<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   FORM 10-QSB

                                   (Mark One)
     |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                  For the quarterly period ended JUNE 30, 2001

                                       OR

     |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

    For the transition period from ___________________ to ___________________

                          Commission File No. 000-29177

                            VIANET TECHNOLOGIES, INC.
             (Exact name of registrant as specified in its charter)

                Delaware                                 87-0434285
       (State or other jurisdiction of                 (IRS Employer
       incorporation or organization)               Identification No.)

                         6509 Windcrest Drive, Suite 160
                               Plano, Texas 75024
               (Address of principal executive offices, zip code)

                                 (972) 543-2700
              (Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|

There were 51,191,271 shares of the registrant's Common Stock, par value $.001
per share, issued as of August 10, 2001.




<PAGE>

                   VIANET TECHNOLOGIES, INC. AND SUBSIDIARIES

                                      INDEX


                                                                           Page
Part 1    Financial Information

Item 1    Financial Statements

          Consolidated Balance Sheet at June 30, 2001 (unaudited)             3

          Consolidated Statements of Operations for the three and
          six-months ended June 30, 2001 and 2000 (unaudited)                 4

          Condensed Consolidated Statements of Cash Flows for the three
          and six-months ended June 30, 2001 and 2000 (unaudited)           5-6

          Notes to Consolidated Financial Statements (unaudited)           7-11

Item 2    Management's Discussion and Analysis                            12-19

Part II   Other Information                                               20-21

Item 1    Legal Proceedings

Item 2    Changes in Securities

Item 3    Defaults Upon Senior Securities

Item 4    Submission of Matters to a Vote of Security Holders

Item 5    Other Information

Item 6    Exhibits and Reports on Form 8-K

          (a) Exhibits

          (b) Reports on Form 8-K

          Signatures                                                         22


                                      -2-
<PAGE>

                   VIANET TECHNOLOGIES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                                  JUNE 30, 2001
                                   (unaudited)

<TABLE>
<S>                                                                         <C>
Current Assets:                      ASSETS
   Cash                                                                     $           193,718
   Due from Escrow Agent                                                                 53,845
   Accounts receivable, net of allowance of $73,447                                       3,549
   Receivable from related party                                                         48,017
   Prepaids and other current assets                                                    164,024
                                                                           --------------------

       Total Current Assets                                                             463,153
                                                                           --------------------

Property and Equipment, less accumulated depreciation
   of $776,692                                                                          444,760
                                                                           --------------------

Notes receivable from Develcon Electronics Ltd., less allowance
   of $3,422,946                                                                             --
                                                                           --------------------

Security Deposits                                                                       233,622
                                                                           --------------------

                                                                            $         1,141,535
                                                                           ====================

LIABILITIES AND DEFICIENCY IN SHAREHOLDERS' EQUITY

Current Liabilities:
   Accounts payable and accruals                                            $         4,367,592
   Loans payable - related parties                                                        4,782
   Demand notes payable                                                                 360,000
   Convertible notes payable, net of discount of $2,675,249                           6,825,751
   Net liabilities of discontinued operations held for sale                             435,174
                                                                           --------------------

       Total Current Liabilities                                                     11,993,299
                                                                           --------------------

Convertible Notes Payable (noncurrent)                                                1,125,000
                                                                           --------------------

Deficiency in Shareholders' Equity
   Common shares, $0.001 par value; 100,000,000 shares authorized;
     51,191,271  shares issued and 51,101,334 shares outstanding                         51,191
   Treasury stock                                                                      (200,000)
   Subscription receivable                                                                 (500)
   Additional paid-in capital                                                        31,774,620
   Warrants issued                                                                   15,532,474
   Deferred offering costs                                                           (1,571,226)
   Accumulated deficit                                                              (57,563,323)
                                                                           --------------------

       Total Deficiency in Shareholders' Equity                                     (11,976,764)
                                                                           --------------------

                                                                            $         1,141,535
                                                                           ====================
</TABLE>

              The accompanying notes are an integral part of these
                       consolidated financial statements.


                                      -3-
<PAGE>

                   VIANET TECHNOLOGIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                          Three Months Ended                        Six Months Ended
                                                 --------------------------------------  ----------------------------------------
                                                   June 30, 2001       June 30, 2000       June 30, 2001        June 30, 2000
                                                 ------------------   -----------------  ------------------   -------------------
<S>                                               <C>                  <C>                <C>                  <C>
Revenue and Other Income:
    Sales                                         $         43,189     $       390,000    $         71,604     $         464,334
    Interest and other income                                7,430              70,677               7,463               114,814
                                                 ------------------   -----------------  ------------------   -------------------

                                                            50,619             460,677              79,067               579,148
                                                 ------------------   -----------------  ------------------   -------------------
Costs and Expenses:
    Cost of goods and services sold                         10,145                  --              11,061                 2,483
    Selling, general and administrative                    914,991           2,758,005           2,974,369             4,668,283
    Research and development                               278,094             486,315             813,112             1,362,443
    Provision for loss on Develcon receivable                   --             936,386                  --             1,386,386
    Depreciation and amortization                           83,915             509,459             209,322             1,005,241
    Interest and other financing costs                   3,662,292              33,259           6,843,994               358,397
                                                 ------------------   -----------------  ------------------   -------------------

                                                         4,949,437           4,723,424          10,851,858             8,783,233
                                                 ------------------   -----------------  ------------------   -------------------

Loss From Continuing Operations                         (4,898,818)         (4,262,747)        (10,772,791)           (8,204,085)
                                                 ------------------   -----------------  ------------------   -------------------

Discontinued Operations

    Operating loss                                              --            (978,387)                 --            (1,494,347)
    Loss on disposal                                            --          (1,000,000)                 --            (1,000,000)

                                                 ------------------   -----------------  ------------------   -------------------
Loss From Discontinued Operations, net
    of income tax of $0                                         --          (1,978,387)                 --            (2,494,347)
                                                 ------------------   -----------------  ------------------   -------------------

Loss Before Extraordinary Item                          (4,898,818)         (6,241,134)        (10,772,791)          (10,698,432)

Net Gain on Extinguishment of Debt                              --                  --             658,204                    --
                                                 ------------------   -----------------  ------------------   -------------------

Net Loss                                          $     (4,898,818)    $    (6,241,134)   $    (10,114,587)    $     (10,698,432)
                                                 ==================   =================  ==================   ===================

Gain (Loss) per share - basic and diluted
    Continuing operations                         $          (0.13)    $         (0.19)            $ (0.33)              $ (0.43)
    Discontinued operations                                     --               (0.09)                 --                 (0.13)
    Net gain on extinguishment of debt                          --                  --                0.02                    --
                                                 ------------------   -----------------  ------------------   -------------------

    Loss per share - basic and diluted            $          (0.13)    $         (0.28)   $          (0.31)    $           (0.56)
                                                 ==================   =================  ==================   ===================

Weighted average number of shares outstanding           37,156,108          21,990,809          32,345,497            19,210,859
                                                 ==================   =================  ==================   ===================
</TABLE>

              The accompanying notes are an integral part of these
                       consolidated financial statements.


                                      -4-
<PAGE>

                   VIANET TECHNOLOGIES, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                          Six Months Ended
                                                  ------------------------------------
                                                   June 30, 2001      June 30, 2000
                                                  ----------------   -----------------
<S>                                                <C>                <C>
   Net Cash Used In Operating Activities           $   (3,367,059)    $    (7,167,515)
                                                  ----------------   -----------------

Investing Activities:
   Security deposits                                        2,250            (350,000)
   Loans to related parties                               (16,349)            (61,616)
   Capital expenditures                                    (1,020)           (309,962)
   Other                                                       --              25,000
                                                  ----------------   -----------------

   Net Cash Used In Investing Activities                  (15,119)           (696,578)
                                                  ----------------   -----------------

Financing Activities:
   Issuance of common stock and warrants                    3,445          13,374,385
   Proceeds from secured convertible notes,
    net of amounts due from escrow agent                3,404,905                  --
   Repayment of note payable                              (15,000)                 --
   Proceeds from notes payable                            175,000                  --
   Principal payments of long term debt                        --             (20,304)
   Loans from related parties                                  --               2,970
                                                  ----------------   -----------------

   Net Cash Provided By Financing Activities            3,568,350          13,357,051
                                                  ----------------   -----------------

   Net Increase In Cash                                   186,172           5,492,958

Cash at beginning                                           7,546             115,101
                                                  ----------------   -----------------

   Cash at end                                     $      193,718     $     5,608,059
                                                  ================   =================
</TABLE>

              The accompanying notes are an integral part of these
                       consolidated financial statements.


                                      -5-
<PAGE>

                   VIANET TECHNOLOGIES, INC. AND SUBSIDIARIES
           CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                   Six Months Ended
                                                                     ---------------------------------------------
                                                                       June 30, 2001           June 30, 2000
                                                                     ---------------------   ---------------------
<S>                                                                   <C>                     <C>
Supplemental Disclosures of Cash Flow Information
    Cash paid for interest                                            $                --     $            95,887
                                                                     =====================   =====================



Noncash Transactions:

    Conversion of notes payable into common stock                     $                --     $         2,199,485
                                                                     =====================   =====================

    Issuance of common stock and warrants for financing services      $                --     $         6,857,533
                                                                     =====================   =====================

    Issuance of common stock and warrants in return for
      loan receivable from Develcon Electronics Ltd.                  $                --     $           750,000
                                                                     =====================   =====================

    Contribution of shares for repayment of convertible notes         $           216,000     $                 -
                                                                     =====================   =====================

    Issuance of common stock and warrants for debt                    $         1,958,405     $                 -
                                                                     =====================   =====================

    Convertible notes and warrants issued for common stock            $         2,534,105     $                 -
                                                                     =====================   =====================

    Common stock issued for deferred offering costs                   $           474,560     $                 -
                                                                     =====================   =====================

    Warrants issued for deferred offering costs                       $         1,096,666     $                 -
                                                                     =====================   =====================
</TABLE>

              The accompanying notes are an integral part of these
                       consolidated financial statements.


                                      -6-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

1. Basis of Presentation:

The accompanying consolidated financial statements have been prepared by the
Company without audit in accordance with generally accepted accounting
principles for interim financial statements and with instructions to Form 10-QSB
and Article 10 of Regulation S-X. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) considered necessary for a
fair presentation have been included.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has suffered
recurring losses from operations and their current and total liabilities exceed
their current and total assets, respectively. This raises substantial doubt
about the Company's ability to continue as a going concern. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

The accompanying consolidated financial statements do not include certain
footnotes and financial presentations normally required under generally accepted
accounting principles and, therefore, should be read in conjunction with the
audited financial statements included in the Company's Form 10-KSB as of
December 31, 2000.

The consolidated financial statements include the accounts of Vianet
Technologies, Inc. (Vianet) and its wholly-owned subsidiaries, Vianet Labs, Inc.
(Labs) and Vianet Access, Inc. (Access) (collectively, the "Company"). All
significant intercompany accounts and transactions have been eliminated. On
January 12, 2001, Vianet disposed of the intellectual property relating to
Access. For accounting purposes the effective date of this disposal is December
31, 2000. Accordingly, the consolidated financial statements have been restated
to reflect Access as a discontinued operation. The Results of Operations for the
three and six-months ended June 30, 2001 are not necessarily indicative of the
results to be expected for the full year.

2. Revenue Recognition Policy

Revenue is measured at fair value of consideration received or receivable.
Revenue is recognized when merchandise is shipped and accepted by the customer;
significant risks and rewards of ownership are transferred to the buyer;
managerial involvement and control have passed; the amount of revenue can be
measured reliably; it is probable that economic benefits will flow to the
Company; and the costs of the transaction (including future costs) can be
measured reliably.

3. Related Party Transactions

Purchase Agreement:

In January 2001, Vianet entered into a Purchase Agreement (the "Agreement") with
Vida Technologies, Inc. ("Vida Technologies") under the terms of which Vianet
agreed to convey (i) all of it's ownership and exclusive rights to all
intellectual property related to Access, and (ii) the fiber optic product lines
of Vianet and Access, to Vida Technologies, a corporation controlled by
shareholders of Vianet and former employees of Access. Also, under the terms of
the Agreement, Access assigned its executive employment agreements to Vida
Technologies. No additional losses were recognized in the six-month period ended
June 30, 2001 related to the disposition of Access. The loss from discontinued
operations for the three and six-month periods ended June 30, 2000 was made up
of $978,387 and $1,494,347, respectively, resulted from the operations of
Access.

Employment / Consulting Agreements:

The Company incurred consulting and management fees of approximately $125,000
during the six-month period ended June 30, 2001 to CFM Capital Limited (CFM) and
Xelix Capital Limited (Xelix), entities controlled by the Company's CFO and
Chairman, respectively.


                                      -7-
<PAGE>

Fees and Expenses:

In January 2001, the Company paid WorldCorp Management Group, a shareholder,
$122,500 in cash in connection with investor relations services performed. The
fees were agreed on and based upon financing transactions consummated and
agreements in place at that time.

Financings:

In March 2001, the Company issued warrants to purchase 2,437,553 shares of
common stock to CFM, at an exercise price of $0.16. CFM is controlled by Peter
Leighton, the Chief Financial Officer of Vianet. In addition, the Company issued
warrants to purchase 1,218,777 shares of common stock to Xelix, at an exercise
price of $0.16. Xelix is controlled by Jeremy Posner, Vianet's Chairman. The
exercise price of both the CFM and Xelix warrants are subject to adjustment in
the event that Vianet issues any other securities at a price lower than $0.16 to
a third party during the term of the warrants. The number of warrants issued to
CFM and Xelix was equal to 8% and 4% respectively, of the then outstanding
number of shares of the company. During the ten-year term of the warrants, the
number of warrants will be increased to equal 8% and 4% of the outstanding
shares of the Company. The Company determined the fair value of the warrants to
be approximately $525,000 by using commonly accepted valuation methodologies
including the Black Scholes Model, which utilizes risk free interest rates,
volatility and available market information. This consideration is included in
Selling, general and administrative expenses in the Consolidated Statement of
Operations for the six-months ended June 30, 2001.

In February 2001, the Company issued warrants to purchase 1,000,000 shares of
the Company's common stock in connection with a distribution agreement. The
warrants expire in two years and are exercisable at $0.25 per share. The Company
determined the fair value of the warrants to be approximately $122,000 by using
commonly accepted valuation methodologies including the Black Scholes Model,
which utilizes risk free interest rates, volatility and available market
information. This amount was recorded as a distribution fee and is included in
Selling, general and administrative expenses in the Consolidated Statement of
Operations for the six-months ended June 30, 2001. The warrants were issued to
Espre Inc., an entity controlled by the Company's Chief Executive Officer. In
addition, the Company may issue additional warrants to purchase up to 2,000,000
shares of common stock at exercise prices of $0.25 to $0.50 per share expiring
in two years from the date of issuance. The additional warrants will be issued
on a pro rata basis based upon revenue resulting from the distribution
agreement.

4. Equity Transactions

Settlements:

During 2000, the Company recognized a contingent Bank Debt of $1,000,000 as a
result of its guarantee of the debt of a former subsidiary, Develcon Electronics
Ltd (Develcon). This debt was reflected as a note payable-bank at December 31,
2000. In January 2001, the Company settled the contingent Bank Debt by issuing
500,000 restricted common shares to Royal Bank Capital Corp. (the "Bank") in
January 2001 and is obligated to issue as many as 500,000 additional shares of
common stock in December 2001 in the event that the Company's shares trade below
$3 in the period prior to December 2001. The market value of the shares issued
was $140,600, which is recorded as an increase to additional paid-in capital on
the Consolidated Balance Sheet as of June 30, 2001, and the fair value of the
potential additional shares to be $140,600, which is recorded in accounts
payable and accruals on the Consolidated Balance Sheet as of June 30, 2001. In
connection with the forgoing transactions, the Company recorded an extraordinary
net gain on extinguishment of debt of approximately $718,800 in the Consolidated
Statement of Operations for the six-months ended June 30, 2001. In return, the
Bank assigned its entire interest in Develcon's indebtedness to the Company. The
Company estimates that its interest in the Develcon indebtedness has no value.

In April 2001, the Company issued 1,254,618 shares of common stock in exchange
for services previously performed and accrued in 2000 of approximately $183,700
and issued 736,938 shares of common stock to employees in settlement of
compensation of approximately $103,000 arising in 2001, such amount is included
in Selling, general and administrative expenses in the Consolidated Statement of
Operations for the six-months ended June 30, 2001.


                                      -8-
<PAGE>

Demand Notes Payable:

In March 2001, the Company issued demand notes payable aggregating $75,000 to
two investors. The notes are in default and bear an interest rate of 8% per
annum. In addition, the notes contain provisions for payment of interest and
financing costs with common stock of the Company.

Financings:

The Company has commitments under various agreements to issue shares beyond its
authorized capital as required by the financing transactions described below and
these can only be met if shareholders approve a proposed increase in authorized
shares. Unless shareholders approve these transactions and approve an amendment
to our certificate of incorporation to increase the number of authorized shares
of common stock from 100,000,000 to 500,000,000, we will be unable to perform
our obligations under the agreements and will be in default pursuant to the
terms of the agreements. Management of the Company believes that it is highly
likely that such default will require the Company to substantially curtail or
cease its operations.

In January 2001, the Company issued an aggregate of $2,100,000 principal amount
of 8% Secured Convertible Notes (the "Notes") due January 9, 2002 in a private
placement to eight investors. In addition, 9,999,999 five-year warrants to
purchase common stock were issued at an exercise price not to exceed $0.28875,
in connection with the issuance of the Notes. The exercise price of the warrants
approximated 110% of the fair market value of our common stock at the time of
issuance. Simultaneously with such transaction, shareholders of 1,566,666 shares
of previously issued common stock agreed to return such shares for cancellation
in consideration for the issuance of $4,700,000 convertible notes which is an
amount equal to the original purchase price for such shares. The notes are due
on January 9, 2002 and bear interest at a rate of 8% per annum. In connection
with such transactions, the Placement Agents received cash fees of $103,750,
warrants to purchase an aggregate of approximately 1,036,962 common shares, and
$56,250 principal amount of the Notes. The Notes are considered to contain a
beneficial conversion feature as they were issued at a conversion price, which
was less than the fair value of the common stock at the date of issuance. The
Company determined the fair value of the beneficial conversion feature of the
Notes to be approximately $2,015,000. This amount was immediately expensed and
included in Interest and other financing costs, as the conversion feature was
immediately available to the investors. The Company also determined the fair
value of the warrants issued to be approximately $3,168,000 by using commonly
accepted valuation methodologies including the Black Scholes Model, which
utilizes risk free interest rates, volatility and available market information.
This amount is being amortized using the interest method over the term of the
Notes. The amount included in Interest and other financing costs in the
Consolidated Statement of Operations for the six-months ended June 30, 2001 was
approximately $1,338,000. The Notes are collateralized by all of the Company's
assets and approximately 3,800,000 shares (the "Secured Shares") owned by the
Company's Chairman and its CFO. In the second quarter 2001, the collateral was
sold by the note-holders. The proceeds received by the note-holders approximated
$216,000.

In January 2001, the Company issued 1,000,000 shares of common stock and
warrants to purchase 4,392,004 common shares at an exercise price not to exceed
$0.28875 to a private investment group in consideration of their entering into
an agreement to furnish a $10 million, 2-year equity line of credit. This
agreement has been subsequently amended so as to provide that the Company will
only be required to issue up to a maximum of 100,000,000 shares pursuant to the
agreement. The Company determined the market value of the shares at the date of
issuance to be $406,200 and the fair value of the warrants to be approximately
$1,097,000 by using commonly accepted valuation methodologies including the
Black Scholes Model, which utilizes risk free interest rates, volatility and
available market information. These amounts are included in Deferred offering
costs in the Consolidated Balance Sheet as of June 30, 2001. The terms of the
agreement allows the Company to request funds on a monthly basis. The funds
available each month from this line shall be based upon the average daily price
of our shares on each separate trading day during the twenty-two trading days
following the delivery of our request for funds. There is a funding limit of
$1.0 million in any one month. The Company will issue common shares to the
investors in exchange for each month's credit line draw down. These common
shares will be issued at 85% of the average daily price of our shares that are
traded during the twenty-two trading days following the date the Company
requests the funds. The utilization of the line of credit is dependent upon the
declaration of effectiveness of a registration statement covering the shares
issuable pursuant to the line of credit by the Securities and Exchange
Commission, which registration statement was filed with the Securities and
Exchange Commission on May 9, 2001. Such registration statement has not been
declared effective.


                                      -9-
<PAGE>

In January 2001, the Company issued 1,294,999 shares of common stock in exchange
for services previously performed (and accrued in 2000) approximating $473,000.
In addition, the Company issued 238,095 shares of common stock and warrants to
purchase 238,095 shares of common stock at an exercise price of $0.28875 per
share as full payment for a $50,000 outstanding debt. In connection with the
issuance of these shares and warrants, the Company incurred a loss on the
extinguishment of debt of approximately $60,600 by using commonly accepted
valuation methodologies including the Black Scholes Model, which utilizes risk
free interest rates, volatility and available market information. The $60,600
loss has been included in net gain on extinguishment of debt in the Consolidated
Statement of Operations for the six-months ended June 30, 2001.

In January 2001, the Company issued 4,144,104 shares of common stock to
shareholders that participated in prior private placements. The shares were
issued as consideration for adjustments required due to a decrease in the market
value of the Company's stock six months after the effective date of the
registration statement relating to the securities purchased in these private
placements. The Company received no proceeds from this stock issuance. The
Company recorded the par value of the shares issued as a reduction of additional
paid-in capital on the Consolidated Balance Sheet as at June 30, 2001.

In February 2001, the Company issued 281,876 shares of common stock to a
placement agent for services rendered in connection with a tender offer. The
Company determined the market value of the shares at the date of issuance to be
$68,360. Such amount is included in Deferred offering costs in the Consolidated
Balance Sheet as of June 30, 2001.

In February 2001, in connection with a strategic marketing alliance with Ogilvy
Group Inc. the Company issued warrants to purchase 1,000,000 shares of common
stock at an exercise price of $0.25 per share expiring two years from the date
of issuance. The Company determined the fair value of the warrants to be
approximately $122,000 by using commonly accepted valuation methodologies
including the Black Scholes Model, which utilizes risk free interest rates,
volatility and available market information. This amount was recorded as a
distribution fee and is included in Selling, general and administrative expenses
in the Consolidated Statement of Operations for the six-months ended June 30,
2001. In addition, the Company may issue additional warrants to purchase up to
2,000,000 shares of common stock at an exercise price of $0.25 per share
expiring two years from the date of issuance. The warrants will be issued on a
pro rata basis based upon revenue resulting from the alliance.

In February 2001, the Company agreed to issue 1,427,623 shares of common stock
to an existing shareholder in exchange for a $100,000 non-interest bearing
demand loan. 867,623 and 560,000 of these shares were issued in March and April
2001, respectively. The Company determined the market value of the shares at the
date of agreement to be approximately $379,000 and such amount is included in
interest and other financing costs in the Consolidated Statement of Operations
for the six-months ended June 30, 2001.

In March 2001, the Company issued 175,000 shares of common stock to entities
providing investor relations and consulting services. The Company determined the
market value of the shares at the date of issuance to be $30,083 and such amount
is included in Selling, general and administrative expenses in the Consolidated
Statement of Operations for the six-months ended June 30, 2001.

In April 2001 through June 2001, the Company issued $1,358,750 one-year 8%
convertible notes and 7,045,238 five-year warrants to purchase shares of common
stock at a price not to exceed $0.28875. Simultaneously with and as a condition
to these transactions, the shareholders of 334,000 shares of common stock and
501,000 related warrants issued pursuant to previous private placement offerings
agreed to return such shares and warrants for cancellation in consideration for
the issuance of $1,002,000 one-year 8% convertible notes, which is the amount
equal to their original purchase price for such securities. In connection with
such transactions, the Placement Agents received cash fees of approximately
$103,000, such amount is included in interest and other financing costs in the
Consolidated Statement of Operations for the six-months ended June 30, 2001.
Placement Agents also received warrants to purchase an aggregate of
approximately 228,380 common shares at a price not to exceed $0.28875. In
addition, the Company issued 14,160,109 shares of common stock to shareholders
that participated in financings prior to March 2000 and participated in the June
2001 financing. The Company received no proceeds from the 14,160,109 stock
issuance. The Company recorded the par value of the shares issued as a reduction
of additional paid-in capital on the Consolidated Balance Sheet as at June 30,
2001. The Company determined the fair value of the warrants issued to be
approximately $893,000 by using commonly accepted valuation methodologies
including the Black Scholes Model, which utilizes risk free interest rates,
volatility and available market information. This amount is being amortized
using the interest method over the term of the Notes. The amount included in


                                      -10-
<PAGE>

Interest and other financing costs in the Consolidated Statement of Operations
for the six-months ended June 30, 2001 was approximately $47,000.

In May 2001, the Company issued warrants to purchase 225,000 shares of common
stock at an exercise price of $0.01 per share expiring two years from the date
of issuance for investor related services performed in June 2001. Accordingly,
approximately $19,000 is included in Selling, general and administrative
expenses in the Consolidated Statement of Operations for the six-months ended
June 30, 2001.

In June 2001, the Company issued 949,733 shares of common stock to existing
shareholders pursuant to clauses in the financing agreements completed prior to
March 2000. The Company received no proceeds from this stock issuance. The
Company recorded the par value of the shares issued as a reduction of additional
paid-in capital on the Consolidated Balance Sheet as at June 30, 2001.

In June 2001, the Company issued 201,333 shares of common stock for warrants
with an exercise price of $0.01 and issued 830,000 shares of common stock in
cancellation of 1,706,667 warrants at exercise prices ranging from $1.375 to
$12.00.

In June 2001, the Company issued 1,406,250 shares of common stock to two
investors in lieu of interest payments on notes payable. Approximately $298,000
is included in interest and other financing costs in the Consolidated Statement
of Operations for the six-months ended June 30, 2001.

5. Reclassification:

Certain reclassifications, in addition to the restatement for discontinued
operations of Access, have been made to the 2000 consolidated financial
statements to conform to the 2001 presentation. The Consolidated Statements of
Operations for the three and six-months ended June 30, 2000 have also been
restated to reflect the accrual of a $1,000,000 Contingent Liability as a loss
on disposal of the discontinued operations, rather than as a component of
continuing operations. As a result, previously stated loss per share from
continuing operations of $0.28 and $0.56 for the three and six-months ended June
30, 2000 has been restated to $0.19 and $0.43, respectively. Previously reported
loss per share from discontinued operations was nil and has subsequently been
restated to $0.09 and $0.13 for the three and six-months ended June 30, 2000,
respectively. The result of this restatement had no effect on total net loss and
loss per share in the Consolidated Statements of Operations for the three and
six-months ended June 30, 2000.

6. Subsequent Event:

In July 2001, the Company signed a $3,300,000 two-year contract with Holy
Universal Limited, a purchasing agency acting on behalf of Beijing Telecom.
Under the terms of the contract, Vianet is licensing its software products,
Video Messenger Pro (VMP) and Video Interactive (VI) to Beijing Telecom for its
broadband services and Video Services Provider (VSP) applications. The Company
expects to ship its licensed software under the first phase of the agreement at
the end of August 2001. The Company expects to receive approximately $600,000
in cash for the first phase of the agreement.


                                      -11-
<PAGE>

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2001

This quarterly report on Form 10-QSB contains forward-looking statements that
are subject to risks and uncertainties, which could cause actual results to
differ materially from those expressed or implied in the statements. This
document contains certain forward-looking statements including, among others,
anticipated trends in our financial condition and results of operations and our
business strategy. These forward-looking statements are based largely on our
current expectations and are subject to a number of risks and uncertainties.
Actual results could differ materially from these forward-looking statements.
Important factors to consider in evaluating such forward-looking statements
include (i) changes in external competitive market factors or in our internal
budgeting process which might impact trends in our results of operations;
(ii) unanticipated working capital or other cash requirements; (iii) changes in
our business strategy or an inability to execute its strategy due to
unanticipated changes in the industries in which we operate; and (iv) various
competitive factors that may prevent us from competing successfully in the
marketplace.

The following information has not been audited. You should read this information
in conjunction with the condensed financial statements and related notes to
financial statements included in this report. In addition, please see our
Management Discussion and Analysis of Financial Condition and Results of
Operations and audited financial statements and related notes included in our
Annual Report on Form 10-KSB for the year ended December 31, 2000.

Our Business

We design and market advanced visual communication technologies and services
that allow our customers to deliver rich media experiences as a market
differentiator.

Our visual communication products are designed to utilize patented wavelet
compression techniques that allow for the delivery of high quality video,
multimedia content and data over the Internet and Intranet with less expense,
delay and bandwidth usage. We believe that this technology allows us to provide
our customers with a competitive advantage by providing high quality video
applications at high data transfer rates to the desktop and, via "set top
boxes", to the television. We intend to utilize this technology as the
foundation for our value added services, and we expect this technology to serve
as our main focus for future expansion.

Our objective is to become a leading provider of enabling technology, services
and applications that allow customers to capitalize on the Internet's rapid
growth as a commercial forum and private network operators to utilize improved
visual communication experiences.

We believe that our combined product portfolio will allow us to excel in the
Internet, private network, and value added services market segments. We intend
to continue our development as a serious competitor in these and other niche
market segments in the communications marketplace.

Compression Technology Products and Value Added Services

We develop and sell data compression technologies and services utilizing a
patented wavelet compression technique. Wavelet based technologies deliver data,
video and multimedia content faster than conventional compression techniques.
Furthermore, wavelet compression typically uses less bandwidth, costs less and
yields higher quality video and still imagery than conventional techniques. In
addition, this technology is flexible enough to be used in a variety of
compression products for many types of data. Our key products include the
Lightning Strike suite of products that include the following:

   o  LS Video Messenger - a product that enables users to send V-Mail, which
      consist of the E-mailing of a video file;

   o  LS Video Interactive - a suite of Video Conferencing products;

   o  LS Power Zoom - a product that allows a user to zoom and pan on still
      images; and

   o  LS Video Stream - a streaming video product that allows users to view
      video on demand.


                                      -12-
<PAGE>

We have determined that the revenue model originally anticipated of direct
product sales contains considerable uncertainties due in part to competition,
market conditions and our customers' perception of value that our products
provide. Accordingly, we have changed our marketing focus to the provision of
visual communications as a suite of service offerings.

We intend to serve these market segments by providing video compression
technology, as well as value added services to provide our customers with the
competitive edge they need. We believe our products will enable communications
across broadband networks that efficiently combine voice, data, graphics and
video across geographic locations with high throughput, protocol flexibility,
and system expandability.

Research and Development Activities

On acquisition, the Vianet Labs products were in the form of CODECS
(COmpressor/DECompressors) representing mathematical algorithms that had been
utilized in a "proof of concept" suite of products known as LS Interactive, LS
Messenger, LS Video Streaming, LS Power Zoom, and LS Facial recognition. These
products were in "pre alpha" form, worked only on one limited platform and were
extremely "buggy" causing computer lock-ups and worse. Since the acquisition,
Vianet's engineering effort has consisted of the design of professional Graphic
User Interfaces (GUI's), debugging and the integration across multiple platforms
as well the further enhancement and development of the basic CODECS.

LS Messenger has moved from a proof of concept to a product phase. LS Messenger
and LS Messenger Pro have been tested on Windows 98, Windows NT, and Windows
2000. We have started to market these products with a positive response.

We launched major codec improvement initiatives in mid April 2000. The result of
this research initiative is a codec with improved video quality, as well as, the
prototype version of our Pure Wavelet codec. The Pure Wavelet codec has the
capability of streaming video at multiple bandwidths from the same file. As of
the date of this filing, the image quality of the Pure Wavelet codec is not as
good as our traditional codecs. Additionally, the Pure Wavelet codec requires
more processor resources than our current codec technology.

In March of 2000, we resumed development of Power Zoom. Power Zoom gives Web
Developers the capability to serve high-resolution images over the Internet. By
using a Power Zoom server, hosting sites give users the capability to zoom in on
the details of a high-resolution image not seen with traditional serving
techniques. Power Zoom is certified on IBM's Netfinity product line, and is
available for general release.

In the second half of 2000, we completed the final release versions of Power
Zoom, Video Interactive, Video Streaming, Video Messenger, and Video Messenger
Pro. LS Video Interactive point to point has moved past the beta stage into a
general release product. We are in the final stages of development based on
input received from alpha customers of LS Video Interactive Multipoint and the
beta release of this product is targeted for the end of August 2001.

No assurance can be given that these developments will be completed or that a
market will exist for the products once the development is completed.


                                      -13-
<PAGE>

Results Of Operations

The following is a discussion of the financial condition and results of our
operations for the three and six months ended June 30, 2001 and 2000,
respectively. This discussion should be read in conjunction with our
Consolidated Financial Statements, the notes related thereto, and the other
financial data included elsewhere in this filing.

Periods ended June 30, 2001 and 2000

Revenues and other income

Revenues and other income for the three-months ended June 30, 2001 decreased to
$50,619 as compared to revenues and other income of $460,677 during the
three-month period ended June 30, 2000. In 2000, $390,000 was generated from
one-time software licensing of our Lightning Strike Suite of Products in the
Korean market.

Revenues and other income for the six months ended June 30, 2001 decreased to
$79,067 as compared to revenues and other income of $579,148 during the
six-month period ended June 30, 2000. In 2000, $74,334 was attributable to OEM
sales, while $390,000 was generated from one-time software licensing of our
Lightning Strike Suite of Products in the Korean market.

The Company has not yet generated any significant sales. Efforts have been
concentrated on the development of distributor relationships, which has
necessitated extensive testing of our products and the training of distributors
staff. This effort is now well advanced and the Company expects to generate
revenues in the second half of the year, although no assurances can be given
that these sales will be generated. In addition, the Company has expended a
substantial effort in completing the development work on a Licensing Server for
delivery to a customer from which the first revenue is expected to be received
in the third quarter 2001.

Costs and Expenses

Costs of goods and services sold

Costs of goods and services sold for the three-months ended June 30, 2001
increased $10,145 from nil as compared to the three-months ended June 30, 2000.
The increase was due to the fact that the sales in 2001 consisted primarily of
servers and cameras as opposed the software sale in 2000.

Costs of goods and services sold for the six-months ended June 30, 2001
increased $8,578 to $11,061, as compared to Costs of good and services sold of
$2,483 during the six-months ended June 30, 2000. The increase was due to the
fact that the sales in 2001 consisted primarily of servers and cameras as
opposed to the software sale in 2000, in which the Company incurred nominal
costs.

Selling, general and administrative

Selling, general and administrative expenses for the three-month period ended
June 30, 2001 decreased $1,843,014 to $914,991, as compared to selling, general
and administrative of $2,758,005 during the three-month period ended June 30,
2000. The company's operations were dramatically reduced in January 2001 due to
a lack of available funding. All areas were affected including administrative
staffing, sales support and sales personnel. The current staffing levels for
selling, general and administrative have been reduced to fifteen as compared to
thirty-five in 2000.

Selling, general and administrative expenses for the six-month period ended
June 30, 2001 decreased $1,693,914 to $2,974,369, as compared to selling,
general and administrative of $4,668,283 during the six-month period ended
June 30, 2000. The company's operations were dramatically reduced in January
2001 due to a lack of available funding. All areas were affected including
administrative staffing, sales support and sales personnel. The current staffing
levels for selling, general and administrative have been reduced to fifteen as
compared to thirty-five in 2000.

The company's expenditures in 2000 included (a) a consolidation of four separate
office locations in to one location; (b) increased marketing expenditures to
introduce its products to potential customers; (c) human resource acquisition
costs in the deployment of personnel to execute its strategy and (d) legal and
other administrative costs caused by the acquisitions.


                                      -14-
<PAGE>

Research and development

Research and development for the three-month period ended June 30, 2001
decreased $208,221 to $278,094, as compared to research and development of
$486,315 during the three-month period ended June 30, 2000. The research and
development efforts in 2001 have been primarily focused on the development of a
Licensing Server and the completion of the Company's multi-point video
conferencing product.

Research and development for the six-month period ended June 30, 2001 decreased
$549,331 to $813,112, as compared to research and development of $1,362,443
during the six-month period ended June 30, 2000. The research and development
efforts in 2001 have been primarily focused on the development of a Licensing
Server and the completion of the Company's multi-point video conferencing
product.

Provision for loss on Develcon receivable

Provision for loss on Develcon receivable was $936,386 and $1,386,386 for the
three and six months ended June 30, 2000, respectively and nil for both the
three and six-months ended June 30, 2001.

Depreciation and Amortization Expenses

Depreciation and Amortization expenses for the three-month period ended June 30,
2001 decreased $425,544 to $83,915, as compared to depreciation and amortization
expense of $509,459 during the three-month period ended June 30, 2000. The
decrease was primarily attributable to the fact that the Company wrote off all
intangible assets at December 31, 2000.

Depreciation and Amortization expenses for the six-month period ended June 30,
2001 decreased $795,919 to $209,322, as compared to depreciation and
amortization expense of $1,005,241 during the six-month period ended June 30,
2000. The decrease was primarily attributable to the fact that the Company wrote
off all intangible assets at December 31, 2000.

Interest Expense and Other Financing Charges

Interest expense and other financing charges for the three-month period ended
June 20, 2001 was $3,662,292, as compared to $33,259 during the three-month
period ended June 30, 2001. The year 2001 expense was primarily attributable to
interest on convertible notes, amortization of debt discount and non cash
charges relating to the issuance of warrants. The 2000 expense primarily relates
to interest on notes payable.

Interest expense and other financing charges for the six-month period ended June
20, 2001 was $6,843,994, as compared to $358,397 during the six-month period
ended June 30, 2001. The year 2001 expense was primarily attributable to
interest on convertible notes, amortization of debt discount and non cash
charges relating to the issuance of warrants. The 2000 expense primarily relates
to interest on notes payable.

Loss from Discontinued Operations

Loss from discontinued operations for the three-month period ended June 30, 2001
was nil, as compared to $1,978,387 during the three-month period ended June 30,
2000. The 2000 operating loss was attributable to the operations of Access, our
former subsidiary, which was discontinued in January 2001. The 2000 loss on
disposal relates to Develcon, our former subsidiary, which was sold in January
2000.

Loss from discontinued operations for the six-month period ended June 30, 2001
was nil, as compared to $2,494,347 during the six-month period ended June 30,
2000. The 2000 operating loss was attributable to the operations of Access, our
former subsidiary, which was discontinued in January 2001. The 2000 loss on
disposal relates to Develcon, our former subsidiary, which was sold in January
2000.


                                      -15-
<PAGE>

Net Gain on Extinguishment of Debt

Net gain on extinguishment of debt includes an extraordinary net gain of
approximately $718,800 in connection with the settlement of Develcon debt to
Royal Bank Capital Corp. that Vianet guaranteed and a loss of approximately
$60,600 related to issuing stock and warrants for debt for the six-months ended
June 30, 2001.

Net Loss

Net loss during the three-month period ended June 30, 2001 was $4,898,818, as
compared to $6,241,134 during the three-month period ended June 30, 2000.

Net loss during the six-month period ended June 30, 2001 was $10,114,587, as
compared to $10,698,432 during the six-month period ended June 30, 2000.

Cash Position

For the six-month period ended June 30, 2001, the Company's cash position
increased by $186,172 from $7,546 to $193,718. The principal source of cash was
$3,404,905 that was generated from the Company's private placement offerings.
The funds received were used to fund operating costs.

Inflation

Vianet has experienced minimal impact from inflation and changing prices on its
net sales and on its income from continuing operations for the periods it has
been engaged in business.

Liquidity and Capital Resources

The working capital deficiency at June 30, 2001, was $11,530,146 compared to a
working capital deficiency of approximately $7,177,756 at December 31, 2000.
This increase in working capital deficiency was due to continued operating
losses and the conversion of capital into secured debt as part of the company's
funding arrangements in January through June 2001.

The Company has historically sustained its operations from the sale of debt and
equity securities, through institutional debt financing and through agreements
or arrangements for financing with certain creditors.

As of June 30, 2001, the Company had the following financing arrangements in
place:

      o In September 1999, we borrowed $500,000 from a private investor at an
      interest rate of 11%. This loan is currently in default and can be
      converted at the option of the holder into common shares at an exchange
      rate of $3.75 per share.

      o We assumed convertible debentures (the "Debentures") as part of the
      acquisition of Vianet Labs in the amount of $1,125,000. The Debentures
      bear interest ranging from 6% to 8%, are convertible into a maximum of
      370,170 shares of common stock through September 30, 2002.

      o In March 2000, we purchased a $1,000,000 (face amount) note receivable
      from Develcon (a former Subsidiary) from a creditor of Develcon in
      exchange for the issuance of 250,000 shares of common stock issued at
      $3.00 per share and 375,000 Class D three year common stock purchase
      warrants, which are exercisable at $4.50 per share. The note has no
      carrying value as of June 30, 2001.

      o In December 2000, we completed a partial tender offer for our class A, B
      and C warrants, pursuant to which we agreed to (i) reduce the exercise
      price of 100% of the class A common stock purchase warrants from $1.53 to
      $0.01, and (ii) reduce the exercise price of 50% of the class B common
      stock purchase warrants from $1.91 to $0.01, in consideration of the
      holders of such securities agreeing to (i) exercise 100% of the reduced
      price class A and B common stock purchase warrants, and (ii) cancel the
      remaining class B and C common stock purchase warrants which they
      currently hold or are entitled to receive.


                                      -16-
<PAGE>

      In addition, the terms of the Tender Offer provide that 50% of the shares
      of common stock to be issued upon the exercise of the reduced price class
      A and B common stock purchase warrants shall be freely tradable at such
      time as a registration covering the sale of the common stock underlying
      the class A and B warrants is declared effective by the Securities and
      Exchange Commission and the 50% balance of such shares of common stock
      shall be subject to a lock-up expiring on the earlier of (i) one hundred
      twenty (120) days after the date of issuance of such shares, or (ii) sixty
      (60) days after the effectiveness of any registration statement covering
      the resale of any shares sold in a private placement offering conducted by
      the Issuer.

      The completion of the Tender Offer shall result in the Company receiving
      an aggregate of approximately $64,650 from the exercise of our class A and
      B warrants, which are dependent upon the declaration of effectiveness of a
      registration statement covering the shares issuable by the Securities and
      Exchange Commission, which registration statement was filed with the
      Securities and Exchange Commission on May 9, 2001. Such registration
      statement has not been declared effective.

      o In January 2001, the Company issued an aggregate of $2,100,000 principal
      amount of 8% Secured Convertible Notes (the "Notes") due January 9, 2002
      in a private placement to eight investors. In addition, 9,999,999
      five-year warrants to purchase common stock were issued at an exercise
      price not to exceed $0.28875, in connection with the issuance of the
      Notes. The exercise price of the warrants approximated 110% of the fair
      market value of our common stock at the time of issuance. Simultaneously
      with such transaction, shareholders of 1,566,666 shares of previously
      issued common stock agreed to return such shares for cancellation in
      consideration for the issuance of $4,700,000 convertible notes which is an
      amount equal to the original purchase price for such shares. The notes are
      due on January 9, 2002 and bear interest at a rate of 8% per annum. In
      connection with such transactions, the Placement Agents received cash fees
      of $103,750, warrants to purchase an aggregate of approximately 1,036,962
      common shares, and $56,250 principal amount of the Notes. The Notes are
      considered to contain a beneficial conversion feature as they were issued
      at a conversion price, which was less than the fair value of the common
      stock at the date of issuance. The Company determined the fair value of
      the beneficial conversion feature of the Notes to be approximately
      $2,015,000. This amount was immediately expensed and included in Interest
      and other financing costs, as the conversion feature was immediately
      available to the investors. The Company also determined the fair value of
      the warrants issued to be approximately $3,168,000 by using commonly
      accepted valuation methodologies including the Black Scholes Model, which
      utilizes risk free interest rates, volatility and available market
      information. This amount is being amortized using the interest method over
      the term of the Notes. The amount included in Interest and other financing
      costs in the Consolidated Statement of Operations for the six-months ended
      June 30, 2001 was approximately $1,338,000. The Notes are collateralized
      by all of the Company's assets and approximately 3,800,000 shares (the
      "Secured Shares") owned by the Company's Chairman and its CFO. In the
      second quarter 2001, the collateral was sold by the note-holders. The
      proceeds received by the note-holders approximated $216,000. This amount
      was used to reduce the liability of the Company and is reflected in the
      Consolidated Balance Sheet as of June 30, 2001.

      o In January 2001, the Company issued 1,000,000 shares of common stock and
      warrants to purchase 4,392,004 common shares at an exercise price not to
      exceed $0.28875 to a private investment group in consideration of their
      entering into an agreement to furnish a $10 million, 2-year equity line of
      credit. This agreement has been subsequently amended so as to provide that
      the Company will only be required to issue up to a maximum of 100,000,000
      shares pursuant to the agreement. The Company determined the market value
      of the shares at the date of issuance to be $406,200 and the fair value of
      the warrants to be approximately $1,097,000 by using commonly accepted
      valuation methodologies including the Black Scholes Model, which utilizes
      risk free interest rates, volatility and available market information.
      These amounts are included in Deferred offering costs in the Consolidated
      Balance Sheet as of June 30, 2001. The terms of the agreement allows the
      Company to request funds on a monthly basis. The funds available each
      month from this line shall be based upon the average daily price of our
      shares on each separate trading day during the twenty-two trading days
      following the delivery of our request for funds. There is a funding limit
      of $1.0 million in any one month. The Company will issue common shares to
      the investors in exchange for each month's credit line draw down. These
      common shares will be issued at 85% of the average daily price of our
      shares that are traded during the twenty-two trading days following the
      date the Company requests the funds. The utilization of the line of credit
      is dependent upon the declaration of effectiveness of a registration
      statement covering the shares issuable pursuant to the line of credit by
      the Securities and Exchange


                                      -17-
<PAGE>

      Commission, which registration statement was filed with the Securities and
      Exchange Commission on May 9, 2001. Such registration statement has not
      been declared effective.

      o In February 2001, the Company agreed to issue 1,427,623 shares of common
      stock to an existing shareholder in exchange for a $100,000 non-interest
      bearing demand loan. 867,623 and 560,000 of these shares were issued in
      March and April 2001, respectively. The Company determined the market
      value of the shares at the date of agreement to be approximately $379,000
      and such amount is included in interest and other financing costs in the
      Consolidated Statement of Operations for the six-months ended June 30,
      2001.

      o In April 2001 through June 2001, the Company issued $1,358,750 one-year
      8% convertible notes and 7,045,238 five-year warrants to purchase shares
      of common stock at a price not to exceed $0.28875. Simultaneously with and
      as a condition to these transactions, the shareholders of 334,000 shares
      of the common stock and 501,000 related warrants issued pursuant to
      previous private placement offerings agreed to return such shares and
      warrants for cancellation in consideration for the issuance of $1,002,000
      one-year 8% convertible notes, which is the amount equal to their original
      purchase price for such securities. In connection with such transactions,
      the Placement Agents received cash fees of approximately $103,000, such
      amount is included in interest and other financing costs in the
      Consolidated Statement of Operations for the six-months ended June 30,
      2001. Placement Agents also received warrants to purchase an aggregate of
      approximately 228,380 common shares at a price not to exceed $0.28875. In
      addition, the Company issued 14,160,109 shares of common stock to
      shareholders that participated in financings prior to March 2000 and
      participated in the June 2001 financing. The Company received no proceeds
      from the 14,160,109 stock issuance. The Company recorded the par value of
      the shares issued as a reduction of additional paid-in capital on the
      Consolidated Balance Sheet as at June 30, 2001. The Company determined the
      fair value of the warrants issued to be approximately $893,000 by using
      commonly accepted valuation methodologies including the Black Scholes
      Model, which utilizes risk free interest rates, volatility and available
      market information. This amount is being amortized using the interest
      method over the term of the Notes. The amount included in Interest and
      other financing costs in the Consolidated Statement of Operations for the
      six-months ended June 30, 2001 was approximately $47,000.

      o In April 2001, the Company issued 1,254,618 shares of common stock in
      exchange for services previously performed and accrued in 2000
      approximating $183,700 and issued 736,938 shares of common stock to
      employees in settlement of compensation approximating $103,000, such
      amount is included in Selling, general and administrative expenses in the
      Consolidated Statement of Operations for the six-months ended June 30,
      2001.

      o In June 2001, the Company issued 949,733 shares of common stock to
      existing shareholders pursuant to clauses in the financing agreements
      completed prior to March 2000. The Company received no proceeds from this
      stock issuance. The Company recorded the par value of the shares issued as
      a reduction of additional paid-in capital on the Consolidated Balance
      Sheet as at June 30, 2001.

      o In June 2001, the Company issued 1,406,250 shares of common stock to two
      investors in lieu of interest payments on notes payable. Approximately
      $298,000 is included in interest and other financing costs in the
      Consolidated Statement of Operations for the six-months ended June 30,
      2001.

Going Concern

The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate our continuation as
a going concern. However, we have experienced net losses of $10,114,587 for the
six-month period ended June 30, 2001 and losses of $27,134,210 for the year
ended December 31, 2000. We also had a net working capital deficit of
$11,530,146 as of June 30, 2001 and $7,177,756 as of December 31, 2000. We must
raise additional capital to meet our continuing operational needs. These factors
raise doubt about our ability to continue as a going concern. In view of the
matters described above, recoverability of a major portion of the recorded asset
amounts shown in the accompanying balance sheet is dependent upon our ability to
generate sufficient sales volume to cover our operating expenses and to raise
sufficient capital to meet our payment obligations. The financial statements do
not include any adjustments relating to the recoverability and classification of
recorded asset amounts, or amounts and classification of liabilities that might
be necessary should we be unable to continue in existence.


                                      -18-
<PAGE>

The Company has commitments under various agreements to issue shares beyond its
authorized capital as required by the financing transactions described above and
these can only be met if our shareholders approve a proposed increase in
authorized shares. Unless our shareholders approve these transactions and
approve an amendment to our certificate of incorporation to increase the number
of authorized shares of common stock from 100,000,000 to 500,000,000, we will be
unable to perform our obligations under the agreements and will be in default
pursuant to the terms of the agreements. Management of the Company believes that
it is highly likely that such default will require the Company to substantially
curtail or cease its operations, and may result in a total loss of shareholder's
investment in the Company.

Potential Future Sources of Capital

After completing the above financings, we have a total of 83,487,577 warrants
and options outstanding as of the date of this filing at an average issue price
of $0.66. In the event that these warrants and options are all exercised we
would receive approximately $55,448,000 in cash proceeds. The exercise of these
warrants and options will depend on, among other things, the liquidity and price
for our common shares. We do not control the exercise of these warrants and
options and therefore no assurances can be given that any warrants will be
exercised.

We are currently seeking sources of additional financing, either in the form of
equity and/or debt financing, to provide the additional capital in order to fund
our current operations, expand our scope of operations and pursue our business
strategy. We intend to complete any equity financing by issuing securities at
prices equal to the current market value on the date of such financing. In
addition, we anticipate that we will be required to issue equity securities in
consideration of obtaining any such debt financing. However, no assurance can be
given that we will be successful in completing any financing. If we are
unsuccessful in completing any financing, we will not be able to fund our
current expenses.

We have used and intend to continue to use the proceeds from the financings
described to execute our sales plan. Our ability to become a serious competitor
may be dependent upon obtaining additional financing.

Future Sources of Revenue

As of the date of this filing, we have completed several distribution agreements
and trial sales that could generate future revenues. While we anticipate
significant revenues from these agreements and others that we will complete in
the future, there can be no guarantees these revenues will be realized. Should
the contracts be cancelled or if our customers do not generate revenues
utilizing our products, our future expected revenues could be adversely
affected.

Summary

Our management 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 expected
revenues will be realized at sufficient levels and profitability to fund our
operations without additional capital. Such inability could have a materially
adverse effect on our business, operating results and financial condition.
Moreover, the estimated cost of the proposed expansion of our production and
marketing activities is subject to numerous uncertainties, including the
problems, expenses, difficulties, complications and delays, many of which are
beyond our control, frequently encountered in connection with the establishment
and development of new business activities, and may be affected by the
competitive environment in which we are operating. Accordingly, there can be no
assurance that we will complete the proposed expansion of our production and
marketing activities described herein.


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<PAGE>



PART II - OTHER INFORMATION

Item 1. Legal Proceedings

        We are not a party to any material legal proceedings, except as
described below.

        We were a defendant in an action for a breach of contract claim relating
        to outstanding invoices for services rendered in the amount of $703,739.
        (Superior Court of California, County of Alameda, Cause # H217819-8) In
        March 2001, a default judgment was entered against Vianet in this
        matter. We engaged in discussions with the plaintiff regarding
        settlement and reached agreement with regard to a payment schedule
        whereby we paid the defendant $36,500 in July, with the balance payable
        over the following eleven months. The $702,739 of outstanding invoices
        is included in accounts payable and accruals on the balance sheet at
        June 30, 2001.

        We were a defendant in an action pending before the Collin County Court
        at Law No. 5, Collin County, Texas, entitled Huntington, Martin & Wood.
        v. Vianet Technologies, Inc. (Cause No.: 005-1304-00). This action was
        commenced by Hunting, Martin & Wood, on January 5, 2001, and sought
        $19,500 in damages for outstanding invoices for products sold or
        services rendered, plus lawyer's fees, interest and court costs. As of
        the date hereof, Vianet has reached an agreement with the plaintiff to
        pay $19,500 in installments, of which $6,000 has now been paid. The
        $19,500 of outstanding invoices is included in accounts payable and
        accruals on the balance sheet at June 30, 2001.

        We are a defendant in an action pending before the County Court at Law
        No. 2, County of Dallas, Texas, entitled AMS Production Group, Inc, v.
        Vianet Technologies, Inc. (Cause No.: CC-01-04590-B). This action was
        commenced by AMS Production Group, Inc on May 1, 2001, and seeks $56,790
        in damages for outstanding invoices for products sold or services
        rendered, plus lawyer's fees, interest and court costs. As of the date
        hereof, Vianet has filed a response to the claim though no discovery has
        yet commenced. Accordingly, it is difficult to estimate the likelihood
        of an unfavorable outcome and estimate the amount or range of a
        potential loss at this time. The $56,790 of outstanding invoices is
        included in accounts payable and accruals on the balance sheet at June
        30, 2001.

        We are a defendant in an action pending before the County Court at Law
        No. 2, Collin County of, Texas, entitled BMI Leasing v. Vianet
        Technologies, Inc. (Cause No.: 2-694-01). This action was commenced by
        BMI Leasing on June 22, 2001, and seeks $44,819 in damages for
        outstanding invoices for products sold or services rendered, plus
        lawyer's fees, interest and court costs. As of the date hereof, Vianet
        has filed a response to the claim though no discovery has yet commenced.
        Accordingly, it is difficult to estimate the likelihood of an
        unfavorable outcome and estimate the amount or range of a potential loss
        at this time. The $44,819 of outstanding invoices is included in
        accounts payable and accruals on the balance sheet at June 30, 2001.

        We are a defendant in an action pending before the Superior Court of
        Justice, Ontario, Canada (File # 99-CV-180354) in which the plaintiffs
        have asserted breach of contract and damages in the amount of
        $155,928 and punitive damages in the amount of $50,000. The Company
        has been defending this claim vigorously. Pleadings have been entered
        and the process of discoveries has commenced. We are currently engaged
        in discussions with the plaintiff regarding settlement of this matter,
        however no assurance can be given that an amicable settlement will be
        reached. In the event we are unable to consummate a settlement of this
        matter, we anticipate that the plaintiff will seek to pursue its claim.


                                      -20-
<PAGE>

Item 2. Changes in Securities and Use of Proceeds

        None.

Item 3. Defaults Upon Senior Securities

        The Company is in default of its Senior Secured Notes through its
        failure to pay interest, the existence of judgments against the company
        in excess of $50,000 and through the cross default provision.

Item 4. Submission of Matters to a Vote of Security Holders

        None.

Item 5. Other Information

        None.

Item 6. Exhibits and Reports on Form 8-K

        None.


                                      -21-
<PAGE>

                                   SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                                             VIANET TECHNOLOGIES, INC.
                                             --------------------------
                                             (Registrant)

Date:   August 17, 2001                         /s/Peter Leighton
        ---------------                      ------------------------
                                                   Peter Leighton
                                              Chief Financial Officer


                                      -22-