July 2004.  Future minimum payments under the lease at June 30, 2001 are asfollows:

| Year  Ending  December 31, |   |    |
|----------------------------|--------|---------|
|                            |   |    |
| 2001                       | $      | 11,400  |   |
| 2002                       | 45,600 |    |
| 2003                       | 45,600 |    |
| 2004                       | 34,200 |    |
|                       |        |    |
|                       | $      | 136,800 |   |
|                       |        |    |

Rentalexpense was $28,210 and $12,646 for the three months ended June 30, 2001 and2000, respectively and was $203,034 for the period October 27, 1997 (inception)to June 30, 2001.

**NOTE 10 – EARNINGS PER SHARE**

Thecomputations of basic and diluted earnings per share from continuing operationsfor the three months ended June 30, 2001 and 2000, and the period October 27,1997 (inception) to June 30, 2001 were as follows:

|                               |   |       |     |            |   | October  20, |   |
|------------------------------------|--------|------------|----------|-----------------|--------|--------------|--------|
|                               |   |       |     |            |   | 1997         |   |
|                               |   | June  30,  |     | (Inception)  to |   |
|                               |   |            |     | June  30,       |   |
|                               |   | 2001       |     | 2000            |   | 2001         |   |
|                               |   |            |     |                 |   |              |   |
| Loss per share-basic               |   |       |     |            |   |         |   |
| Numerator:                         |   |       |     |            |   |         |   |
| Net loss                           |   | $          | (951,370 | )               | $      | (608,490     | )      | $ | (2,629,128 | ) |
|                               |   |       |     |            |   |         |   |
| Denominator:                       |   |       |     |            |   |         |   |
| Weighted average  number of shares |   | 13,650,234 |     | 10,783,333      |   | 15,795,234   |   |
|                               |   |            |     |                 |   |              |   |
| Loss per share-basic               |   | $          | (0.07    | )               | $      | (0.06        | )      | $ | (0.17 | ) |
|                               |   |            |     |                 |   |              |   |

**NOTE 11 - INCOME TAXES**

AtJune 30, 2001 the Company has a net operating loss carry-forward for taxpurposes of approximately $700,000 which expires though the year 2021.  Net deferred tax assets at June 30, 2001 and2000 were approximately $2,600,000 and $1,250,000, respectively, whichrepresent the amount of tax benefits of start-up, organization and syndicationcosts.  The Company has established avaluation allowance against these net deferred tax assets because it is morethan likely that the deferred tax benefits will not be utilized.

**NOTE 12 - RELATED PARTY TRANSACTIONS**

**IntangibleAssets**

InJanuary 1999 the Company acquired certain intangible assets from Trans-ScienceCorporation, a company under common control through July 7, 2000.  Also in January 1999, Trans-ScienceCorporation sold, assigned and transferred all of its rights, title andinterest in the Earthquake Retrofit Design Software to the Company.

**Stock-BasedCompensation**

OnOctober 21, 1997 the Company issued 1,601,000 shares to its President for thevalue of services rendered in connection with the organization of theCompany.  Also in April 1998 the Companyissued 49,500 shares to its Executive Vice President for services.

**NotePayable**

OnJuly 20, 2000 the director advanced the Company $25,000.  On August 18, 2000 the director advanced theCompany an additional $1,316 and the Company repaid $1,500.  On October 20, 2000 and November 21, 2000the director advanced the Company additional $1,480 and $4,200,respectively.  On December 11, 2000 theCompany paid principal in the amount of $30,496 plus interest of $686. Duringthe period January 2001 through June 2001 the director paid a bills for theCompany of $1,277 and 1,162. The director advanced the Company $7,000 and$150,000 on February 16, 2001 and March 12, 2001, and an additional $46,603during the period of April 2001 through June 2001.

**OfficeLease and Office Expenses**

InJanuary 1999, the Company began sharing office space and certain relatedexpenses with Trans-Science Corporation, a company under common control throughJuly 7, 2000.  The Company remitted thelease payment directly to an independent lessor.  Rent expense was $53,907 for the period October 1, 1999 to July7, 2000, $12,646 for the three months ended December 31, 1999 and $91,707 forthe period October 20, 1997 (inception) to July 7, 2000.  Total payments to Trans-Science Corporationfor office expenses were $4,432 for the period October 1, 1999 to July 7, 2000,$1,810 for the three months ended December 31, 1999 and $7,896 for the periodOctober 20, 1997 (inception) to July 7, 2000. At December 31, 1999, Trans-Science Corporation owed the Company $3,883for its share of rent and office expense. At July 7, 2000 the amount was repaid. On July 7, 2000 the Company purchased 100% of the shares of outstandingcommon stock of Trans-Science Corporation and at June 30, 2001 and for theperiod July 8, 2000 to June 30, 2001 all significant inter-company transactionshave been eliminated in consolidation.

**Agreements**

InOctober 1999, the Company entered into a consulting agreement with ashareholder for management, marketing and technical services.  Under the terms of the agreement, for thenine months ended June 30, 2001 and 2000 the Company made payments of $108,000and $114,000, respectively, for management consulting services.

InJuly 2000, the Company entered into a consulting agreement with an officer formanagement and technical services. Under the terms of the agreement, for the three months ended June 30,2001 the Company made payments of $74,800 for management consulting services.

**NOTE 13 - AGREEMENTS**

**GlobalAlliance and Subscription Agreement**

OnDecember 7, 2000 the Company entered into a Global Alliance Agreement with ThePrime Group located in Seoul, Korea. According to the terms of the Agreement, the Company will receive a 15%equity position in The Prime Group.  Inaddition, The Prime Group entered into a Subscription Agreement to purchasebetween 4,166,667 to 5,000,000 shares of the Company’s common stock for cash inthe amount of $2,000,000.  The first2,500,000 shares of common stock will be issued quarterly at $0.40 per sharefor a total of $1,000,000.  Anadditional 2,500,000 shares of common stock will be issued at $0.40 per shareif payment is received by May 31, 2001 or an additional 1,666,667 will beissued at $0.60 per share if payment is received after May 31,2001.  The Prime Group has an option to purchase1,000,000 shares of common stock between October 31, 2001 to October 31, 2003at an exercise price equal to 35% of the fair value of the shares issued.  During the nine months ended June 30, 2001,the Company issued 625,000 shares of stock corresponding to the first quarterlypayment of $250,000. The second and third quarter payments were not receivedand the contract is currently in default.

**NOTE 15 - SUBSEQUENT EVENTS**

**Subcontract**

OnJanuary 12, 2001 the Company was awarded a subcontract with Karagozian &Case (K&C).  The subcontract for developmentof retrofit design methodology in the amount of $288,309 will begin inSeptember 2001 and will support K&C’s contract with the United StatesDepartment of Defense, Defense Threat Reduction Agency, Office of SpecialTechnology.

**ITEM2.  MANAGEMENT'S DISCUSSION AND ANALYSIS**

**GENERAL**

TheCompany’s primary business focus is toward composite overlay technologysolutions, which can be applied to the retrofit and rehabilitation/repair ofstructures that are subject to seismic or blast loads as well as the upgrade ofaging bridges, buildings and other structures for increased service loads.  In addition, these technology solutions,which include computational analysis tools, design procedures and software,composite material systems and application methods, can be applied to newconstruction as well.

Thekey element of the Company’s composite overlay technology consists of anaerospace-type advanced composite material system, such as carbon or glassfabric impregnated with a chemical resin. For retrofit/repairs, the compositeoverlay system is in the form of cured-in-place structural “wallpaper” forapplication to walls, columns, floors and other structural elements.  For new construction, compositestay-in-place forms are utilized for columns, beams, girders, etc.  These forms are structural, and they allowthe elimination of most steel reinforcement in concrete structures.

**RESULTSOF OPERATIONS**

Thefollowing is a discussion of the financial condition and results of ouroperations for the three and nine months ended June 30, 2001 and 2000.. Thisdiscussion should be read in conjunction with our Consolidated FinancialStatements, the notes related thereto, and the other financial data includedelsewhere in this filing.

NetLoss: For the fiscal quarterended June 30, 2001, the Company recorded an operating loss of $ 326,188 fromcontinuing operations, as compared to $312,899 during the three-month periodended June 30, 2000.  Net accumulatedloss from continuing operations for the nine months ended June 30, 2001increased to $1,039,588 from $607,690 for the nine months ended June 30, 2000.This loss is largely due to payroll, professional fees and administrativeexpenses. In order to reduce its overhead costs, on July 7, 2001 the Companymoved its corporate headquarters  to asmaller office space with a 3-year lease, affording a saving of almost 45% inrental expense.

Sales and Marketing: The Company has not yet generated any significantsales. Efforts have been concentrated on the development and marketing of a widerange of value-priced retrofit technology to commercial and governmentalcustomers as well as composite overlay solution services to construction andA&E firms through technology licenses. This effort is now well advanced andthe Company expects to generate revenues in the next six months, although noassurances can be given that these sales will be generated. In addition, theCompany has expended a substantial effort in the development of blast retrofittechnology for government facilities, such as embassies. The first revenue from this work is expected to bereceived in the next quarter.

Liquidityand Capital Resources: The working capitaldeficiency on June 30, 2001 was $2,629,129 compared to a working capitaldeficiency of approximately $1,183,340 on June 30, 2000. This increase inworking capital deficiency was due to continued operating losses. The majorcontributing factor for these losses is due to the default of the Prime Groupof Seoul, Korea in the amount of two scheduled quarterly payments of $250,000each.

 As of June 30,2001, the Company had no longterm liabilities, but its current liabilities total $661,274.

Atthe fiscal quarter ended June 30, 2001, the Company had current assets of$2,549 and total assets of $ 1,184,041. These assets consist of cash in theamount of $1,295, property and equipment in the amount of $ 17,248, intangibleassets in the amount of $1,143,399 and deposits of $ 20,845.

**CASHREQUIREMENTS AND ADDITIONAL FUNDING**

Itis apparent that the Company will need to raise additional capital. In the nearterm, the Company contemplates raising new capital of approximately $500,000 to$1,000,000 through short term financing. This additional capital would cover the current liabilities and pay forcosts such as marketing, upgrading our technology, overhead expenses for theday-to-day operation of the business and other unexpected expenses due toeconomic changes. The Company is currently negotiating several potentialagreements from overseas for additional capital.

SUMMARY

Themanagement believes that upon full implementation of our business plan,sufficient revenues will be generated to meet operating requirements. However,no assurance can be given that such goal will be obtained or that our expectedrevenues will be realized at sufficient levels and profitability to fund ouroperations without additional capital. Such inability could have a materiallyadverse effect on our business, operating results and financial condition.

FORWARD-LOOKINGSTATEMENTS

When included in thisQuarterly Report on Form 10-QSB, the words "expects,""intends," "anticipates," "plans,""projects" and estimates," and analogous or similar expressionsare intended to identify forward–looking statements. Such statements,which include statements contained in Item 2 hereof, are inherently subject to a variety of risks and uncertaintiesthat could cause actual results to differ materially from those reflected insuch forward–looking statements.

These forward–looking statementsspeak only as of the date of this Quarterly Report on Form

10-QSB. The Company expressly disclaimsany obligation or undertaking to release publicly any updates or revisions toany forward–looking statement contained herein to reflect any change inthe Company's expectations with regard thereto or any change in events,conditions or circumstances on which any such statement is based.

**PART II**

**ITEM 1.   LEGALPROCEEDINGS.**

The Company knows of no legal proceedingsto which it is a party or to which any of its property is the subject, whichare pending, threatened or contemplated or any unsatisfied judgments againstthe Company.

**ITEM 5.   OTHERINFORMATION - OFFICERS AND DIRECTORS**

**Effective July 3, 2001, the following persons have beenappointed as Directors and Officers of the Registrant:**

**1.**          **Michael J. Perlman, Ph.D.**      **Director, President and Chief Executive Officer**

**2.          Edward H. Davis, Esq.  Director, Executive Vice President, GeneralCounsel**and Corporate Secretary

A brief summary of their background is asfollows:

Michael J. Perlman, Ph.D.

Mr. Perlman has more than 20 yearsexperience in the domestic and international capital markets.  He has in-depth knowledge and expertise indeveloping successful strategic financing in complex and illiquid products andmarketplaces, in the financing infrastructure and processes required to supportadvanced technology and intellectual property, and in conducting business on aglobal scale.  Prior to joining thisCompany, he was Co-founder and Principal of Ace International Domaine andGroupe Domaine, a boutique investment bank, advising on matters of corporatestrategy, M&A, finance and advanced technologies.  He has been chief investment officer to ACE in growth industriesthat are profoundly affected by new ascendant technologies.  He has held several executive management anddirector's roles, including being CEO and CFO of a Silicon Valley digitalimaging company and numerous non-executive director positions with start-upsand early development stage companies. In his capacity as advisor and executive, he has successfully negotiatedprivate placements and technology licensing agreements in Asia and Europe andprimary and secondary IPOs in the U.S. He holds an M.A. and Ph.D. from the University of California, Berkeley.

Edward H. Davis, Esq.

Prior to joining this Company, Mr. Davisserved as Senior Vice President of Strategic Alliances, General Counsel, andSecretary of the Board of Directors for Burst.Com, Inc. (a video softwarecompany in San Francisco), from 1998 to 2001. Mr. Davis was responsible for all SEC, Sate Regulatory and US Patent andTrademark filings.  He successfullyguided Burst through the SEC and NASD Registration process of becoming a fullyreporting public entity, and a full NASDAQ listing member.  From 1985 to 1998, Mr. Davis served ascorporate counsel for Pacific Telesis Group (PTG now SBC).  Mr. Davis advised PTG consolidatedcompanies, including Nevada Bell, Pacific Bell Directory, Pacific BellInformation Services, and Pacific Bell Video Services, with respect to: ratemaking strategies; corporate tax and business strategies; federal and state taxplanning; tax litigation; mergers and acquisitions; new business development;analysis of emerging technology; structuring and negotiation of equipment andsoftware licensing agreements; federal and state legislative analysis; and realestate development.  From 1982 to 1985,Mr. Davis was a Senior Tax Consultant for Arthur Andersen & Co. in SanFrancisco, advising on tax research, planning, mergers and acquisitions.  His client base included manufacturing,leasing, oil and gas, transportation, and real estate companies.  Mr. Davis holds an L.L.M. in Taxation fromGolden Gate University, a J.D. from University of San Francisco, a B.A. inHistory and Political Science from Gonzaga University and completed his foreignstudy at the University of Florence in Italy. Mr. Davis is admitted to practice before the California Supreme Court,U.S. District Court for the Northern District of California, U.S. Tax Court,and the Ninth Circuit Court of Appeals.

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

(a)         Theexhibits  required to be filed  herewith by Item 601 of  Regulation S-B, as described in thefollowing index of exhibits, are incorporated herein by reference, as follows:

None.

 (b)       Reports on Form8-k:

None.

**Signatures**

             Inaccordance with the requirements of the Exchange Act, the registrant  has caused this report to be signed on itsbehalf by the undersigned, there unto duly authorized.

Date: August 20, 2001

|   | Composite  Solutions, Inc. |
|--------|----------------------------|

 

|   |   |   |   | By:    | /s/  Gilbert Hegemier       |
|--------|--------|--------|--------|--------|-----------------------------|
|   |   |   |   |   |                             |
|   |   |   |   |   |  Chairman of The Board |