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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K/A
Amendment No. 2

|  |  |                                                                                                                                                        |  | 
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------ |  | 
|x |  | ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the Fiscal Year Ended June 30, 2001                          
|  |  |                                                                                                                                                        |  | 
|  |  | or                                                                                                                                                    
|  |  |                                                                                                                                                        |  | 
|o |  | TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from _____________ to _____________

COMMISSION FILE NUMBER: 0-31867

MAXXIS GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)

|                                                                                        |  |                                                 
|--------------------------------------------------------------------------------------- |  | ------------------------------------------------
|Georgia
(State or Other Jurisdiction of
Incorporation or Organization)                  |  | 58-22-78241
(I.R.S. Employer Identification No.)
|                                                                                       
|1901 Montreal Road, Suite 108, Tucker, Georgia
(Address of Principal Executive Offices) |  | 30084
(Zip Code)                                

Registrants telephone number, including area code:  (770) 696-6343

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act: NONE

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrants knowledge, in definitive proxy or information statements
incorporated by reference into Part III of this Form 10-K or any amendment to
this Form 10-K.  [  ]

The aggregate market value of the Common Stock held by affiliates of the
Registrant as of March 31, 2002 was $4,769,991. This calculation is based upon
a price of $ 5.50 per share, or the price per share of Common Stock sold in the
most recent private offering. There is no active trading market for the Common
Stock, and the
$ 5.50 per share price is not necessarily indicative of market value. There
were 1,788,016 shares of Common Stock issued and outstanding as of March 31,
2002.



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TABLE OF CONTENTS



|                                                                                              |  |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 
|PART I                                                                                       
|ITEM 1. BUSINESS                                                                             
|ITEM 2. PROPERTIES                                                                           
|ITEM 3. LEGAL PROCEEDINGS                                                                    
|ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|PART II                                                                                      
|ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS                             
|ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA                                                 
|ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS                         
|ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                          
|ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS IN ACCOUNTING AND FINANCIAL DISCLOSURE 
|PART III                                                                                     
|ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                  
|ITEM 11. EXECUTIVE COMPENSATION                                                              
|ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                      
|ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                      
|PART IV                                                                                      
|ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                     
|SIGNATURES                                                                                   
|INDEX TO CONSOLIDATED FINANCIAL STATEMENTS                                                   



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INTRODUCTORY NOTE

This Amendment No. 2 to the Registrants Annual Report on Form 10-K,
as filed by the Registrant on September 6, 2002, is being filed to
amend certain sections of this Form 10-K to include additional
information.

INDEX TO FORM 10-K

|           |    |                                                                                       |     
|---------- | -- | ------------------------------------------------------------------------------------- | ----
|           |    |                                                                                       | Page
|           |    |                                                                                       |     
|PART I    
|Item 1.    |    | Business                                                                              | 1   
|Item 2.    |    | Properties                                                                            | 9   
|Item 3.    |    | Legal Proceedings                                                                     | 9   
|Item 4.    |    | Submission of Matters to a Vote of Security Holders                                   | 9   
|PART II   
|Item 5.    |    | Market for Common Equity and Related Shareholder Matters                              | 10  
|Item 6.    |    | Selected Consolidated Financial Data                                                  | 11  
|Item 7.    |    | Managements Discussion and Analysis of Financial Condition and Results of Operations | 12  
|Item 7A.   |    | Quantitative and Qualitative Disclosures About Market Risks                           | 18  
|Item 8.    |    | Financial Statements and Supplementary Data                                           | 18  
|Item 9.    |    | Changes in and Disagreements with Accountants in Accounting and Financial Disclosure  | 19  
|PART III  
|Item 10.   |    | Directors and Executive Officers of the Registrant                                    | 20  
|Item 11.   |    | Executive Compensation                                                                | 22  
|Item 12.   |    | Security Ownership of Certain Beneficial Owners and Management                        | 23  
|Item 13.   |    | Certain Relationships and Related Transactions                                        | 24  
|PART IV   
|Item 14.   |    | Exhibits, Financial Statement Schedules and Reports on Form 8-K                       | 24  
|SIGNATURES | 27





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PART I




ITEM 1.  BUSINESS

This Report contains statements which constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and the Securities Exchange Act of 1934, as amended. These statements
appear in a number of places in this Report and include all statements that are
not historical statements of fact regarding the intent, belief or current
expectations of Maxxis or its directors or officers with respect to, among
other things: (i) our financing plans; (ii) trends affecting our financial
condition or results of operations; (iii) our growth strategy and operating
strategy; and (iv) our anticipated capital needs. When used in this Report,
the words expects, intends, believes, anticipates, estimates, may,
could, should, would, will, plans and similar expressions and
variations thereof are intended to identify forward-looking statements.
Investors are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, many of
which are beyond our ability to control, and that actual results may differ
materially from those projected in the forward-looking statements as a result
of various factors discussed herein and those factors discussed in detail in
our filings with the Securities and Exchange Commission, including the Risk
Factors section of our Registration Statement on Form S-1 (Registration Number
333-38623).

Our independent associates market communications and Internet services and
nutritional and health enhancement products through our multi-level network
marketing system. We operate through our subsidiaries: Maxxis 2000, Inc.
(Maxxis 2000); Maxxis Communications, Inc. (Maxxis Communications); and
Maxxis Nutritionals, Inc. (Maxxis Nutritionals).

We believe that our marketing system allows us to obtain customers for our
products and services in a cost effective manner. We believe that our
marketing system also enhances customer retention because of the personal
relationships between our independent associates, or IAs, and their customers.
Maxxis was incorporated in January 1997 and began sponsoring independent
associates and marketing telecommunications services in March 1997. We
generated aggregate net revenues of $10,726,000 for our fiscal year ended June
30, 2001.

We initially built a customer base without committing capital or
management resources to construct our own communications network. In February
1997, we contracted with Colorado River Communications Corp., or CRC, to allow
our independent associates to market long distance services provided by
Colorado River Communications. In September 1998, we leased telecommunications
switching equipment and ancillary hardware and software in order to create our
own communications network. Due to the competitive nature of the
communications market, however, our communications revenues have dropped
significantly in the past year

We began marketing private label dietary supplements to our customers and
independent associates in November 1997. During 1998, we began marketing
additional nutritional and health enhancement products. In September 1998, we
began providing Internet access and Web-page development and hosting services.
We believe that the persons who purchase communications services through our
independent associates may also be potential customers for our nutritional and
health enhancement products and Internet-related services.

Our products and services are marketed exclusively by our network of
independent associates. Our multi-level network marketing system and our
reliance upon independent associates are intended to reduce marketing costs,
customer acquisition costs and customer attrition. We believe that our
multi-level network marketing system creates a base of potential customers for
additional services and products. We believe that independent associates are
generally attracted to our multi-level network marketing system because of the
potential for supplemental income and because they are not required to purchase
substantial inventory, have no monthly sales quotas or account collection
issues, have minimal required paperwork, and have a flexible work schedule. We
encourage independent associates to market services and products to persons
with whom the independent associates have an ongoing relationship, such as
family members, friends, business associates and neighbors. We also sponsor
meetings at which current independent associates are encouraged to bring in
others for an introduction to our marketing system.

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Strategy

Our goal is to develop a national distribution system through which our
products and services may be sold. We intend to increase our revenues by
expanding our marketing network, increasing the number of customers who
purchase our products and services, and providing additional products and
services for sale through our independent associates. We intend to achieve our
goals by:



| |  |  | Growing and Developing our Network of Independent Associates
by enhancing our sponsoring and training services, continuing to
support the marketing efforts of independent associates and
introducing new income opportunities for independent associates.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Maintaining and Expanding the Number of Customersby offering
high quality, competitively-priced products and services through a
highly motivated network of independent associates.                                                                       
|
| |  |  | Improving and Expanding Our Product Linesby continuing to
evaluate and offer products that are attractive to our independent
associates and customers.                                                                                                    
|
| |  |  | Obtaining Competitive Priceson products and services through
the purchasing power of our nationwide network.                                                                                                                                              

Maxxis Switch

In September 1998, we entered into an agreement to lease a
telecommunications switch (the Maxxis Switch) formerly owned by Cherry
Communications, Inc. Beginning in February 1999, our lease required us to make
payments of approximately $118,000 per month. As we obtained the required
regulatory approvals to offer telecommunications services throughout 1999, we
began to market services provided through the Maxxis Switch to the subscriber
base that was developed under our agreement with CRC, as well as customers that
we have obtained more recently.

We are required to obtain the consent of customers before changing their
long distance service. This process can be difficult, time consuming and
expensive. Additionally, the FCC has stringent legislation that governs the
procedure by which we must obtain the consent of customers before changing
their long distance service. Problems associated with the transition of these
customers from their existing providers to our network could have a material
adverse effect on our business, financial condition and operating results.

Marketing

We market products and services exclusively through our network of
independent associates. Currently, we have six independent associate positions
in our marketing system: associate; senior associate; director; regional
director; executive director; and presidential director. Independent
associates are paid only by commissions, and we do not pay them any salary.
Independent associate commissions are a specified percentage or a designated
amount of the gross proceeds received by us from the sale of our services and
products. We designate a portion of our gross sales as commission value, or
CV, and allocate the CV among eligible participants in our marketing system.
Currently, 10% of the CV earned with respect to a long distance subscriber is
paid monthly to the independent associate who sponsored such subscriber, 57% of
the CV is paid monthly to eligible directors who have the independent associate
who sponsored the subscriber in their downline and an additional 28% is
retained by us to be paid out to regional directors, executive directors and
presidential directors in our performance bonus programs. All directors,
executive directors, regional directors and presidential directors who meet
certain performance criteria are eligible to receive additional performance
bonuses.

To become an associate, individuals (other than individuals in North
Dakota) must complete an application and purchase a distributor kit.
Independent associates also pay an annual fee in order to maintain their status
as independent associates. The distributor kit is a package of basic materials
which assists an associate in beginning his or her business. Associates are
also entitled to purchase products from us at discounted prices for retail
sales. An associate becomes a senior associate when the associate sells $100 of
bonus-eligible products. Senior associates continue to receive a percentage of
CV with regard to all subscribers personally gathered by them and are also
entitled to purchase products from us at discounted prices for retail sales.

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To become a director, a senior associate must sponsor two additional
senior associate positions. A director increases the size of the directors
sales organization by sponsoring additional persons to become senior
associates. These senior associates, and all senior associates that they, in
turn, sponsor, become part of the sales organization of the director who
sponsored them. Senior associates, through the growth of their sales
organizations, may become directors, regional directors, executive directors or
presidential directors and thereby increase the size of the sales organization
of the person who was their original sponsor. The organization that grows
below each director through this process is called a downline. Directors are
eligible to receive the same commissions as senior associates and, if they
directly gather and maintain a minimum commission volume of eight dollars
monthly, are eligible to receive a percentage of the CV produced by each
independent associate that is within 15 levels below them in their downline.
In order to encourage the growth of our marketing system, we also pay eligible
directors a bonus amount, which is designated as bonus value, or BV, for
each sale of bonus-eligible products. We primarily designate retail priced
phone cards, nutritional products and Web-page development and hosting services
as bonus-eligible products. Directors become regional directors, executive
directors and presidential directors upon the achievement of certain
independent associate sales goals. Regional directors, executive directors and
presidential directors are eligible to receive the same commissions as
directors and, if they qualify, share in performance bonuses.

Relationship with Independent Associates

We seek to contractually limit the statements that independent associates
make about our business. Each independent associate must also agree to
policies and procedures to be followed in order to maintain the independent
associates status in our organization. We expressly forbid independent
associates from making any representation as to the possible earnings of any
independent associate or from making any representation with regard to our
Common Stock. We also prohibit independent associates from creating any
marketing literature that we have not pre-approved. While we have these
policies and procedures in place governing the conduct of the independent
associates, it is difficult to enforce such policies and procedures. Because
the independent associates are classified as independent contractors, we are
unable to provide them the same level of direction and oversight as our
employees. Violations of our policies and procedures may reflect negatively on
us and could have a material adverse effect on our business, financial
condition and operating results.

Training and Marketing Support

We offer our independent associates a number of support services. We
offer training, information and motivational support to the independent
associate network through our training program, regional meetings and
distributors websites.

We intend to hold conventions for independent associates to:



| |  |  | recognize the top performers,                                                                    
| | - |  | -------------------------------------------------------------------------------------------------
| |  |  | direct access to senior management,                                                              
| |  |  | provide a chance for independent associates to share experiences and develop support systems, and
| |  |  | allow independent associates and potential independent associates to learn more about us.        

We also publish a newsletter for the independent associates containing
informative and motivational articles and recognizing independent associate
achievements.

Products and Services

Following is a summary of the various services and products we currently
provide to independent associates and customers. We may add and remove services
and products from our services and product lines from time to time.

Communications Services and Products. Our independent associates market a
variety of long distance and other communications services and products, which
currently include 1-Plus long distance service, prepaid phone cards and
Internet-related services.



| |  |  | 1-Plus Long Distance. Our 1-Plus long distance service
serves as a replacement for a customers former long distance
service (such as the long distance services provided by AT&T
Corporation
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |   |  | (AT&T), WorldCom, Inc. (WorldCom) and Sprint
Corporation (Sprint)). Our 1-Plus services are billed on a flat
rate basis, where the cost of a call does not vary depending upon
the distance of a call or the time of day or day of week when the
call is originated or terminated. Our residential 1-Plus services
are billed based on one minute increments, and business 1-Plus
service is billed based on 6-second increments with a 30-second
minimum.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Prepaid Phone Cards. We offer prepaid phone cards in
domestic time increments of 1 hour and 30 minutes. These cards may
be used for domestic and international calls. We also offer
international prepaid phone cards that are denominated in dollar
amounts. Charges are deducted from these cards based upon the rates
applicable to the calls placed by cardholders.                                                                                         
|
| |  |  | MAXXCONNECT. In September 1998, we began providing Internet
access through InteReach Internet Services, L.L.C. and also began
providing Web-page development and hosting services for independent
associates.                                                                                                                                                                                                                                                   

Nutritional and Health Enhancement Products. We market a line of private
label nutritional and health enhancement products to our independent associates
and customers. Representative products include:



| |  |  | Maxx-A-Cholis a dietary supplement which is a specialized
combination of six herbs.                                                                                             
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | MAXXIS MSMis a dietary supplement consisting of
methylsulfonylmethane, vitamin C, citrus bioflavonoid complex and
ginseng.                                                      
|
| |  |  | MAXXIS Multivitaminis a multivitamin nutritional supplement
which is delivered by means of a spray.                                                                             
|
| |  |  | MAXXIS 02is a nutritional supplement that contains
electrolytes, oxygen, trace elements, enzymes and amino acids.                                                               
|
| |  |  | BetaShieldis a nutritional product containing an extract
from the cell walls of bakers yeast.                                                                                  
|
| |  |  | Maxx-Lifeis a dietary supplement containing amino acids and
other ingredients, including lysine, arginine, GABA, glutamine and
ornithine.                                       
|
| |  |  | Weight-Idealis a dietary supplement in capsule and spray
forms which contains a blend of nutrients, including chromium
picolinate, magnesium acetate and niacin.                
|
| |  |  | Maxxis Skin Care Systemconsists of the following health and
beauty products: shampoo; conditioner; body wash; hand and body
conditioner; face wash; skin toner; and moisturizer.

Certain nutritional products are sold as a nutritional pack, and the skin care
products are sold as a complete system and individually.

Promotional Materials. We also derive revenues from the sale of various
educational and promotional materials designed to aid our independent
associates in maintaining and building their businesses. Such materials
include various sales aids, informational videotapes and cassette recordings,
and product and marketing brochures.

Independent Associate Support and Information Systems

We operate a call center where advisors answer independent associate
questions and provide information to independent associates. The call center
maintains a system that includes a current database of all independent
associates, their downlines, and their long distance customers. We believe
that maintaining sophisticated and reliable transaction processing systems is
essential for multi-level network marketing companies. We use a commission
processing software system that incorporates the provisions of our marketing
program for purposes of processing detailed and customized independent
associate commission payments, monitoring and analyzing financial and operating
trends and tracking each independent associates downline. We also maintain
transaction processing systems that facilitate the shipment of

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independent
associate training and marketing materials. In addition, our order processing
system tracks the receipt, storage, shipment and sale of our sales aid
products.

Suppliers

Prior to 1999, we did not own a long distance network. As a result,
Maxxis Communications entered into the 1-Plus Agreement with CRC to allow our
independent associates to market CRCs telecommunications services. Subscribers
gathered by our independent associates were long distance customers on CRCs
network, and CRC provided subscriber support. Subscribers had the right to
change their service at any time. In January of 1999, we notified CRC of our
intent to terminate our 1-Plus agreement and begin a process of migrating our
customers to the Maxxis communications network. At that time, we entered into
an agreement with WorldCom to provide us with the necessary private lines,
circuits and other network services to be able to originate and terminate
telephone calls through the Maxxis Switch. In March 1999, we entered an
agreement with IXC Communications Services, Inc. to provide switched services
for carrying the portion of the Maxxis traffic that does not go through the
Maxxis Switch. In September 2000, we terminated our agreements with IXC and
WorldCom and entered into an agreement with Broadwing Communications Services,
Inc. for our telecommunications services. Pursuant to our agreement with
Broadwing, we are obligated to purchase at least $50,000 of communications
services per month. If we do not purchase this minimum amount, Broadwing may
terminate their agreement with us or raise the rates and charges we pay them
under our agreement. Our agreement with Broadwing currently renews on a
month-to-month basis.

In November 1997, we began marketing a line of private label nutritional
products. All of the nutritional products offered and distributed by us are
developed and manufactured by third-party suppliers. Certain of the
nutritional products offered by us are proprietary to these suppliers. We do
not have any commitment that these suppliers and manufacturers will continue to
sell us nutritional products. We believe that our relationships with our
suppliers are satisfactory; however, there can be no assurance that any or all
of these suppliers will continue to be reliable suppliers to us. Accordingly,
there is a risk that any or all of our suppliers or manufacturers, including
suppliers which provide proprietary products to us, could discontinue selling
their nutritional products to us. In the event any of the third-party
manufacturers become unable or unwilling to continue to provide the nutritional
products in required volumes, we would be required to identify and obtain
acceptable replacement sources, and we cannot guarantee that any alternative
replacement sources would become available to us on a timely basis.

Customer Support

During fiscal 2001, Maxxis Communications was primarily responsible for
the billing of long distance customers and for providing customer service.
Certain of our communications services, including 1-Plus long distance and
prepaid phone cards, are provided under IXCs or WorldComs state, national and
international tariffs. We have been informed that IXC and WorldCom possess all
tariffs necessary to offer such services. After we received tariffs from
certain state authorities in April 1999, we assumed the responsibility for
billing long distance and customer service as we migrated customers from those
states onto the Maxxis communications network. We provide our Internet access
services through InteReach, which is responsible for billing certain Internet
access customers and for providing customer support.

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Competition

We face competition for our products and services and for independent
associates.

Communications Services. The United States long distance communications
industry is intensely competitive, rapidly evolving and subject to rapid
technological change. In addition, the industry is significantly influenced by
the marketing and pricing practices of the major industry participants. AT&T,
WorldCom and Sprint are the dominant competitors in the domestic long distance
communications industry. All of these companies are significantly larger than
we are and have substantially greater resources. Many of our current and
potential competitors have longer operating histories, greater name
recognition, larger customer bases and substantially greater financial,
personnel, marketing, technical and other resources than us. These competitors
employ various means to attract new customers, including television and other
advertising campaigns, telemarketing programs, network marketing and cash
payments and other incentives to new customers. Our ability to compete
effectively depends upon, among other factors, our ability to offer high
quality products and services at competitive prices. There can be no assurance
that we will be able to compete successfully.

Nutritional and Health Enhancement Products. We also compete in the
highly competitive market of dietary supplements and health enhancement
products. This market segment includes numerous manufacturers, other network
marketing companies, catalog companies, distributors, marketers, retailers and
physicians that actively compete for the business of consumers. We compete
with other providers of such nutritional and health enhancement products,
especially retail outlets, based upon convenience of purchase, price and
immediate availability of the purchased product. For the most part, our
competitors offering comparable products are substantially larger and have
available considerably greater financial resources. The market is highly
sensitive to the introduction of new products (including various prescription
drugs) that may rapidly capture a significant share of the market. As a
result, our ability to remain competitive depends in part upon the successful
introduction of new products at competitive prices.

Internet Access and Internet-Related Services. The market for the
provision of Internet access and Internet-related services is extremely
competitive. There are no substantial barriers to entry, and we expect that
competition will continue to intensify. We cannot guarantee that we will be
able to compete successfully against current or future competitors or that
competitive pressures faced by us will not materially adversely affect our
business, financial condition and operating results. Our current and future
competitors include, without limitation, the following types of Internet access
providers: (i) national commercial Internet service providers (ISPs); (ii)
numerous regional and local commercial ISPs; (iii) established on-line
commercial information service providers; (iv) national long distance carriers;
(v) regional telephone companies; and (vi) cable operators.

Independent Associates. We compete for independent associates with other
direct selling organizations, some of which have longer operating histories and
greater visibility, name recognition and financial resources. The largest
network marketing companies in our markets are:



| |  |  | EXCEL Communications, Inc.,        
| | - |  | -----------------------------------
| |  |  | American Communications Network,   
| |  |  | BeautiControl Cosmetics, Inc.,     
| |  |  | HerbalLife International, Inc., and
| |  |  | Mary Kay, Inc.                     

We compete for new independent associates on the basis of our reputation,
perceived opportunity for financial success and quality and range of products
offered for sale. We envision the entry of many more direct selling
organizations into the marketplace. We cannot guarantee that we will be able
to successfully meet the challenges posed by this increased competition. We
also compete for the time, attention and commitment of our independent
associates. Given that the pool of individuals interested in the business
opportunities presented by direct selling is limited in each market, the
potential pool of independent associates for our products and services is
reduced to the extent other network marketing companies successfully attract
these individuals. There can be no assurance that other network marketing
companies will not convince our existing independent associates to join their
organizations. In such event, our business, financial condition and operating
results could be materially adversely affected.

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Proprietary Rights

We have applied for a federal registration for the mark MAXXIS. In
addition, we rely upon common law rights to protect other marks used by us and
other rights that we consider to be our intellectual property. We cannot
guarantee that our measures to protect our intellectual property will prevent
or deter the use or misappropriation of our intellectual property by other
parties. Our inability to protect our intellectual property from use or
misappropriation from others could have a material adverse effect upon our
business, financial condition and operating results. From time to time,
companies may assert other trademark, service mark or intellectual property
rights in marks (including the mark MAXXIS) or other intellectual property
used by us. We could incur substantial costs to defend any legal action taken
against us. Our use of our trademarks, service marks or other rights could be
found to infringe upon intellectual property rights of other parties. We could
be enjoined from further infringement and required to pay damages. In the
event a third party were to sustain a valid claim against us, and in the event
any required license were not available on commercially reasonable terms, our
business, financial condition and operating results could be materially
adversely affected. Litigation, which could result in substantial cost to and
diversion of our resources, may also be necessary to enforce our intellectual
property rights or to defend us against claimed infringement of the rights of
others.

Regulation

Regulation of Long Distance Telephone Services. Various regulatory
factors affect our financial performance and our ability to compete. IXC and
Maxxis are telecommunications carriers, and both of our services are currently
subject to federal, state and local regulation. Pursuant to the Communications
Act, the FCC generally exercises jurisdiction over the facilities of, and
services offered by, telecommunications common carriers that provide interstate
or international communications services. State regulatory authorities retain
jurisdiction over the same facilities and services to the extent that they are
used to provide intrastate communications services. Various international
authorities may also seek to regulate the provision of certain services.

Federal Regulation. The FCC does not require long distance
telecommunications carriers to obtain prior authorization to provide domestic
interstate services, including operator services, although such carriers
currently must file tariffs at the FCC setting forth the rates, terms and
conditions for such services. FCC regulations require telecommunications
carriers to apply for and to obtain certification from the FCC prior to
offering international services, and to file international tariffs with the
FCC.

IXC and Maxxis must comply with the requirements applicable to common
carriers under the Communications Act, which include a duty to offer services
upon request at reasonable rates and on nondiscriminatory terms and conditions.
Long distance telecommunications carriers also are subject to a variety of
miscellaneous regulations that, for example, govern the documentation and
verifications necessary to change a consumers long distance carrier, require
the filing of periodic reports and the payment of regulatory fees. Currently,
FCC regulations also require long distance telecommunications carriers to
permit resale of their transmission services, and local exchange carriers to
provide all long distance carriers with equal access to local exchange
facilities for purposes of origination and termination of long distance calls.
If either or both of these requirements were eliminated, our business could be
adversely affected.

The FCC generally has the authority to condition, modify, cancel,
terminate or revoke a carriers authority to operate for failure to comply with
federal laws or FCC orders, rules, regulations or policies. Fines or other
penalties also may be imposed by such violations. The FCC has jurisdiction to
act upon complaints against any telecommunications carrier for failure to
comply with its statutory obligations. We cannot guarantee that the FCC or
third parties will not raise issues regarding our compliance with applicable
laws and regulations, which could have a material adverse effect on our
business, financial condition and operating results.

The enactment of the Telecommunications Act served to increase competition
in the long distance market. The Telecommunications Act, among other things,
allowed the Bell operating companies to provide long distance service outside
of their local service territories, but barred them from immediately offering
in-region, interLATA long distance services until they had satisfied certain
conditions. A Bell operating company must apply to the FCC to provide
in-region, interLATA long distance services and must satisfy a set of
pro-competitive criteria intended to ensure that Bell operating companies open
their own local markets to competition before the FCC will approve such
application. We are unable to determine how the FCC will rule on any such
applications. As a result of the Telecommunications Act, IXC and Maxxis may
experience increased competition from others, including the Bell operating companies. In
addition, both IXC and

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Maxxis may be subject to additional regulatory
requirements and fees, including, without limitation, universal service
assessments, additional access charge assessments, and payphone compensation
surcharges resulting from the implementation of the Telecommunications Act.

State Regulation. IXC and Maxxis are subject to varying levels of
regulation in states in which each company provides long distance services.
The vast majority of states require long distance carriers to apply for
certificates to provide telecommunications services, or at least to register or
to be found exempt from regulation, before they may commence providing
intrastate long distance services. This authorization process generally
requires the carrier to demonstrate that it has sufficient financial, technical
and managerial capabilities and that granting the authorization will serve the
public interest. Also, a majority of states require long distance carriers to
file and to maintain detailed tariffs listing rates for intrastate services.
Many states also impose various reporting and fee requirements, including,
without limitation, state universal service requirements. State regulatory
agencies also generally require prior notice or approval for (i) transfers of
control of certificated carriers, (ii) sales or transfers of carrier assets,
including customer bases, (iii) carrier stock offerings and (iv) a carriers
incurrence of significant debt obligations. Certificates of authority can
generally be conditioned, modified, canceled, terminated or revoked by state
telecommunications regulatory agencies for failure to comply with state laws
and rules, regulations and regulatory policies. Fines and other penalties may
be imposed for such violations.

We believe that IXC has made the necessary filings with the various state
telecommunications regulatory agencies to provide intrastate long distance
services in the states where IXC currently conducts its operations. We believe
we have filed the necessary applications and tariffs with the states in order
to provide intrastate long distance services prior to offering such services to
our customers. We cannot guarantee that we will maintain all necessary
authorizations, that IXC will maintain its necessary authorizations or that IXC
will not provide services in a state where it is not properly certificate or
terrified. The occurrence of any or all of the foregoing could have a material
adverse effect on our business, financial condition or operating results.

Regulation Affecting Nutritional and Health Enhancement Products. The
formulation, manufacturing, packaging, labeling, advertising, distribution and
sale of our nutritional products are subject to regulation by a number of
governmental agencies, the most active of which is the FDA, which regulates our
products under the FDCA and regulations promulgated thereunder. Our products
are also subject to regulation by the FTC, the CPSC, the USDA and the EPA. The
FDCA has been amended several times with respect to dietary supplements, most
recently by the NLEA and the DSHEA. Our nutritional products are generally
classified and regulated as dietary supplements under the FDCA, as amended, and
therefore are not subject to pre-market approval by the FDA. However, these
products are subject to extensive labeling regulation by the FDA and can be
removed from the market if shown to be unsafe. Moreover, if the FDA determines
on the basis of our labeling or advertising claims, that the intended use of
any of our nutritional products is for the diagnosis, cure, mitigation,
treatment or prevention of disease, the FDA can regulate those products as
drugs and require pre-market clearance for safety and effectiveness. In
addition, if the FDA determines that we have made claims regarding the effect
of dietary supplements on the structure or function of the body, such claims
could result in the regulation of such products as drugs.

The FTC and certain states regulate advertising, product claims and other
consumer matters, including advertising of our products. In the past several
years, the FTC has instituted enforcement actions against several dietary
supplement companies for false and misleading advertising of certain products.
In addition, the FTC has increased its scrutiny of the use of testimonials. We
cannot guarantee that the FTC will not question our advertising or other
operations. Moreover, we cannot guarantee that a state will not interpret
product claims presumptively valid under federal law as illegal under that
states regulations. Furthermore, our independent associates and customers may
file actions on their own behalf, as a class or otherwise, and may file
complaints with the FTC or state or local consumer affairs offices. These
agencies may take action on their own initiative or on a referral from
independent associates, customers or others, including actions resulting in
entries of consent decrees and the refund of amounts paid by the complaining
independent associate or customer, refunds to an entire class of independent
associates or customers, or other damages, as well as changes in our method of
doing business. A complaint resulting from the practice of one independent
associate, whether or not that practice was authorized by us, could result in
an order affecting some or all independent associates in a particular state.
In addition, an order in one state could influence courts or government
agencies in other states. Proceedings resulting from these complaints may
result in significant defense costs, settlement payments or judgments and could
have a material adverse effect on our business, financial condition or
operating results.

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Although many of the ingredients in our nutritional products are vitamins,
minerals, herbs and other substances for which there is a long history of human
consumption, some of our nutritional products contain ingredients for which
there is little history of human consumption. We have not tested, and have not
engaged any independent third party to test, any of our nutritional products.
Accordingly, we cannot guarantee that our nutritional products, even when used
as directed, will have the effects intended. Although we believe that our
nutritional products are safe when consumed as directed, we have not sponsored
clinical studies on the long-term effect of human consumption.

Regulation of Network Marketing.Our multi-level network marketing system
is subject to extensive government regulation, including, without limitation,
federal and state regulations governing the offer and sale of business
franchises, business opportunities and securities. Various governmental
agencies monitor direct selling activities, and they could require us to supply
information regarding our marketing plan at any time. Although we believe that
our multi-level network marketing system is in material compliance with the
laws and regulations relating to direct selling activities, we cannot guarantee
that future legislation and regulations adopted in particular jurisdictions
will not adversely affect our business, financial condition and operating
results. We have not obtained no-action letters or advance rulings from any
federal or state securities regulator or other governmental agency concerning
the legality of our operations. Federal and state regulators may find our
multi-level network marketing system to be in noncompliance with existing
statutes or regulations as a result of, among other things, misconduct by our
independent associates, over whom we have limited control, the ambiguous nature
of certain of the regulations and the considerable interpretive and enforcement
discretion given to regulators. Any assertion or determination that we or our
independent associates are not in compliance with existing statutes or
regulations could require us to modify our multi-level network marketing
system, create negative publicity, affect distributor morale and loyalty and
have a material adverse effect on our business, financial condition and
operating results. An adverse determination by any one state regulator on a
regulatory matter could influence the decisions of regulatory authorities in
other jurisdictions.

Facilities

We operate out of offices in Atlanta, Georgia consisting of approximately
26,000 square feet of leased space for general and administrative office space,
warehouse space and training space. We may be required to lease or build
additional facilities in order to adequately meet our future needs. We believe
that suitable additional or alternative space will be available in the future
on commercially reasonable terms as needed.

Employees

As of December 31, 2001, we employed approximately 30 people on a
full-time basis. Our IAs are classified as independent contractors. Our
employees are not unionized, and we believe our relationship with our employees
is good.




ITEM 2.  PROPERTIES

See the information provided in Item 1 above entitled Business 
Facilities for information with respect to our properties.




ITEM 3.  LEGAL PROCEEDINGS

We are not a party to, nor is any of our property subject to, any material
legal proceedings, other than routine litigation incidental to our business.




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

No matter was submitted to a vote of our security holders during the
fourth quarter of the year ended June 30, 2001.

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PART II




ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

As of January 14, 2002, there were approximately 991 holders of our Common
Stock of record. There is no established trading market for the Common Stock.

From March, 2000 to May, 2000, we sold 992,022 shares of our Series A
Convertible Preferred Stock solely to accredited investors at a purchase price
of $5.50 per share. The Preferred Stock is: (i) non-voting; (ii) entitled to an
antidilution adjustment only upon a stock split, recapitalization or similar
event; (iii) entitled to a liquidation preference over the Common Stock; and
(iv) convertible into Common Stock at the option of the holder at any time
commencing 14 months following the date of the issuance of the Preferred Stock
and automatically upon the closing of a public offering that occurs at least 14
months following the issuance of the Preferred Stock and that provides us with
gross proceeds of at least $7,500,000.

From October, 2000 to December, 2000 we sold 267,824 shares of common
stock solely to accredited investors at a purchase price of $5.50 per share.

We issued the securities described above in reliance on one an exemption
from registration provided by Section 4(2) of the Securities Act and Rule 506
promulgated thereunder. There were no underwriting discounts or commissions
involved with these sales. Recipients of securities in these transactions
represented their intention to acquire the securities for investment purposes
only and not with a view to or for the sale in connection with any distribution
of those securities, and we affixed appropriate legends to the share
certificates issued in those transactions. All recipients of these securities
had adequate access, through their relationships with us or otherwise, to
information about us.

From January to February of 1999, we conducted our public offering of
common stock. Pursuant to this offering, we sold 46,450 shares of Common Stock
at an offering price of $5.50 per share pursuant to a registration statement on
Form S-1 (Commission File No. 333-38623). Our gross proceeds from the offering
were approximately $255,475; our proceeds, net of offering expenses were
approximately $1,000.

All outstanding shares of our Common Stock are entitled to share equally
in dividends from funds legally available therefor, when, as and if declared by
the Board of Directors. We have never declared or paid any dividends on our
Common Stock and do not plan to declare any dividends in the immediate future.

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ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth selected consolidated financial data for
the periods presented. The statement of operations data for the fiscal years
ended June 30, 1999, 2000 and 2001 and the balance sheet data as of June 30,
1999, 2000 and 2001 are derived from our audited consolidated financial
statements. The statement of operations data for the three months ended
September 30, 2000 and 2001 and the balance sheet data as of September 30, 2001
are derived from our unaudited consolidated financial statements. The
consolidated financial statements as of and for the year ended June 30, 2001
were audited by Cherry, Bekaert & Holland, L.L.P., independent public
accountants. The consolidated financial statements as of and for the years
ended June 30, 1999 and 2000 were audited by Arthur Andersen LLP, independent
public accountants. The selected consolidated financial data should be read in
conjunction with Managements Discussion and Analysis of Financial Condition
and Results of Operations and the Consolidated Financial Statements and the
related notes thereto appearing elsewhere in this Report.

|                                              |                            |                          |           |            |           |                      |           |               |           |      |            |           |            |      |            |            |            |   |            |           |            |   |           |                     |           |   |           |           |           | 
|--------------------------------------------- | -------------------------- | ------------------------ | --------- | ---------- | --------- | -------------------- | --------- | ------------- | --------- | ---- | ---------- | --------- | ---------- | ---- | ---------- | ---------- | ---------- | - | ---------- | --------- | ---------- | - | --------- | ------------------- | --------- | - | --------- | --------- | --------- | 
|                                              |                            |                          |           |            |           |                      |           |               |           |      |            |           |            |      |            |            |            |   |            |           |            |   |           | Three Months Ending
|                                              |                            |                          |           | Jan. 24 to |           | Year Ending June 30, |           | September 30,
|                                              |                            |                          |           | June 30,   |           |                      |           |              
|                                              |                            |                          |           | 1997       |           | 1998                 |           | 1999          |           | 2000 |            | 2001      |            | 2000 |            | 2001      
|                                              |                            |                          |           |            |           |                      |           |               |           |      |            |           |            |      |            |           
|Statement of Operations Data:                 |                            |                          |           |            |           |                      |           |               |           |      |            |           |            |      |            |            |            |   |            |           |            |   |           |                     |           |   |           |          
|Net revenues:                                 |                            |                          |           |            |           |                      |           |               |           |      |            |           |            |      |            |            |            |   |            |           |            |   |           |                     |           |   |           |          
|                                              | Communications services    |                          | $         | 2,322,000  |           |                      | $         | 5,293,000     |           |      | $          | 8,416,000 |            |      | $          | 9,646,000  |            |   | $          | 4,375,000 |            |   | $         | 1,057,000           |           |   | $         | 965,000   |          
|                                              | Nutritional products       |                          |           |           |           |                      |           | 526,000       |           |      |            | 1,371,000 |            |      |            | 17,003,000 |            |   |            | 2,851,000 |            |   |           | 1,259,000           |           |   |           | 462,000   |          
|                                              | Marketing services         |                          |           | 369,000    |           |                      |           | 1,172,000     |           |      |            | 2,557,000 |            |      |            | 2,484,000  |            |   |            | 3,500,000 |            |   |           | 1,022,000           |           |   |           | 648,000   |          
|                                              |                            |                          |           |            |           |                      |           |               |           |      |            |           |            |      |            |            |            |   |            |           |            |   |           |                     |           |   |           |           |          
|                                              |                            | Total net revenues       |           |            | 2,691,000 |                      |           |               | 6,991,000 |      |            |           | 12,344,000 |      |            |            | 29,133,000 |   |            |           | 10,726,000 |   |           |                     | 3,338,000 |   |           |           | 2,075,000 | 
|                                              |                            |                          |           |            |           |                      |           |               |           |      |            |           |            |      |            |            |            |   |            |           |            |   |           |                     |           |   |           |           |          
|Cost of services:                             |                            |                          |           |            |           |                      |           |               |           |      |            |           |            |      |            |            |            |   |            |           |            |   |           |                     |           |   |           |          
|                                              | Communications services    |                          |           | 761,000    |           |                      |           | 1,351,000     |           |      |            | 2,166,000 |            |      |            | 5,292,000  |            |   |            | 3,014,000 |            |   |           | 1,032,000           |           |   |           | 561,000   |          
|                                              | Nutritional products       |                          |           |           |           |                      |           | 294,000       |           |      |            | 662,000   |            |      |            | 3,403,000  |            |   |            | 813,000   |            |   |           | 362,000             |           |   |           | 97,000    |          
|                                              | Marketing services         |                          |           | 255,000    |           |                      |           | 431,000       |           |      |            | 947,000   |            |      |            | 519,000    |            |   |            | 699,000   |            |   |           | 137,000             |           |   |           | 198,000   |          
|                                              |                            |                          |           |            |           |                      |           |               |           |      |            |           |            |      |            |            |            |   |            |           |            |   |           |                     |           |   |           |           |          
|                                              |                            | Total cost of services   |           |            | 1,016,000 |                      |           |               | 2,076,000 |      |            |           | 3,775,000  |      |            |            | 9,214,000  |   |            |           | 4,526,000  |   |           |                     | 1,531,000 |   |           |           | 856,000   | 
|                                              |                            |                          |           |            |           |                      |           |               |           |      |            |           |            |      |            |            |            |   |            |           |            |   |           |                     |           |   |           |           |          
|Gross margin                                  |                            |                          | 1,675,000 |            |           |                      | 4,915,000 |               |           |      | 8,569,000  |           |            |      | 19,919,000 |            |            |   | 6,200,000  |           |            |   | 1,807,000 |                     |           |   | 1,219,000 |          
|                                              |                            |                          |           |            |           |                      |           |               |           |      |            |           |            |      |            |            |            |   |            |           |            |   |           |                     |           |   |           |           |          
|Operating expenses:                           |                            |                          |           |            |           |                      |           |               |           |      |            |           |            |      |            |            |            |   |            |           |            |   |           |                     |           |   |           |          
|                                              | Selling and marketing      |                          |           | 1,089,000  |           |                      |           | 2,665,000     |           |      |            | 5,373,000 |            |      |            | 11,827,000 |            |   |            | 2,721,000 |            |   |           | 881,000             |           |   |           | 660,000   |          
|                                              | General and administrative |                          |           | 660,000    |           |                      |           | 2,344,000     |           |      |            | 4,376,000 |            |      |            | 6,411,000  |            |   |            | 6,987,000 |            |   |           | 1,132,000           |           |   |           | 1,057,000 |          
|                                              |                            |                          |           |            |           |                      |           |               |           |      |            |           |            |      |            |            |            |   |            |           |            |   |           |                     |           |   |           |           |          
|                                              |                            | Total operating expenses |           |            | 1,749,000 |                      |           |               | 5,009,000 |      |            |           | 9,749,000  |      |            |            | 18,238,000 |   |            |           | 9,708,000  |   |           |                     | 2,013,000 |   |           |           | 1,717,000 | 
|                                              |                            |                          |           |            |           |                      |           |               |           |      |            |           |            |      |            |            |            |   |            |           |            |   |           |                     |           |   |           |           |          
|Interest expense (income)                     |                            |                          |          |            |           |                      | 2,000     |               |           |      | 356,000    |           |            |      | 648,000    |            |            |   | 448,000    |           |            |   | 206,000   |                     |           |   | (3,000    | )        
|                                              |                            |                          |           |            |           |                      |           |               |           |      |            |           |            |      |            |            |            |   |            |           |            |   |           |                     |           |   |           |           |          
|Loss before income tax benefit                |                            |                          | (74,000   | )          |           |                      | (96,000   | )             |           |      | (1,536,000 | )         |            |      | 1,033,000  |            |            |   | (3,956,000 | )         |            |   | (46,000   | )                   |           |   | (501,000  | )        
|Income tax benefit                            |                            |                          |          |            |           |                      |          |               |           |      |           |           |            |      |           |            |            |   |           |           |            |   |          |                     |           |   |          |          
|                                              |                            |                          |           |            |           |                      |           |               |           |      |            |           |            |      |            |            |            |   |            |           |            |   |           |                     |           |   |           |           |          
|Net (loss) income                             |                            | $                        | (74,000   | )          |           | $                    | (96,000   | )             |           | $    | (1,536,000 | )         |            | $    | 1,033,000  |            |            | $ | (3,956,000 | )         |            | $ | (252,000  | )                   |           | $ | (501,000  | )        
|                                              |                            |                          |           |            |           |                      |           |               |           |      |            |           |            |      |            |            |            |   |            |           |            |   |           |                     |           |   |           |           |          
|Per Share Data:                               |                            |                          |           |            |           |                      |           |               |           |      |            |           |            |      |            |            |            |   |            |           |            |   |           |                     |           |   |           |          
|Net (loss) income per share                   |                            |                          |           |            |           |                      |           |               |           |      |            |           |            |      |            |            |            |   |            |           |            |   |           |                     |           |   |           |          
|                                              | Basic                      |                          |           | (0.05      | )         |                      | $         | (0.06         | )         |      | $          | (0.96     | )          |      | $          | 0.66       |            |   | $          | (2.33     | )          |   | $         | (0.16               | )         |   | $         | (0.28     | )        
|                                              |                            |                          |           |            |           |                      |           |               |           |      |            |           |            |      |            |            |            |   |            |           |            |   |           |                     |           |   |           |           |          
|                                              | Diluted                    |                          | $         | (0.05      | )         |                      | $         | (0.06         | )         |      | $          | (0.96     | )          |      | $          | 0.56       |            |   |            | (2.33     | )          |   |           | (0.16               | )         |   |           | (0.28     | )        
|                                              |                            |                          |           |            |           |                      |           |               |           |      |            |           |            |      |            |            |            |   |            |           |            |   |           |                     |           |   |           |           |          
|Weighted average number of
shares outstanding |                            |                          |           |            |           |                      |           |               |           |      |            |           |            |      |            |            |            |   |            |           |            |   |           |                     |           |   |           |          
|                                              | Basic                      |                          |           | 1,571,187  |           |                      | $         | 1,571,187     |           |      |            | 1,594,387 |            |      |            | 1,563,092  |            |   |            | 1,700,237 |            |   |           | 1,546,919           |           |   |           | 1,814,743 |          
|                                              |                            |                          |           |            |           |                      |           |               |           |      |            |           |            |      |            |            |            |   |            |           |            |   |           |                     |           |   |           |           |          
|                                              | Diluted                    |                          |           | 1,571,187  |           |                      |           | 1,571,187     |           |      |            | 1,594,387 |            |      |            | 1,844,346  |            |   |            | 1,700,237 |            |   |           | 1,546,919           |           |   |           | 1,814,743 |          
|                                              |                            |                          |           |            |           |                      |           |               |           |      |            |           |            |      |            |            |            |   |            |           |            |   |           |                     |           |   |           |           |          

|                              |  |                |         |                |  |               |           |      |  |      |            |      |  |   |            |  |  |   |           |   |  |   |            |  
|----------------------------- |  | -------------- | ------- | -------------- |  | ------------- | --------- | ---- |  | ---- | ---------- | ---- |  | - | ---------- |  |  | - | --------- | - |  | - | ---------- | -
|                              |  | January 24,    |         |                |  |               |           |      |  |      |            |      |  |   |            |  |  |   |           |   |  |  
|                              |  | 1997 Inception |         |                |  |               |           |      |  |      |            |      |  |   |            |  |  |   |           |   |  |  
|                              |  | to             |         | As of June 30, |  | As of        
|                              |  | June 30,       |         |                |  | September 30,
|                              |  | 1997           |         | 1998           |  | 1999          |           | 2000 |  | 2001 |            | 2001
|                              |  |                |         |                |  |               |           |      |  |      |            |     
|Balance Sheet Data:           |  |                |         |                |  |               |           |      |  |      |            |      |  |   |            |  |  |   |           |   |  |   |            |  
|Working capital               |  | $              | (13,000 | )              |  | $             | 180,000   |      |  | $    | (1,942,000 | )    |  | $ | 2,641,000  |  |  | $ | (973,000  | ) |  | $ | (1,066,000 | )
|Property and equipment, net   |  |                | 92,000  |                |  |               | 169,000   |      |  |      | 5,842,000  |      |  |   | 5,000,000  |  |  |   | 4,742,000 |   |  |   | 4,650,000  |  
|Total assets                  |  |                | 596,000 |                |  |               | 1,263,000 |      |  |      | 8,286,000  |      |  |   | 12,667,000 |  |  |   | 7,428,000 |   |  |   | 7,083,000  |  
|Long-term obligations         |  |                |        |                |  |               |          |      |  |      | 5,395,000  |      |  |   | 3,107,000  |  |  |   | 1,980,000 |   |  |   | 1,872,000  |  
|Shareholders(deficit) equity |  |                | 293,000 |                |  |               | 484,000   |      |  |      | (1,014,000 | )    |  |   | 4,923,000  |  |  |   | 2,308,000 |   |  |   | 2,165,000  |  

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ITEM 7.  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with
the Selected Consolidated Financial Data and the Consolidated Financial
Statements and Notes thereto included elsewhere in this Report. This Report
contains certain forward-looking statements relating to, without limitation,
future economic performance, plans and objectives of management for future
operations and projections of revenues and other financial items that are based
on the beliefs of our management, as well as assumptions made by, and
information currently available to, our management. When used in this Report,
the words intends, believes, anticipates, estimates, may, could,
should, would, will, plans and similar expressions and variations
thereof are intended to identify forward-looking statements. The cautionary
statements set forth elsewhere in this Report identify important factors with
respect to such forward-looking statements, including certain risks and
uncertainties, that could cause actual results to differ materially from those
in such forward-looking statements.

We market communications and Internet services and nutritional and health
enhancement products through our multi-level network marketing system of
independent associates. We operate through our subsidiaries: Maxxis 2000;
Maxxis Communications; and Maxxis Nutritionals.

We are a network marketing company that currently markets 1-Plus long
distance service, prepaid phone cards, 800 service and international
telecommunications services, Internet access and Web-page development and
hosting services, and nutritional and health enhancement products. We believe
that our marketing system allows us to obtain customers for our products and
services in a cost effective manner. We believe that our marketing system also
enhances customer retention because of the personal relationships between our
independent associates and their customers. We believe that the
telecommunications customers obtained by our independent associates are also
potential customers for our nutritional and health enhancement products and
Internet-related services.

We derive revenues from communications services, nutritional products and
marketing services. Communications services revenues are comprised of: (i)
sales of prepaid phone cards to our independent associates; (ii) usage and fees
from long distance services provided by the Maxxis network, net of allowances
for bad debt and billing adjustments; and (iii) subscription fees from our
Internet subscribers. Because of the administrative procedures that must be
complied with in order to establish 1-Plus customers and to collect the usage
and access fees, there is generally a delay of up to two to three months from
the time a prospective customer indicates a desire to become a 1-Plus customer
and the time that we begin to receive revenues from such customers usage. In
September 2000, we entered into an agreement with Broadwing Communications
Services, Inc. for our telecommunications services. Pursuant to our agreement
with Broadwing, we are obligated to purchase at least $50,000 of communications
services per month. If we do not purchase this minimum amount, Broadwing may
terminate their agreement with us or raise the rates and charges we pay them
under our agreement. Our agreement with Broadwing currently renews on a
month-to-month basis.

Nutritional products revenues include sales of private-label nutritional
products to our nutrition customers. Marketing services revenues include
application fees from independent associates and purchases of sales aids by
independent associates, including distributor kits which consist of forms,
promotional brochures, audio and video tapes, marketing materials and
presentation materials. To become an independent associate, individuals (other
than individuals in North Dakota) must complete an application and purchase a
distributor kit. Independent associates also pay an annual non-refundable fee,
which we amortize into revenues over the renewal period, in order to maintain
their status as an independent associate.

Cost of services consists of communications services cost, nutritional
products cost and marketing services cost. Communications services cost
consists of the cost of providing service for prepaid phone cards and the
network services cost to provide or purchase 1-Plus long distance services.
Nutritional products cost consists of the cost of purchasing private label
nutritional products. Marketing services cost includes the costs of purchasing
independent associate distributor kits, sales aids and promotional materials
and training costs. Operating expenses consist of selling and marketing
expenses and general and administrative expenses. Selling and marketing
expenses include commissions paid to independent associates based on: (i) sales
of products to new independent associates sponsored into Maxxis; (ii) usage of
long distance services by customers; and (iii) sales of additional products and
services to customers. General and administrative expenses include costs for
independent associate support services, information systems services and administrative
personnel to support our operations and growth.

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Maxxis has a limited operating history, and our operations are subject to
the risks inherent in the establishment of any new business. We expect that we
will incur substantial initial expenses, and there can be no assurance that we
will maintain profitability. If we continue to grow rapidly, we will be
required to continually expand and modify our operational and financial
systems, add additional independent associates and new customers, and train and
manage both current and new employees and independent associates. Such rapid
growth would place a significant strain on our operational resources and
systems, and the failure to effectively manage any such growth could have a
material adverse effect on our business, financial condition and operating
results.

Results of Operations

The following table sets forth the percentage of total revenues
attributable to each category for the periods shown.

|                    |                            |                          |  |                     |     |               |  |      |     |   |  |    |     |      |  |                    |  |  |  |      |     |   |  |  |  |  |  |    |     |   |  |  |  | 
|------------------- | -------------------------- | ------------------------ |  | ------------------- | --- | ------------- |  | ---- | --- | - |  | -- | --- | ---- |  | ------------------ |  |  |  | ---- | --- | - |  |  |  |  |  | -- | --- | - |  |  |  | 
|                    |                            |                          |  |                     |     |               |  |      |     |   |  |    |     |      |  | Three Months Ended
|                    |                            |                          |  | Year Ended June 30, |     | September 30,
|                    |                            |                          |  |                     |     |              
|                    |                            |                          |  | 1999                |     | 2000          |  | 2001 |     |   |  |    |     | 2000 |  |                    |  |  |  | 2001 |     |   |  | 
|                    |                            |                          |  |                     |     |               |  |      |     |   |  |    |     |      |  |                    |  |  |  |      |     |   |  | 
|Net revenues:       |                            |                          |  |                     |     |               |  |      |     |   |  |    |     |      |  |                    |  |  |  |      |     |   |  |  |  |  |  |   
|                    | Communications services    |                          |  | 68                  | %   |               |  | 33   | %   |   |  | 41 | %   |      |  |                    |  |  |  | 32   | %   |   |  |  |  |  |  | 47 | %  
|                    | Nutritional products       |                          |  | 11                  |     |               |  | 58   |     |   |  | 27 |     |      |  |                    |  |  |  | 38   |     |   |  |  |  |  |  | 22 |    
|                    | Marketing services         |                          |  | 21                  |     |               |  | 9    |     |   |  | 32 |     |      |  |                    |  |  |  | 30   |     |   |  |  |  |  |  | 31 |    
|                    |                            |                          |  |                     |     |               |  |      |     |   |  |    |     |      |  |                    |  |  |  |      |     |   |  |  |  |  |  |    |    
|                    |                            | Total net revenues       |  |                     | 100 | %             |  |      | 100 | % |  |    | 100 | %    |  |                    |  |  |  |      | 100 | % |  |  |  |  |  |    | 100 | %
|                    |                            |                          |  |                     |     |               |  |      |     |   |  |    |     |      |  |                    |  |  |  |      |     |   |  |  |  |  |  |    |    
|Cost of services:   |                            |                          |  |                     |     |               |  |      |     |   |  |    |     |      |  |                    |  |  |  |      |     |   |  |  |  |  |  |   
|                    | Communications services    |                          |  | 18                  | %   |               |  | 18   | %   |   |  | 28 | %   |      |  |                    |  |  |  | 31   | %   |   |  |  |  |  |  | 26 | %  
|                    | Nutritional products       |                          |  | 5                   |     |               |  | 12   |     |   |  | 8  |     |      |  |                    |  |  |  | 11   |     |   |  |  |  |  |  | 5  |    
|                    | Marketing services         |                          |  | 8                   |     |               |  | 2    |     |   |  | 6  |     |      |  |                    |  |  |  | 4    |     |   |  |  |  |  |  | 10 |    
|                    |                            |                          |  |                     |     |               |  |      |     |   |  |    |     |      |  |                    |  |  |  |      |     |   |  |  |  |  |  |    |    
|                    |                            | Total cost of services   |  |                     | 31  | %             |  |      | 32  | % |  |    | 42  | %    |  |                    |  |  |  |      | 46  | % |  |  |  |  |  |    | 41  | %
|Operating expenses: |                            |                          |  |                     |     |               |  |      |     |   |  |    |     |      |  |                    |  |  |  |      |     |   |  |  |  |  |  |   
|                    | Selling and marketing      |                          |  | 44                  | %   |               |  | 41   | %   |   |  | 25 | %   |      |  |                    |  |  |  | 26   | %   |   |  |  |  |  |  | 32 |    
|                    | General and administrative |                          |  | 35                  |     |               |  | 22   |     |   |  | 65 |     |      |  |                    |  |  |  | 34   |     |   |  |  |  |  |  | 51 | %  
|                    |                            |                          |  |                     |     |               |  |      |     |   |  |    |     |      |  |                    |  |  |  |      |     |   |  |  |  |  |  |    |    
|                    |                            | Total operating expenses |  |                     | 79  | %             |  |      | 63  | % |  |    | 90  | %    |  |                    |  |  |  |      | 60  | % |  |  |  |  |  |    | 83  | %
|                    |                            |                          |  |                     |     |               |  |      |     |   |  |    |     |      |  |                    |  |  |  |      |     |   |  |  |  |  |  |    |    

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Three Months Ended September 30, 2001 compared with September 30, 2000

Net Revenues.Total net revenues are derived from sales of communications
services, nutritional products and marketing services. Total net revenues
decreased $1.3 million, or 38%, to $2.1 million for three months ended
September 30, 2001 from $3.4 million for the same period in 2000. The decrease
in total net revenues was primarily due to lower sales promotions related to
our communications, nutritional products and marketing services as well as
worse general economic conditions for the customers of our IAs.

Communications services revenues consist of sales of prepaid phone cards
to IAs and commissions, fees and revenues generated from long distance
customers and fees generated from Internet services and web hosting activities.
Communications services revenues decreased $92,000, or 9%, to $965,000 for
three months ended September 30, 2001 from $1,057,000 for the same period in
2000. This decrease was primarily due to increased competition in the
communications services industry, which caused us to lose customers.

Nutritional products revenues consist of sales of private label
nutritional products. Nutritional products revenues decreased $797,000, or
37%, to $462,000 for three months ended September 30, 2001 from $1.3 million
for the same period in 2000. This decrease was primarily due to the
elimination of sales promotions related to nutritional products for the three
months ending September 30, 2001 compared to the number of sales promotions we
offered for the three months ending September 30, 2000.

Marketing services revenues consist of application fees paid by
independent associates, purchases of sales aids by independent associates, and
registration fees related to annual summit marketing. Marketing services
revenues decreased $374,000, or 37%, to $648,000 for three months ended
September 30, 2001 from $1.0 million for the same period in 2000. This
decrease was due to a decrease in the number of new independent associates for
the three months ending September 30, 2001 compared to the three months ending
September 30, 2000.

Cost of Goods and Services.Cost of goods and services includes
communications services cost, nutritional products cost and marketing services
cost. Total cost of goods and services for the three months ending September
30, 2001 was $856,000, or 41% of total net revenues, as compared to $1.5
million, or 46% of total net revenues, for the same period in 2000. The
decrease in costs of goods and services as a percentage of total net revenues
was due to cost control measures in connection with our telecommunications
switch and better prices on the purchase of our nutritional products inventory.

Communications services cost consisted primarily of the cost of purchasing
activated prepaid phone cards from WorldCom and other outside vendors as well
as the costs of operating the Maxxis Switch. Communications services cost was
$561,000, or 26% of total net revenues for the three months ending September
30, 2001, as compared to $1.0 million, or 31% of total net revenues, for the
same period in 2000. This decrease in cost of communications services was due
primarily to better cost control measures and decreased sales volume for the
three months ending September 30, 2001. Nutritional products cost was $97,000,
or 5% of total net revenues for the three months ending September 30, 2001, as
compared to $362,000, or 11% of total revenues for the comparable 2000 period.
This decrease in the cost of nutritional products as a percentage of total net
revenues was due to better prices from our suppliers. Marketing services cost
was $198,000, or 10% of total net revenues for the three months ending
September 30, 2001, as compared to $137,000, or 4% of total net revenues, for
the same period in 2000. The increase in marketing services cost as a
percentage of total net revenues was due primarily to costs associated with the
introduction of new marketing products that we began to offer for sale to our
independent associates in the three months ending September 30, 2001.

Gross Margin.Gross margin decreased to $1.2 million for the three months
ending September 30, 2001 from $1.8 million for the same period in 2000. As a
percentage of total net revenues, gross margin was 59% for the three months
ending September 30, 2001 as compared to 54% for the three months ending
September 30, 2000.

Operating Expenses.Selling and marketing expenses consist of commissions
paid to independent associates based on (i) sales of products to new
independent associates sponsored into Maxxis, (ii) usage of long distance
services by customers, and (iii) sales of additional products and services to
customers. For the three months ending September 30, 2001, selling and
marketing expenses were $660,000, or 32% of total net revenues, as compared
with $881,000, or 26% of total net revenues, for the same period in 2000. This
decrease was due to the decrease in the number of IAs as well as
lower commissions resulting from lower sales revenue. General and
administrative expenses were $1,057,000, or 51% of

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total net revenues for the
three months ending September 30, 2001, as compared to $1,132,000, or 34% of
total net revenues, for the same period in 2000. Total operating expenses as a
percentage of net revenue increased to 83% of net revenues for the three months
ending September 30, 2001 from 60% of net revenues for the three months ending
September 30, 2000 due to the large portion of general and administrative
expenses that are fixed in nature relative to the decreased total net revenues
for the three months ending September 30, 2001.

Interest Expense. For the three months ending September 30, 2001,
interest expense was $3,000. Interest expense of $206,000 for the three months
ending September 30, 2000 was largely comprised of interest costs related to
the lease of the Maxxis Switch.

Net Income/Loss. Net loss for the three months ending September 30, 2001
was $501,000 as compared to a net loss of $252,000 for the three months ending
September 30, 2000.

Year ended June 30, 2001 compared with year ended June 30, 2000

Net Revenues.Total net revenues decreased $18.4 million, or 63%, to
$10.7 million for fiscal year ended June 30, 2001 from $29.1 million for the
same period in 2000. The decrease in total net revenues was primarily due to a
shift in our focus in fiscal year 2001 from offering sales promotions related
to our communications, nutritional products and marketing services to improving
our infrastructure. We expect that the reported declining trend in net
revenues will continue due to a decline in general economic conditions
affecting our customer base, and a continuing decrease in the number of new IAs
we are able to recruit.

Communications services revenues decreased $5.2 million, or 55%, to $4.4
million for fiscal 2001 from $9.6 million for the same period in 2000. This
decrease was primarily due to a decrease in our customer base for prepaid phone
cards and long distance and Internet services which, in turn, caused us to
eliminate certain revenue-generating communications services.

Nutritional products revenues decreased $14.1 million, or 83%, to $2.9
million for fiscal 2001 from $17.0 million for fiscal 2000. This decrease was
primarily due to the elimination of sales promotions related to nutritional
products for fiscal 2001 compared to the large number of sales promotions we
offered in fiscal 2000.

Marketing services revenues increased $1.0 million, or 41%, to $3.5
million for fiscal 2001 from $2.5 million for the same period in 2000. This
increase was due to an increase in the number of memberships being renewed by
current independent associates.

Cost of Goods and Services.Total cost of goods and services for fiscal
2001 was $4.5 million, or 42% of total net revenues, as compared to $9.2
million, or 32% of total net revenues, for the same period in 2000. The
increase in costs of goods and services as a percentage of total net revenues
was due to a sharp reduction in telecommunications and nutritional products
revenues without a comparable reduction in costs because of the largely fixed
cost nature of our communications cost of services.

Communications services cost was $3.0 million, or 28% of total net
revenues, for fiscal 2001, as compared to $5.3 million, or 18% of total net
revenues, for the same period in 2000. This decrease in cost of communications
services was due primarily to decreased sales volume. Nutritional products
cost was $0.8 million or 8% of total net revenues for fiscal 2001 as compared
to $3.4 million, or 12% of total revenues for the comparable 2000 period. This
decrease in the cost of nutritional products was due primarily to decreased
sales volume. Marketing services cost was $813,000, or 7% of total net
revenues, for fiscal 2001, as compared to $519,000, or 2% of total net
revenues, for the same period in 2000. The increase in marketing services cost
as a percentage of total net revenues was due primarily to costs associated
with the introduction of new marketing products that we began to offer for sale
to our independent associates in fiscal year 2001.

Gross Margin.Gross margin decreased to $6.2 million for fiscal 2001 from
$19.9 million for the same period in 2000. As a percentage of total net
revenues, gross margin was 58% for fiscal 2001 as compared to 68% for fiscal
2000.

Operating Expenses.For fiscal 2001, selling and marketing expenses were
$2.7 million, or 25% of total net revenues, as compared with $11.8 million, or
41% of total net revenues, for the same period in 2000. This decrease was

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due
to the lower commissions resulting from lower sales revenue. General and
administrative expenses were $6.9 million, or 65% of total net revenues for
2001, as compared to $6.4 million, or 22% of total net revenues, for the same
period in 2000. General and administrative expenses increased as a percentage
of total revenues in fiscal 2001 due to the write-off of $1 million for
receivables that we deemed were uncollectible and our purchase for $1.1 million
of a downline from the Maxxis Millionaire Society, a Georgia partnership in
which Ivey Stokes, our Chairman, Chief Executive Officer and President, and
Alvin Curry, our Chief Operating Officer, are partners. Total operating
expenses as a percentage of net revenue increased to 91% of net revenues for
fiscal 2001 from 63% of net revenues for fiscal 2000.

Interest Expense. For the year ended June 30, 2001, interest expense was
$448,000. The expense was largely comprised of interest costs related to the
lease of the Maxxis Switch. Interest expense of $616,000 in fiscal 2000 was
largely comprised of interest cost related to the lease of the Maxxis Switch.

Net Income/Loss. Net Loss for fiscal 2001 was $4.0 million as compared to
a net income of $1.0 million for the same period in 2000.

Year ended June 30, 2000 compared with year ended June 30, 1999

Net Revenues.Total net revenues increased $16.8 million, or 136%, to
$29.1 million for fiscal year ended June 30, 2000 from $12.3 million for the
same period in 1999. The increase in total net revenues was primarily due to
the increase in nutritional sales for the current year.

Communications services revenues increased $1.2 million, or 14.6%, to $9.6
million for fiscal 2000 from $8.4 million for the same period in 1999. This
increase was primarily due to increased phone card sales to our IAs and
increased long distance telephone commissions resulting from our larger
communications customer base and the increase in usage offset by a decrease
caused by lower revenues per minute.

Nutritional products revenues increased $15.6 million, or 1140%, to $17.0
million for fiscal 2000 from $1.4 million for fiscal 1999. This increase was
primarily due to the more expansive product line we offered during fiscal 2000
and the promotional contests associated with our product line.

Marketing services revenues decreased $73,000, or 3%, to $2.5 million for
fiscal 2000 from $2.6 million for the same period in 1999. This decrease was
due to the decrease in the number of new IAs.

Cost of Goods and Services.Total cost of goods and services for fiscal
2000 was $9.2 million, or 32% of total net revenues, as compared to $3.8
million, or 31% of total net revenues, for the same period in 1999 as the
result of flat communications services margins which was partially mitigated by
an improvement in nutritional product and marketing services margins.

Communications services cost was $5.3 million, or 18% of total net
revenues, for fiscal 2000, as compared to $2.2 million, or 18% of total net
revenues, for the same period in 1999. Nutritional products cost was $3.4
million or 12% of total net revenues for fiscal 2000 as compared to $662,000,
or 5% of total revenues for the comparable 1999 period. This increase in the
cost of nutritional products was due primarily to increased sales volume.
Marketing services cost was $519,000, or 2% of total net revenues, for fiscal
2000, as compared to $947,000, or 8% of total net revenues, for the same period
in 1999. The decrease in marketing services cost as a percentage of total net
revenues was due primarily to an increase in overall sales and better control
of expenses.

Gross Margin.Gross margin increased to $19.9 million for fiscal 2000
from $8.6 million for the same period in 1999. As a percentage of total net
revenues, gross margin was 68% for fiscal 2000 as compared to 69% for fiscal
1999.

Operating Expenses.For fiscal 2000, selling and marketing expenses were
$11.8 million, or 41% of total net revenues, as compared with $5.4 million, or
44% of total net revenues, for the same period in 1999. This decrease as a
percentage of revenue was due to greater efficiency resulting from increased
revenues. General and administrative expenses were $6.4 million, or 22% of
total net revenues for 2000, as compared to $4.4 million, or 35% of total net
revenues, for the same period in 1999. General and administrative expenses
increased as a percentage of total revenues in fiscal 2000 due to higher legal
and other expenses incurred in connection with the filing of tariffs in various
states to offer

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long distance service. Total operating expenses as a
percentage of net revenue decreased to 63% of net revenues for fiscal 2000 from
79% of net revenues for fiscal 1999.

Interest Expense. For the year ended June 30, 2000, interest expense was
$616,000. The expense was largely comprised of interest costs related to the
lease of the Maxxis Switch. Interest expense of $338,000 in fiscal 1999 was
largely comprised of interest cost related to the lease of the Maxxis Switch
and interest on the line of credit facility, partially offset by interest
earned on overnight cash balances.

Net Income. Net Income for fiscal 2000 was $1.0 million as compared to a
net loss of $1.6 million for the same period in 1999.

Seasonality

We have historically experienced, and expect to continue to experience,
significant seasonal fluctuations in the recruitment of its IAs and the sale of
our products and services. Our operating results may vary significantly in the
future, partly due to such seasonal fluctuations. Because of the potential
quarterly fluctuations in our revenue and operating results, results for any
particular quarter may not be indicative of future quarterly or annual results.

Liquidity and Capital Resources

From March, 2000 to May, 2000, we sold 992,022 shares of Series A
Convertible Preferred Stock solely to accredited investors at a purchase price
of $5.50 per share.

From October, 2000 to December, 2000, we sold 267,824 shares of common
stock solely to accredited investors at a purchase price of $5.50 per share.

From January to February of 1999, we conducted a public offering of our
common stock. Pursuant to this offering, we sold 46,450 shares of Common Stock
at an offering price of $5.50 per share pursuant to a registration statement on
Form S-1 (Commission File No. 333-38623). Our proceeds from the offering were
approximately $255,475; our proceeds, net of offering expenses were
approximately $1,000.

On November 22, 1998, we entered into a line of credit with the Maxxis
Millionaire Society, a Georgia partnership in which Ivey Stokes, our Chairman,
Chief Executive Officer and President, and Alvin Curry, our Chief Operating
Officer, are partners. The line of credit was amended on May 1, 1999. Pursuant
to the line of credit, Maxxis may borrow up to $2,000,000 at 10% annual
interest. Advances or interest thereon pursuant to the line of credit are
payable on demand. As of June 30, 2001, there were no advances or accrued
interest outstanding on this line of credit.

In November 1997, we entered into a demand promissory note to fund
expenses incurred in connection with the launch of our nutritional product
line. As of March 23, 1998, we had borrowed $200,000 under such promissory
note. On March 23, 1998, we converted the outstanding principal amount under
the promissory note into units (Units) at a price of $5.50 per Unit with each
Unit consisting of one share of convertible preferred stock (the Preferred
Stock) and a warrant (a Warrant) to purchase one share of Common Stock at a
price of $5.50 per share. The Preferred Stock is: (i) non-voting; (ii)
entitled to an antidilution adjustment only upon a stock split,
recapitalization or similar event; (iii) entitled to a liquidation preference
over the Common Stock; and (iv) convertible into Common Stock at the option of
the holder at any time commencing 14 months following the date of the issuance
of the Preferred Stock and automatically upon the closing of a public offering
that occurs at least 14 months following the issuance of the Preferred Stock
and that provides us with gross proceeds of at least $7,500,000. The Warrants
are entitled to an antidilution adjustment only upon a stock split,
recapitalization or similar event, are not exercisable until 14 months
following their date of issuance and remain exercisable at the option of the
holder until the seventh anniversary of their issuance. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of the Preferred Stock and any additional preferred
stock that may be issued in the future.

We anticipate that cash generated from operations, together with
additional borrowings or equity financings, will be sufficient to meet our
capital requirements for the next 12 months. However, if we do not receive
sufficient funds from our operations and borrowings and equity financings to
fund our operations, we may need to raise additional capital. In addition, any
increases in our growth rate, shortfalls in anticipated revenues, increases in
expenses or significant acquisitions could have a material adverse effect on
our liquidity and capital resources and could require us to raise

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additional
capital. We may also need to raise additional funds in order to take advantage
of unanticipated opportunities, such as acquisitions of complementary
businesses or the development of new products, or otherwise respond to
unanticipated competitive pressures. Sources of additional capital may include
venture capital financing, cash flow from operations, additional lines of
credit and private equity and debt financings. Our cash and financing needs
for 2001 and beyond will be dependent on our level of IA and customer growth
and the related capital expenditures, advertising costs and working capital
needs necessary to support such growth. We believe that major capital
expenditures may be necessary over the next few years to develop additional
product lines to sell through our IAs and to develop and/or acquire
information, accounting and/or inventory control systems to monitor and analyze
our growing multi-level network marketing system.

For 2001, net cash used in operating activities was $4.1 million, compared
to net cash provided by operating activities of $2.7 million for 2000.
Operating activities for 2001 consisted primarily of a $4.0 million net loss
and $180,000 in net adjustments to reconcile net income to operating cash
flows, which net adjustments consisted primarily of $1.0 million of non-cash
depreciation and amortization and $1.0 million in non-cash provisions for
doubtful receivables. In addition, changes in significant accounts included a
$742,000 decrease in accrued compensation and a $460,000 decrease in accrued
expenses. The $742,000 decrease in accrued compensation primarily relates to
and includes compensation bonus arrangements we accrued through the year ended
June 30, 2000. We paid these bonuses after June 30, 2000, and they are
reflected as a use of cash during the year ended June 30, 2001. The $460,000
decrease in accrued expenses primarily relates to a reduction in accrued
expenses from our operations through June 30, 2000. We paid these amounts
after to June 30, 2000 and they are reflected as a use of cash during the year
ended June 30, 2001.

Cash used in investing activities was $738,000 for 2001, as compared to
$617,000 for 2000. Investing activities for 2001 consisted of capital
expenditures of $738,000.

Cash provided from financing activities was $155,000 for 2001, as compared
to $2.7 million for 2000. Financing activities for 2001 consisted primarily of
1.2 million in proceeds from the sale of common stock offset by payments
totaling $1.0 million on the lease obligation.




ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

Not applicable.




ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our consolidated financial statements, including our consolidated balance
sheets as of June 30, 1999, 2000 and 2001 and consolidated statements of
operations, shareholders equity (deficit) and cash flows for each of these
years, together with the report of Cherry, Bekaert & Holland, L.L.P. dated
December 21, 2001 and the report of Arthur Andersen LLP, dated September 22,
2000 are included on pages F-1 through F-8 of this Report.

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Supplementary Financial Data
(Unaudited)

|                                           |  |                     |           |               |  |                |           |               |  |  |            |  |  |  |            | 
|------------------------------------------ |  | ------------------- | --------- | ------------- |  | -------------- | --------- | ------------- |  |  | ---------- |  |  |  | ---------- | 
|                                           |  | Three Months Ending
|                                           |  |                    
|                                           |  | Sep. 30, 1999       |           | Dec. 31, 1999 |  | March 31, 2000 |           | June 30, 2000
|                                           |  |                     |           |               |  |                |           |              
|Net revenues                               |  |                     | 4,320,000 |               |  |                | 3,293,000 |               |  |  | 11,317,000 |  |  |  | 10,203,000 | 
|Gross margin                               |  |                     | 2,430,000 |               |  |                | 1,734,000 |               |  |  | 8,480,000  |  |  |  | 7,275,000  | 
|Net (loss) income                          |  |                     | (880,000  | )             |  |                | (632,000  | )             |  |  | 1,963,000  |  |  |  | 582,000    | 
|Net (loss) income per common
sharebasic   |  |                     | (0.54     | )             |  |                | (0.41     | )             |  |  | 1.21       |  |  |  | 0.36       | 
|Net (loss) income per common
sharediluted |  |                     | (0.54     | )             |  |                | (0.41     | )             |  |  | 1.21       |  |  |  | 0.36       | 

|                                           |  |                     |           |               |  |                |            |               |  |               |           |   |  |  |            |   |  |  |           |  
|------------------------------------------ |  | ------------------- | --------- | ------------- |  | -------------- | ---------- | ------------- |  | ------------- | --------- | - |  |  | ---------- | - |  |  | --------- | -
|                                           |  | Three Months Ending
|                                           |  |                    
|                                           |  | Sep. 30, 2000       |           | Dec. 31, 2000 |  | March 31, 2001 |            | June 30, 2001 |  | Sep. 30, 2001
|                                           |  |                     |           |               |  |                |            |               |  |              
|Net revenues                               |  |                     | 3,038,000 |               |  |                | 2,415,000  |               |  |               | 2,734,000 |   |  |  | 2,539,000  |   |  |  | 2,075,000 |  
|Gross margin                               |  |                     | 1,807,000 |               |  |                | 1,383,000  |               |  |               | 1,361,000 |   |  |  | 1,649,000  |   |  |  | 1,219,000 |  
|Net (loss) income                          |  |                     | (252,000  | )             |  |                | (1,460,000 | )             |  |               | (941,000  | ) |  |  | (1,303,000 | ) |  |  | (501,000  | )
|Net (loss) income per
common sharebasic   |  |                     | (0.16     | )             |  |                | (0.80      | )             |  |               | (0.52     | ) |  |  | (0.72      | ) |  |  | (0.28     | )
|Net (loss) income per
common sharediluted |  |                     | (0.16     | )             |  |                | (0.80      | )             |  |               | (0.52     | ) |  |  | (0.72      | ) |  |  | (0.28     | )




ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS IN ACCOUNTING AND FINANCIAL DISCLOSURE

On August 14, 2001, we dismissed the firm of Arthur Andersen LLP as our
independent auditors. The decision to dismiss Arthur Andersen was authorized by
the board of directors.

The reports of Arthur Andersen on our financial statements for the past
two fiscal years did not contain an adverse opinion or a disclaimer of opinion
and were not qualified or modified as to uncertainty, audit scope, or
accounting principles.

In connection with the audits of our financial statements for the fiscal
year ended June 30, 2000 and June 30, 1999, and during any subsequent interim
period preceding the dismissal of Arthur Andersen, there were no disagreements
with Arthur Andersen on any matters of accounting principles or practices,
financial statement disclosure, or auditing scope and procedures which, if not
resolved to the satisfaction of Arthur Andersen, would have caused Arthur
Andersen to make reference to the matter in their report.

During the fiscal years ended June 30, 2000 and June 30, 1999, and during
any subsequent interim period preceding the dismissal of Arthur Andersen, there
were no reportable events to describe as specified in Item 304(a)(1)(v) of
Regulation S-K.

On October 12, 2001, we engaged the firm of Cherry, Bekaert & Holland,
L.L.P. as our independent auditors for the fiscal year ending June 30, 2001, to
audit our financial statements. During our two most recent fiscal years and
the subsequent interim period preceding the engagement of Cherry, Bekaert &
Holland, we did not consult with Cherry, Bekaert & Holland on any matter
requiring disclosure under Item 304(a)(2) of Regulation S-K.

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PART III




ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Executive Officers and Directors

Our directors and executive officers are set forth below. Our Board of
Directors consists of nine directors divided into three classes of directors,
serving staggered three-year terms. Our directors and executive officers are
elected to serve until they resign or are removed, or are otherwise
disqualified to serve, or until their successors are elected and qualified.
Our directors are elected at the annual meeting of shareholders. Our officers
are appointed at the Boards first meeting after each annual meeting of
shareholders. The ages of the persons set forth below are as of December 31,
2001.

|                         |  |     |    |          |  |                                                                            |  |          |      | 
|------------------------ |  | --- | -- | -------- |  | -------------------------------------------------------------------------- |  | -------- | ---- | 
|                         |  |     |    |          |  |                                                                            |  | Term as 
|                         |  |     |    |          |  |                                                                            |  | Director
|Name                     |  | Age |    | Position |  | Expires                                                                   
|                         |  |     |    |          |  |                                                                           
|Ivey J. Stokes           |  |     | 42 |          |  | Chairman of the Board of Directors,
Chief Executive Officer, and President |  |          | 2001 | 
|Alvin Curry              |  |     | 45 |          |  | Chief Operating Officer and Director                                       |  |          | 2001 | 
|DeChane Cameron          |  |     | 32 |          |  | Chief Financial Officer                                                    |  |          |     | 
|Larry W. Gates, II       |  |     | 38 |          |  | Vice President, Secretary, and Director                                    |  |          | 2002 | 
|Henry Steve Johnson      |  |     | 53 |          |  | Director                                                                   |  |          | 2001 | 
|David Finkelstein        |  |     | 43 |          |  | Director                                                                   |  |          | 2002 | 
|Sandra Jordan            |  |     | 50 |          |  | Director                                                                   |  |          | 2003 | 
|George Steinberger       |  |     | 64 |          |  | Director                                                                   |  |          | 2003 | 
|Robert James Glover, Jr. |  |     | 40 |          |  | Director                                                                   |  |          | 2002 | 
|Terry Harris             |  |     | 46 |          |  | Director                                                                   |  |          | 2003 | 

Ivey J. Stokeshas served as our Chairman of the Board of Directors since
our inception and as our Chief Executive Officer and President since September
1999. Mr. Stokes began his marketing career in 1982 at A.L. Williams
Corporation (A.L. Williams) where he became one of less than 400 National
Sales Directors out of 1.3 million insurance agents. In March 1991, Mr. Stokes
left the financial services industry to launch his own independent marketing
firm, Global Marketing Alliance (Global Alliance). Over the next five years,
Mr. Stokes became one of the leading money earners in several national network
marketing firms. Mr. Stokes marketing firm, Global Alliance, has sponsored
and trained over 150,000 distributors since 1991. Mr. Stokes has a bachelors
degree in industrial management from the Georgia Institute of Technology.

Alvin Curryhas served as a director since our inception. He also serves
as our Executive Vice President and Chief Operating Officer. Mr. Curry started
his marketing career in 1986 with A.L. Williams, where he attained the position
of Senior Vice President in less than three years. In March 1991, Mr. Curry
left the financial services industry to join Mr. Stokes in Global Alliance.
Mr. Curry attended Northwest Mississippi Junior College and Tacoma Community
College, and he received a degree from the Knapp College of Business.

DeChane Cameronhas served as Chief Financial Officer for the Maxxis Group
since February 2000 after serving as Controller for Maxxis Communications since
he joined us 1999. Before joining us, Mr. Cameron served as Controller with
Meyer Laminates from 1997 to 1999. Prior to that, Mr. Cameron served as
Accounting Manager with Premier Medical Network from 1994 to 1997. Other
positions held by Mr. Cameron include Senior Accountant with Eastern Foods,
Inc. and Matson, Driscoll & Damico. Mr. Cameron is a member of the National
Association of Management Accountants, the National Association of Black
Accountants, and holds a Bachelors of Science in Accounting from Clemson
University.

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Larry W. Gates, IIhas served as Vice President since our inception and as
a director since May 1997. Mr. Gates became a part-time independent insurance
agent for A.L. Williams in 1989 while serving in the U.S. Army. In 1993, he
left the financial services industry and became a full-time independent
marketer of telecommunications services through his own independent marketing
firm, Classic Enterprises. Mr. Gates built a downline of over 10,000
distributors between 1993 and 1996. Mr. Gates has an associates degree from
Pierre College.

Henry Steve Johnsonhas served as a director since July, 2001. Mr.
Johnson has served as an independent associate with us since March of 1997.
Mr. Johnson has a Masters degree from the University of Michigan.

David Finkelsteinhas served as a director since July, 2001. During the
last five years, Mr. Finkelstein has served as a marketer and educator with
respect to home based business industries. Mr. Finkelstein received a Bachelor
of Arts in Business from Michigan State University.

Sandra Jordanhas served as a director since July, 2001. Ms. Jordan has
served as a professor of law at the University of Pittsburgh school of law
since 1989 and is currently a tenured professor. Ms. Jordan received her Juris
Doctor degree in 1979 from the University of Pittsburgh school of law and
received her Bachelor of Science in Education from Wilbeforce University.

George Steinbergerhas served as a director since July, 2001. Mr.
Steinberger served as a Vice President and Manager of Washington Federal
Savings from 1987-1998, and was a member of the advisory board of the Salem
Housing Authority from 1993 to 1998. Mr. Steinberger attended the University
of Oregon.

Robert James Glover, Jr.has served as a director since our inception.
Mr. Glover started his marketing career as an independent insurance agent with
A.L. Williams in 1985, where he attained the sales position of Senior Vice
President. In December 1993, Mr. Glover left the financial services industry
and became an independent marketer of telecommunications services through his
own independent marketing firm, Glover Enterprises. Mr. Glovers network
marketing firm has sponsored and trained over 10,000 distributors. Mr. Glover
attended Maryland University.

Terry Harrishas served as a director since May 1997. Since 1982, Mr.
Harris has served as Pastor and President of Tacoma Christian Center Inc. Mr.
Harris has a bachelors degree from the University of Puget Sound and attended
Rhema Bible School.

Committees of the Board

The Executive Committee of our Board of Directors exercises, during the
interval between Board meetings, all of the powers of our Board of Directors
with certain limitations. During the year ended June 30, 2001, there were no
meetings of our Executive Committee.

The Audit Committee of the Board of Directors reviews, with our
independent public accountants, our annual financial statements, reviews the
work of such independent public accountants and makes annual recommendations to
the Board of Directors for the appointment of independent public accountants
for the ensuing year. The Audit Committee also reviews the effectiveness of
our financial and accounting functions, organization, operations and
management. During the year ended June 30, 2001, the Audit Committee was
composed of Terry Harris, Charles Bernstein and Phil Lundquist. However,
following the re-composition of our board of directors, our Audit Committee is
currently composed of Terry Harris, David Finkelstein and George Steinberger.
Messrs. Harris, Finkelstein and Steinberger are responsible for the review of
the effectiveness of our financial and accounting functions, organization,
operations and management for the financials as of and for the year ended June
30, 2001.

The Compensation Committee reviews and recommends to the Board of
Directors the compensation and benefits of our officers and administers the
issuance of stock options to our officers, employees, consultants and advisors.
The Compensation Committee also reviews general policy matters relating to the
compensation and benefits of our employees. During the year ended June 30,
2001, there were no meetings of our Compensation Committee.

We do not have a standing nominating committee. The Board of Directors or
the Executive Committee nominates candidates to stand for election as
directors. Our Amended and Restated Bylaws permit shareholders to make
nominations for directors but only if such nominations are made pursuant to
timely notice in writing to the Secretary of

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Maxxis. To be timely, notice of
shareholder nominations for directors must be delivered in writing to the
Secretary of Maxxis no later than 90 days prior to the anniversary of the
previous years annual meeting, together with the identity of the nominator and
the number of shares of Common Stock owned, directly or indirectly, by the
nominator.

During the year ended June 30, 2001, our Board of Directors held one
meeting. All of our directors have attended 75% or more of the aggregate of
all Board meetings and all meetings of committees of which they were members.




ITEM 11.  EXECUTIVE COMPENSATION

Director Compensation

Members of the Board of Directors are reimbursed for their out-of-pocket
expenses for each meeting attended, but otherwise serve without compensation.

Executive Compensation

The following Summary Compensation Table sets forth the compensation
earned by our Chief Executive Officer during the years ended June 30, 2001,
2000 and 1999. No other executive officers received a combined salary and
bonus in excess of $100,000 during the years ended June 30, 2000 and 2001.

Summary Compensation Table

|                                      |  |             |  |        |         |                     |  |   |   |  |  | 
|------------------------------------- |  | ----------- |  | ------ | ------- | ------------------- |  | - | - |  |  | 
|                                      |  |             |  |        |         | Annual Compensation
|                                      |  |             |  |        |         |                    
|Name and Principal Position           |  | Period      |  | Salary |         | Bonus(1)           
|                                      |  |             |  |        |         |                    
|Ivey J. Stokes                        |  | Fiscal 2001 |  | $      | 104,000 |                     |  | $ | 0 | 
|Chief Executive Officer and President |  | Fiscal 2000 |  | $      | 104,000 |                     |  | $ | 0 | 
|                                      |  | Fiscal 1999 |  | $      | 104,000 |                     |  | $ | 0 | 
|                                     
|
|Alvin Curry                           |  | Fiscal 2001 |  | $      | 85,000  |                     |  | $ | 0 | 
|Chief Operating Officer               |  |             |  |        |         |                     |  |   |   |  |  | 



---

|(1) |  | In October 2000, we purchased a downline from the Maxxis Millionaire
Society for $1.1 million. Ivey Stokes, our Chief Executive Officer and Alvin
Curry, our Chief Operating Officer, are partners in the Maxxis Millionaire
Society.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Option Grants During Fiscal 2001

As of June 30, 2001, no options had been granted to our Chief Executive
Officer during the year ended June 30, 2001.

Employment Agreement

In September 1999, our Executive Committee appointed our Chairman of the
Board, Ivey J. Stokes, to serve as our Chief Executive Officer and President.
Mr. Stokes is not presently a party to an employment agreement with us.

Sales Representative Agreements

We entered into independent sales representative agreements (collectively,
the Sales Representative Agreements) with ten independent sales
representatives, including Messrs. Stokes, Gates and Glover. The Sales
Representative Agreements provide for a minimum fee of $800.00 per week. Each
sales representative is also eligible to receive quarterly payments of a
performance bonus which is a percentage of total revenue from Maxxis 2000. To
be paid a bonus, a sales representative must have 180 new activations in a
quarter. The bonus amount is then determined by the
number of open centers in that quarter. The bonus ranges from 1% to 5% based
on Production. Each sales representative

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is an independent contractor, and we
do not exercise control over the activities of the sales representatives other
than as set forth in the Sales Representative Agreements.

Each of the Sales Representative Agreements has a term of one year, and
the term renews daily for an additional year until either party fixes the
remaining term at one year by giving written notice. We can terminate each
sales representative upon death or disability (as defined in the Sales
Representative Agreements) or with or without cause upon delivery to the sales
representative of a notice of termination. If a sales representative is
terminated, the sales representative will receive any accrued fees through the
termination date and any accrued performance bonus, unless the sales
representative is terminated for cause. If the sales representative is our
director or officer, the sales representative shall tender his resignation to
such positions effective as of the termination date. Under the Sales
Representative Agreements, each sales representative agrees to maintain the
confidentiality of our trade secrets and confidential business information.




ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the
beneficial ownership of the Common Stock as of December 31, 2001 by: (i) each
person known by us beneficially to own more than 5% of the outstanding shares
of the Common Stock; (ii) each of our directors; and (iii) all of our directors
and executive officers as a group. Except as otherwise indicated, all persons
listed have sole voting and investment power with respect to their shares.

|                                                                       |  |              |         |               |  |  |      |  
|---------------------------------------------------------------------- |  | ------------ | ------- | ------------- |  |  | ---- | -
|                                                                       |  | Amount of    |         | Percentage of
|                                                                       |  | Beneficial   |         | Common Stock 
|Name and Address(a) of Beneficial Owner                                |  | Ownership(b) |         | Outstanding  
|                                                                       |  |              |         |              
|Alvin Curry(c)                                                         |  |              | 636,363 |               |  |  | 35.1 | %
|King David Trust(d)                                                    |  |              | 454,545 |               |  |  | 25.0 |  
|Cynthia Glover, trustee(e)                                             |  |              | 181,818 |               |  |  | 10.0 |  
|Steve Johnson                                                          |  |              | 3,636   |               |  |  | *    |  
|Sandra Jordan                                                          |  |              | 4,000   |               |  |  |     |  
|Larry W. Gates, II                                                     |  |              | 45,454  |               |  |  | 2.5  |  
|Robert J. Glover(f)                                                    |  |              |        |               |  |  |     |  
|Terry Harris                                                           |  |              | 3,636   |               |  |  | *    |  
|Ivey J. Stokes(g)                                                      |  |              |        |               |  |  |     |  
|David Finkelstein                                                      |  |              | 3,075   |               |  |  | *    |  
|George Steinberger                                                     |  |              | 4,000   |               |  |  | *    |  
|All directors and executive officers as a group
(10 persons) (c)  (g) |  |              | 883,982 |               |  |  | 48.7 |  



---

|*   |  | Less than one percent                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(a) |  | The address of the King David Trust and Alvin Curry is c/o Maxxis Group,
Inc., 1901 Montreal Drive, Suite 108, Tucker, Georgia 30084. The address
of Cynthia Glover, trustee, U/A Louise Glover dated January 10, 1997 is
7839 Taylor Circle, Riverdale, Georgia 30274.                                                                                                                                                                                                                                                                                              
|   
|(b) |  | In accordance with Rule 13d-3 under the Securities Exchange Act of 1934,
as amended, a person is deemed to be the beneficial owner, for purposes of
this table, of any shares of Common Stock if such person has or shares
voting power or investment power with respect to such security, or has the
right to acquire beneficial ownership at any time within 60 days from
December 31, 2001. As used herein, voting power is the power to vote or
direct the voting of shares and investment power is the power to dispose
or direct the disposition of shares.
|   
|(c) |  | Includes 454,545 shares owned by the King David Trust of which Mr. Curry,
a director of, is the trustee. Mr. Curry disclaims beneficial ownership
of such shares.                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|(d) |  | All such shares are owned by the King David Trust of which Mr. Curry is
the trustee and Mr. Stokes minor children are the beneficiaries. Mr.
Stokes, the Chairman of the Board, disclaims beneficial ownership of such
shares.                                                                                                                                                                                                                                                                                                                                      
|   
|(e) |  | All such shares are owned by Cynthia Glover, trustee, U/A Louise Glover
dated January 10, 1997. Ms. Glover is the wife of Robert J. Glover, a
director. Mr. Glover is the sole beneficiary and disclaims beneficial
ownership of such shares. In addition, Ms. Glover disclaims beneficial
ownership of such shares.                                                                                                                                                                                                                                                 
|   
|(f) |  | Excludes 181,818 shares owned by Cynthia Glover, trustee, U/A Louise
Glover dated January 10, 1997 of which Mr. Glover is the sole beneficiary.
Mr. Glover disclaims beneficial ownership of such shares.                                                                                                                                                                                                                                                                                                                                                            
|   
|(g) |  | Excludes 454,545 shares owned by the King David Trust of which Mr.
Stokes minor children are the beneficiaries. Mr. Stokes disclaims
beneficial ownership of such shares.                                                                                                                                                                                                                                                                                                                                                                                           

23



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##### Table of Contents






ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In October 2000, we purchased a downline from the Maxxis Millionaire
Society for $1.1 million. Ivey Stokes, our Chief Executive Officer and Alvin
Curry, our Chief Operating Officer, are partners in the Maxxis Millionaire
Society.

On November 22, 1998, Maxxis entered into a line of credit with the Maxxis
Millionaire Society, a Georgia partnership. The line of credit was amended on
May 1, 1999. Ivey Stokes and Alvin Curry, Maxxis Chairman of the Board and
Chief Operating Officer are partners in the Maxxis Millionaire Society.
Pursuant to the line of credit, Maxxis may borrow up to $2,000,000 at 10%
annual interest.

On February 16, 1997, Glover Enterprises, Inc., an affiliate of Robert J.
Glover, a director, loaned us $50,000 to fund our initial start-up costs. We
have repaid this loan.

During the Inception Period, we paid a fee of $184,000 to IS 14, Inc. (IS
14), a former Delaware corporation which was controlled by certain of our
directors and officers. The IS 14 fee was comprised of compensation for
managerial, marketing and administrative services performed by certain of our
officers and sales representatives prior to the establishment of our payroll.
IS 14 has been dissolved, and we will not make any additional payments to IS
14.

Certain of the transactions described above may be on terms more favorable
to officers, directors and principal shareholders than they could obtain in a
transaction with an unaffiliated third party. We have adopted a policy
requiring that all material transactions between Maxxis and its officers,
directors or other affiliates must: (i) be approved by a majority of the
disinterested members of our Board of Directors; and (ii) be on terms no less
favorable to us than could be obtained from unaffiliated third parties.




PART IV




ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

|       |  |                                                                                                                                      
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------
|(a)(1) |  | Financial Statements                                                                                                                 
|       |  |                                                                                                                                      
|       |  | The following consolidated financial statements are filed as a
part of this Report and are attached hereto as pages F-1 through
F-30:
|       |  |                                                                                                                                      
|       |  | Consolidated Balance Sheets as of June 30, 2000 and 2001                                                                             
|       |  | Consolidated Statements of Operations for the Years Ended June 30,
1999, 2000 and 2001                                               
|       |  | Consolidated Statements of Changes in Shareholders Equity for the
Years Ended June 30, 1999, 2000 and 2001                          
|       |  | Consolidated Statements of Cash Flows for the Years Ended June 30,
1999, 2000 and 2001                                               
|       |  | Notes
to Consolidated Financial Statements                                                                                           
|       |  | Condensed Consolidated Balance Sheet as of September 30, 2001
(unaudited)                                                            
|       |  | Consolidated Statements of Operations for the three months ending
September 30, 2001 and September 30, 2000 (unaudited)              
|       |  | Consolidated Statements of Cash Flows for the three months ending
September 30, 2001 and September 30, 2000 (unaudited)              
|       |  |                                                                                                                                      
|(a)(2) |  | Financial Statement Schedules                                                                                                        

24



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##### Table of Contents



(a)(3)  Exhibits

|         |  |                                                                                                                                                                                              |  |  |  | 
|-------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Exhibit  |  |                                                                                                                                                                                              |  |  |  | 
|Number   |  | Exhibit Description                                                                                                                                                                          |  |  |  | 
|         |  |                                                                                                                                                                                              |  |  |  | 
|2.1*     |  | Plan of Reorganization of the Company effective as of February 17, 1998.                                                                                                                    
|3.1*     |  | Amended and Restated Articles of Incorporation of the Company, as amended to date.                                                                                                          
|3.2*     |  | Amended and Restated Bylaws of the Company, as amended to date.                                                                                                                             
|4.1*     |  | See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated Articles of
Incorporation and Amended and Restated Bylaws defining the rights of holders of Common
Stock of the Company.
|4.2*     |  | Specimen Common Stock certificate.                                                                                                                                                          
|4.3*     |  | Shareholders Agreement, dated as of September 1, 1997 among the Company and the
holders of Class A Common Stock.                                                                            
|4.4*     |  | Amended and Restated Shareholders Agreement, dated as of February 18, 1998 among the
Company and certain holders of its Common Stock.                                                       
|10.1*    |  | Form of Employment Agreement by and between the Company and certain of its officers.                                                                                                        
|10.2*    |  | Form of Independent Sales Representative Agreement by and between the Company and
certain of its sales representatives.                                                                     
|10.3*    |  | Software License Agreement between Summit V. Inc., a subsidiary of Jenkon
International, Inc. and the Company dated February 2, 1997.                                                       
|10.4*    |  | Software Service Agreement between Summit V. Inc., a subsidiary of Jenkon
International, Inc. and the Company dated February 2, 1997.                                                       
|10.5*    |  | Equipment Purchase Agreement between Summit V. Inc., a subsidiary of Jenkon
International, Inc. and the Company dated February 2, 1997.                                                     
|10.6*    |  | Agreement for 1-Plus Services between Colorado River Communications Corporation and
the Company dated February 20, 1997.                                                                   
|10.7*    |  | Sublease Agreement between DowElanco and the Company dated February 14, 1997.                                                                                                               
|10.8*    |  | Warehouse lease between Malon D. Mimms and the Company dated March 17, 1997.                                                                                                                
|10.9*    |  | Warehouse lease between Malon D. Mimms and the Company dated June 23, 1997.                                                                                                                 
|10.10*   |  | Sub-Sublease Agreement between the Company and Simons Engineering, Inc. dated
September 1, 1997.                                                                                            
|10.11**  |  | Maxxis Group, Inc. 1998 Stock Option Plan.                                                                                                                                                  
|10.12**  |  | Lease Amendment Agreement dated June 5, 1998 among Malon D. Mimms, the Company and
Richard Bowers & Co.                                                                                     
|10.13**  |  | Lease Amendment Agreement dated August 14, 1998 among Malon D. Mimms, the Company and
Richard Bowers & Co.                                                                                  
|10.14#   |  | Software Purchase Agreement between UsefulWare Incorporated and the Company dated as
of August 13, 1998.                                                                                   
|10.15#   |  | Asset Purchase Agreement by and among Cherry Communications Incorporated (Cherry),
World Access, Inc. (World Access) and the Company dated as of September 29, 1998.                    
|10.16#   |  | Promissory Note by the Company in favor of Cherry dated September 29, 1998.                                                                                                                 
|10.17#   |  | Security Agreement between the Company and World Access dated as of September 29, 1998.                                                                                                     
|10.18#   |  | Software License Agreement between Alcatel USA Marketing, Inc. and the Company dated
as of September 29, 1998.                                                                              
|10.19#   |  | Sublease between Cherry and the Company dated as of September 30, 1998.                                                                                                                     
|10.20#   |  | Master Lease Agreement between Rockford Industries, Inc. and the Company dated as of
September 29, 1998 (World Access)                                                                      
|10.21#   |  | Master Lease Agreement between Rockford Industries, Inc. and the Company dated as of
September 29, 1998 (NACT Telecommunications, Inc.)                                                     
|10.22##  |  | Line of Credit between the Company and the Maxxis Millionaire Society dated as of
November 22, 1998.                                                                                        
|10.23##  |  | Investment Agreement between InteReach Internet Services, LLC and the Company dated as
of December 8, 1998.                                                                                 
|10.24##  |  | Virtual ISP Agreement between InteReach Internet Services, Inc. and the Company dated
as of December 8, 1998.                                                                               
|10.25### |  | Digital Services Agreement between Worldcom Network Services, Inc. and the Company
dated as of January 21, 1999                                                                             

25



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##### Table of Contents



|          |  |                                                                                                                                                                           |  |  |  | 
|--------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|10.26### |  | Telecommunications Services Agreement between Worldcom Network Services, Inc. and the
Maxxis Communications dated as of January 21, 1999.                                
|10.27###  |  | Program Enrollment Terms to the Telecommunications Services Agreement dated as of
January 21, 1999 between Worldcom Network Services, Inc. and the Maxxis
Communications.
|10.28### |  | Master Service Agreement between IXC Communications Services, Inc. and the Company
dated as of March 25, 1999.                                                           
|10.29###  |  | Amendment to the Line of Credit between the Company and the Maxxis Millionaire Society
dated as of May 1, 1999.                                                          
|21.1###   |  | Subsidiaries of the Company.                                                                                                                                             
|24.1      |  | Power of Attorney (contained on the signature page hereof)                                                                                                               



---

|*   |  | Incorporated by reference to the Companys Registration Statement on Form
S-1 (Registration No. 333-38623).                                                                                                                                                                      
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|**  |  | Incorporated by reference to the Companys Form 10-K for the year ended
June 30, 1998 as filed with the Commission on September 25, 1998.                                                                                                                                        
|#   |  | Incorporated by reference to the Companys Form 109-Q for the quarter
ended September 30, 1998 as filed with the Commission on November 12,
1998.                                                                                                                                
|##  |  | Incorporated by reference to the Companys Form 10-Q for the quarter
ended December 31, 1998 as filed with the Commission on February 16,
1999.                                                                                                                                  
|### |  | Incorporated by reference to the Companys Form 10-K for the year
ended June 30, 1999 as filed with the Commission on October 13, 2000.                                                                                                                                          
|   |  | Confidential treatment has been requested for certain confidential
portions of this exhibit pursuant to Rule 406 under the Securities
Act. In accordance with Rule 406, these confidential portions have
been omitted from this exhibit and filed separately with the
Commission.
|   
|(b) |  | Reports on Form 8-K                                                                                                                                                                                                                                                              



| |                                                                                                               
| | --------------------------------------------------------------------------------------------------------------
| | Form 8-K filed August 20, 2001                                                                                
|
| | Filing under Item 4 regarding the dismissal of the firm Arthur Andersen,
LLP as our independent auditors.     
|
| | Form 8-K filed October 17, 2001                                                                               
|
| | Filing under Item 4 regarding the engagement of Cherry, Bekaert &
Holland, L.L.P. as our independent auditors.

26



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment No. 2 to
its Report on Form 10-K to be signed on its behalf by the undersigned,
thereunto duly authorized.

|                |  |                    |                                                     
|--------------- |  | ------------------ | ----------------------------------------------------
|                |  | MAXXIS GROUP, INC.
|               
|August 28, 2002 |  | By:                | /s/ Alvin C.
Curry                                  
|                |  |                    |                                                     
|                |  |                    | Alvin C. Curry
Chief Executive Officer and President

POWER OF ATTORNEY

KNOW BY ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints jointly and severally, Alvin C. Curry
and DeChane Cameron, and each one of them, his attorneys-in-fact, each with the
power of substitution, for him in any and all capacities, to sign any and all
amendments to this Annual Report (Form 10-K) and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each said attorney-in-fact, or his substitute or substitutes, may do or cause
to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Amendment No. 2 to the Registrants Report on Form 10-K has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.

|                 |  |                                                                                     
|---------------- |  | ------------------------------------------------------------------------------------
|August 28, 2002  |  | /s/ Ivey J.
Stokes                                                                  
|                 |  |                                                                                     
|                 |  | Ivey J. Stokes
Chairman of the Board                                                
|                 |  |                                                                                     
|August 28, 2002  |  | /s/ DeChane
Cameron                                                                 
|                 |  |                                                                                     
|                 |  | DeChane Cameron
Chief Financial Officer
(Principal financial and accounting officer)
|                 |  |                                                                                     
|August    , 2002 |  |                                                                                     
|                 |  |                                                                                     
|                 |  | Steve Johnson
Director                                                              
|                 |  |                                                                                     
|August 28, 2002  |  | /s/ Larry W.
Gates, II*                                                             
|                 |  |                                                                                     
|                 |  | Larry W. Gates, II
Vice President, Secretary, and Director                          
|                 |  |                                                                                     
|August    , 2002 |  |                                                                                     
|                 |  |                                                                                     
|                 |  | Sandra Jordan
Director                                                              

27



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##### Table of Contents



|                 |  |                                                                                                                   
|---------------- |  | ------------------------------------------------------------------------------------------------------------------
|August 28, 2002  |  | /s/ Alvin Curry                                                                                                   
|                 |  |                                                                                                                   
|                 |  | Alvin Curry
Chief Executive Officer, President,
Chief Operating Officer and Director
(Principal executive officer)
|                 |  |                                                                                                                   
|August 28, 2002  |  | /s/ Robert J.
Glover, Jr.*                                                                                        
|                 |  |                                                                                                                   
|                 |  | Robert J. Glover, Jr.
Director                                                                                    
|                 |  |                                                                                                                   
|August 28, 2002  |  | /s/ Terry Harris*                                                                                                 
|                 |  |                                                                                                                   
|                 |  | Terry Harris
Director                                                                                             
|                 |  |                                                                                                                   
|August    , 2002 |  |                                                                                                                   
|                 |  |                                                                                                                   
|                 |  | David Finkelstein
Director                                                                                        
|                 |  |                                                                                                                   
|August    , 2002 |  |                                                                                                                   
|                 |  |                                                                                                                   
|                 |  | George Steinberger
Director                                                                                       
|                 |  |                                                                                                                   
|August 28, 2002  |  | By: /s/
DeChane Cameron                                                                                           
|                 |  |                                                                                                                   
|                 |  | *DeChane Cameron
Attorney-in-fact                                                                                 

28



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##### Table of Contents






INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                                                        |  |      |      | 
|----------------------------------------------------------------------------------------------------------------------- |  | ---- | ---- | 
|                                                                                                                        |  | Page
|                                                                                                                        |  |     
|Independent Auditors Report                                                                                            |  |      | F-2  | 
|Report of Independent Public Accountants                                                                                |  |      | F-3  | 
|Consolidated Balance Sheets as of June 30, 1999, 2000 and 2001                                                          |  |      | F-4  | 
|Consolidated Statements of Operations for the Years Ended June 30, 1999, 2000 and 2001                                  |  |      | F-6  | 
|Consolidated Statements of Changes in Shareholders Equity for the Years Ended June 30, 1999, 2000 and
2001             |  |      | F-7  | 
|Consolidated Statements of Cash Flows for the Years Ended June 30, 1999, 2000 and 2001                                  |  |      | F-8  | 
|Notes to Consolidated Financial Statements                                                                              |  |      | F-10 | 
|Condensed Consolidated Balance Sheet as of September 30, 2001 (unaudited)                                               |  |      | F-28 | 
|Consolidated Statements of Operations for the three months ending September 30, 2001 and September 30,
2000 (unaudited) |  |      | F-29 | 
|Consolidated Statements of Cash Flows for the three months ending September 30, 2001 and September 30,
2000 (unaudited) |  |      | F-30 | 

F-1



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##### Table of Contents



[Cherry, Bekaert & Holland, L.L.P. letterhead]

INDEPENDENT AUDITORS REPORT

To the Board of Directors

Maxxis Group, Inc. and Subsidiaries
Tucker, Georgia

We have audited the accompanying consolidated balance sheet of Maxxis Group, Inc. and Subsidiaries as of June 30, 2001 and the related consolidated
statements of operations, shareholders equity and cash flows for the year then ended. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements based on our audit.

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

In our opinion, the 2001 financial statements referred to above present fairly, in all material respects, the financial position of Maxxis Group, Inc. and
Subsidiaries as of June 30, 2001 and the results of their operations and their cash flows for the year ended June 30, 2001 in conformity with accounting
principles generally accepted in the United States.

/s/ Cherry, Bekaert & Holland, L.L.P.

Atlanta, Georgia
January 31, 2002

F-2



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##### Table of Contents



[Andersen letterhead]

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Maxxis Group, Inc. and Subsidiaries:

We have audited the accompanying consolidated balance sheets of MAXXIS GROUP, INC. (a Georgia corporation) AND SUBSIDIARIES as of June 30, 1999 and 2000 and
the related consolidated statements of operations, shareholders equity (deficit), and cash flows for the years then ended. These financial statements are
the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Maxxis Group, Inc. and
subsidiaries as of June 30, 1999 and 2000 and the results of their operations and their cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States

/s/ Arthur Andersen LLP

ARTHUR ANDERSEN LLP

Atlanta, Georgia
September 22, 2000

F-3



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##### Table of Contents



MAXXIS GROUP, INC AND SUBSIDIARIES

Consolidated Balance Sheets
June 30, 2001 and 2000

Assets

|                                            |                                                                                                                     |                      |           |           |           |      |           |           |            | 
|------------------------------------------- | ------------------------------------------------------------------------------------------------------------------- | -------------------- | --------- | --------- | --------- | ---- | --------- | --------- | ---------- | 
|                                            |                                                                                                                     |                      |           | 2001      |           | 2000
|                                            |                                                                                                                     |                      |           |           |           |     
|Current Assets                              |                                                                                                                     |                      |           |           |           |      |           |          
|                                            | Cash and cash equivalents                                                                                           |                      | $         | 148,000   |           |      | $         | 4,867,000 |           
|                                            | Accounts receivable, net of allowance for doubtful
accounts of $484,000 and $931,000 in 2001 and
2000, respectively |                      |           | 341,000   |           |      |           | 1,081,000 |           
|                                            | Inventories, net                                                                                                    |                      |           | 1,402,000 |           |      |           | 1,093,000 |           
|                                            | Prepaid expenses and other current assets                                                                           |                      |           | 276,000   |           |      |           | 237,000   |           
|                                            |                                                                                                                     |                      |           |           |           |      |           |          
|                                            |                                                                                                                     | Total Current Assets |           |           | 2,167,000 |      |           |           | 7,278,000  | 
|                                            |                                                                                                                     |                      |           |           |           |      |           |          
|Property and Equipment, net                 |                                                                                                                     |                      | 4,742,000 |           |           |      | 5,000,000 |          
|                                            |                                                                                                                     |                      |           |           |           |      |           |          
|Capitalized Software Development Costs, net |                                                                                                                     |                      | 396,000   |           |           |      | 358,000   |          
|                                            |                                                                                                                     |                      |           |           |           |      |           |          
|Other Assets                                |                                                                                                                     |                      | 123,000   |           |           |      | 31,000    |          
|                                            |                                                                                                                     |                      |           |           |           |      |           |          
|                                            |                                                                                                                     | Total Assets         |           | $         | 7,428,000 |      |           | $         | 12,667,000 | 
|                                            |                                                                                                                     |                      |           |           |           |      |           |          

F-4



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Liabilities and Shareholders Equity (Deficit)

|                                    |                                                                                                                                                |                                                                                                                                                                                                                                                      |                                                      |                             |           |           |           |          |           |            |           | 
|----------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------- | --------------------------- | --------- | --------- | --------- | -------- | --------- | ---------- | --------- | 
|                                    |                                                                                                                                                |                                                                                                                                                                                                                                                      |                                                      |                             |           | 2001      |           | 2000    
|                                    |                                                                                                                                                |                                                                                                                                                                                                                                                      |                                                      |                             |           |           |           |         
|Current Liabilities                 |                                                                                                                                                |                                                                                                                                                                                                                                                      |                                                      |                             |           |           |           |         
|                                    | Line of Credit                                                                                                                                 |                                                                                                                                                                                                                                                      | $                                                    |                            |           |           | $         | 65,000   |          
|                                    | Accounts payable                                                                                                                               |                                                                                                                                                                                                                                                      |                                                      | 1,001,000                   |           |           |           | 814,000  |          
|                                    | Commissions payable                                                                                                                            |                                                                                                                                                                                                                                                      |                                                      | 114,000                     |           |           |           | 160,000  |          
|                                    | Accrued compensation                                                                                                                           |                                                                                                                                                                                                                                                      |                                                      | 14,000                      |           |           |           | 756,000  |          
|                                    | Sales tax payable                                                                                                                              |                                                                                                                                                                                                                                                      |                                                      | 316,000                     |           |           |           | 177,000  |          
|                                    | Accrued expenses                                                                                                                               |                                                                                                                                                                                                                                                      |                                                      | 100,000                     |           |           |           | 813,000  |          
|                                    | Current maturities of capital lease obligations                                                                                                |                                                                                                                                                                                                                                                      |                                                      | 1,233,000                   |           |           |           | 974,000  |          
|                                    | Deferred revenue                                                                                                                               |                                                                                                                                                                                                                                                      |                                                      | 362,000                     |           |           |           | 878,000  |          
|                                    |                                                                                                                                                |                                                                                                                                                                                                                                                      |                                                      |                             |           |           |           |         
|                                    |                                                                                                                                                |                                                                                                                                                                                                                                                      |                                                      | Total Current Liabilities   |           |           | 3,140,000 |          |           |            | 4,637,000 | 
|                                    |                                                                                                                                                |                                                                                                                                                                                                                                                      |                                                      |                             |           |           |           |         
|Contracts                           |                                                                                                                                                |                                                                                                                                                                                                                                                      | 110,000                                              |                             |           |           |          |         
|Long-term capital lease obligations |                                                                                                                                                |                                                                                                                                                                                                                                                      | 1,870,000                                            |                             |           |           | 3,107,000 |         
|                                    |                                                                                                                                                |                                                                                                                                                                                                                                                      |                                                      |                             |           |           |           |         
|                                    |                                                                                                                                                |                                                                                                                                                                                                                                                      |                                                      | Total Long-Term Liabilities |           |           | 1,980,000 |          |           |            | 3,107,000 | 
|                                    |                                                                                                                                                |                                                                                                                                                                                                                                                      |                                                      |                             |           |           |           |         
|Commitments and Contingencies       |                                                                                                                                                |                                                                                                                                                                                                                                                      |                                                      |                             |           |           |           |         
|Shareholders
Equity (Deficit):     |                                                                                                                                                |                                                                                                                                                                                                                                                      |                                                      |                             |           |           |           |         
|                                    |                                                                                                                                                | Preferred stock, no par value; 10,000,000 shares
authorized, 1,000,000 shares
designated as Series A Convertible Preferred
Stock, 962,814 and 992,814 Series A Convertible
Preferred stock shares issued and outstanding 2001
and 2000, respectively |                                                      |                             | 4,976,000 |           |           |          | 5,141,000 |           
|                                    | Common Stock, no par value; 20,000,000 shares
authorized, 1,814,743 and 1,546,919 shares issued and
outstanding in 2001 and 2000, respectively |                                                                                                                                                                                                                                                      |                                                      | 1,818,000                   |           |           |           | 455,000  |          
|                                    | Subscription receivable                                                                                                                        |                                                                                                                                                                                                                                                      |                                                      | 143,000                     |           |           |           |         |          
|                                    | Accumulated deficit                                                                                                                            |                                                                                                                                                                                                                                                      |                                                      | (4,629,000                  | )         |           |           | (673,000 | )        
|                                    |                                                                                                                                                |                                                                                                                                                                                                                                                      |                                                      |                             |           |           |           |         
|                                    |                                                                                                                                                |                                                                                                                                                                                                                                                      | Total Shareholders Equity (Deficit)                 |                             |           | 2,308,000 |           |          |           | 4,923,000  |          
|                                    |                                                                                                                                                |                                                                                                                                                                                                                                                      |                                                      |                             |           |           |           |         
|                                    |                                                                                                                                                |                                                                                                                                                                                                                                                      | Total Liabilities and Shareholders Equity (Deficit) |                             | $         | 7,428,000 |           |          | $         | 12,667,000 |          
|                                    |                                                                                                                                                |                                                                                                                                                                                                                                                      |                                                      |                             |           |           |           |         

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

F-5



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##### Table of Contents



MAXXIS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Operations
For the years ended June 30, 2001, 2000, and 1999

|                                         |                            |                                       |            |           |            |      |            |            |            |   |            |           |            | 
|---------------------------------------- | -------------------------- | ------------------------------------- | ---------- | --------- | ---------- | ---- | ---------- | ---------- | ---------- | - | ---------- | --------- | ---------- | 
|                                         |                            |                                       |            | 2001      |            | 2000 |            | 1999      
|                                         |                            |                                       |            |           |            |      |            |           
|Net Revenues                             |                            |                                       |            |           |            |      |            |            |            |   |            |          
|                                         | Communications services    |                                       | $          | 4,375,000 |            |      | $          | 9,646,000  |            |   | $          | 8,416,000 |           
|                                         | Nutritional products       |                                       |            | 2,851,000 |            |      |            | 17,003,000 |            |   |            | 1,371,000 |           
|                                         | Marketing services         |                                       |            | 3,500,000 |            |      |            | 2,484,000  |            |   |            | 2,557,000 |           
|                                         |                            |                                       |            |           |            |      |            |            |            |   |            |          
|                                         |                            | Total Net Revenues                    |            |           | 10,726,000 |      |            |            | 29,133,000 |   |            |           | 12,344,000 | 
|                                         |                            |                                       |            |           |            |      |            |            |            |   |            |          
|Cost of Goods and Services Sold          |                            |                                       |            |           |            |      |            |            |            |   |            |          
|                                         | Communications services    |                                       |            | 3,014,000 |            |      |            | 5,292,000  |            |   |            | 2,166,000 |           
|                                         | Nutritional products       |                                       |            | 813,000   |            |      |            | 3,403,000  |            |   |            | 662,000   |           
|                                         | Marketing services         |                                       |            | 699,000   |            |      |            | 519,000    |            |   |            | 947,000   |           
|                                         |                            |                                       |            |           |            |      |            |            |            |   |            |          
|                                         |                            | Total Cost of Goods and Services Sold |            |           | 4,526,000  |      |            |            | 9,214,000  |   |            |           | 3,775,000  | 
|                                         |                            |                                       |            |           |            |      |            |            |            |   |            |          
|Gross Margin                             |                            |                                       | 6,200,000  |           |            |      | 19,919,000 |            |            |   | 8,569,000  |          
|                                         |                            |                                       |            |           |            |      |            |            |            |   |            |          
|Operating Expenses                       |                            |                                       |            |           |            |      |            |            |            |   |            |          
|                                         | Selling and marketing      |                                       |            | 2,721,000 |            |      |            | 11,827,000 |            |   |            | 5,373,000 |           
|                                         | General and administrative |                                       |            | 6,987,000 |            |      |            | 6,411,000  |            |   |            | 4,376,000 |           
|                                         |                            |                                       |            |           |            |      |            |            |            |   |            |          
|                                         |                            | Total Operating Expenses              |            |           | 9,708,000  |      |            |            | 18,238,000 |   |            |           | 9,749,000  | 
|                                         |                            |                                       |            |           |            |      |            |            |            |   |            |          
|Interest and Other Expenses              |                            |                                       |            |           |            |      |            |            |            |   |            |          
|                                         | Interest expense           |                                       |            | 448,000   |            |      |            | 616,000    |            |   |            | 338,000   |           
|                                         | Other expense              |                                       |            |          |            |      |            | 32,000     |            |   |            | 18,000    |           
|                                         |                            |                                       |            |           |            |      |            |            |            |   |            |          
|                                         |                            | Total Interest and Other Expenses     |            |           | 448,000    |      |            |            | 648,000    |   |            |           | 356,000    | 
|                                         |                            |                                       |            |           |            |      |            |            |            |   |            |          
|Income (Loss) Before Income Taxes        |                            |                                       | (3,956,000 | )         |            |      | 1,033,000  |            |            |   | (1,536,000 | )        
|Income Taxes                             |                            |                                       |           |           |            |      |           |            |            |   |           |          
|                                         |                            |                                       |            |           |            |      |            |            |            |   |            |          
|Income (Loss)                            |                            | $                                     | (3,956,000 | )         |            | $    | 1,033,000  |            |            | $ | (1,536,000 | )        
|                                         |                            |                                       |            |           |            |      |            |            |            |   |            |          
|Income (Loss) Per Share:                 |                            |                                       |            |           |            |      |            |            |            |   |            |          
|                                         | Basic                      |                                       | $          | (2.33     | )          |      | $          | 0.66       |            |   | $          | (0.96     | )         
|                                         |                            |                                       |            |           |            |      |            |            |            |   |            |          
|                                         | Diluted                    |                                       | $          | (2.33     | )          |      | $          | 0.56       |            |   | $          | (0.96     | )         
|                                         |                            |                                       |            |           |            |      |            |            |            |   |            |          
|Weighted Average Number of Shares:       |                            |                                       |            |           |            |      |            |            |            |   |            |          
|                                         | Basic                      |                                       |            | 1,700,237 |            |      |            | 1,563,092  |            |   |            | 1,594,387 |           
|                                         |                            |                                       |            |           |            |      |            |            |            |   |            |          
|                                         | Diluted                    |                                       |            | 1,700,237 |            |      |            | 1,844,346  |            |   |            | 1,594,387 |           
|                                         |                            |                                       |            |           |            |      |            |            |            |   |            |          
|Effect of change in accounting estimate: |                            |                                       |            |           |            |      |            |            |            |   |            |          
|                                         | Increase net income        |                                       | $          | 776,000   |            |      | $          |           |            |   | $          |          |           
|                                         |                            |                                       |            |           |            |      |            |            |            |   |            |          
|                                         | Increase income per share  |                                       | $          | 0.46      |            |      | $          |           |            |   | $          |          |           
|                                         |                            |                                       |            |           |            |      |            |            |            |   |            |          

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

F-6



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##### Table of Contents



MAXXIS GROUP, INC AND SUBSIDIARIES

Consolidated Statements of Shareholders Equity (Deficit)
For the years ended June 30, 2001, 2000, and 1999

|                                                      |  |                 |         |              |  |             |           |             |  |              |           |         |  |            |           |       |  |   |          |   |  |   |            |   |  |   |         |  |  |   |            |  
|----------------------------------------------------- |  | --------------- | ------- | ------------ |  | ----------- | --------- | ----------- |  | ------------ | --------- | ------- |  | ---------- | --------- | ----- |  | - | -------- | - |  | - | ---------- | - |  | - | ------- |  |  | - | ---------- | -
|                                                      |  | Preferred Stock |         | Common Stock |  | Shareholder |           |             |  |              |           |         |  |            |           |       |  |  
|                                                      |  |                 |         |              |  | Note        |           | Accumulated |  | Subscription |           |         |  |           
|                                                      |  | Shares          |         | Amount       |  | Shares      |           | Amount      |  | Receivable   |           | Deficit |  | Receivable |           | Total
|                                                      |  |                 |         |              |  |             |           |             |  |              |           |         |  |            |           |      
|Balance, June 30, 1998                                |  |                 | 36,359  |              |  | $           | 200,000   |             |  |              | 1,573,196 |         |  | $          | 574,000   |       |  | $ | (120,000 | ) |  | $ | (170,000   | ) |  | $ |        |  |  | $ | 484,000    |  
|Issuance of common stock, net of
issuance expenses    |  |                 |        |              |  |             |          |             |  |              | 46,450    |         |  |            | 1,000     |       |  |   |         |   |  |   |           |   |  |   |        |  |  |   | 1,000      |  
|Compensation expense for stock
option issuance        |  |                 |        |              |  |             |          |             |  |              |          |         |  |            | 37,000    |       |  |   |         |   |  |   |           |   |  |   |        |  |  |   | 37,000     |  
|Net Loss                                              |  |                 |        |              |  |             |          |             |  |              |          |         |  |            |          |       |  |   |         |   |  |   | (1,536,000 | ) |  |   |        |  |  |   | (1,536,000 | )
|                                                      |  |                 |         |              |  |             |           |             |  |              |           |         |  |            |           |       |  |   |          |   |  |   |            |   |  |   |         |  |  |   |            |  
|Balance, June 30, 1999                                |  |                 | 36,359  |              |  |             | 200,000   |             |  |              | 1,619,646 |         |  |            | 612,000   |       |  |   | (120,000 | ) |  |   | (1,706,000 | ) |  |   |        |  |  |   | (1,014,000 | )
|Issuance of preferred stock, net of
issuance expenses |  |                 | 997,000 |              |  |             | 5,164,000 |             |  |              |          |         |  |            |          |       |  |   |         |   |  |   |           |   |  |   |        |  |  |   | 5,164,000  |  
|Reaquisition of note receivable
with common stock     |  |                 |        |              |  |             |          |             |  |              | (72,727   | )       |  |            | (120,000  | )     |  |   | 120,000  |   |  |   |           |   |  |   |        |  |  |   |           |  
|Acquisition of preferred stock                        |  |                 | (40,545 | )            |  |             | (223,000  | )           |  |              |          |         |  |            |          |       |  |   |         |   |  |   |           |   |  |   |        |  |  |   | (223,000   | )
|Forfeited stock options                               |  |                 |        |              |  |             |          |             |  |              |          |         |  |            | (37,000   | )     |  |   |         |   |  |   |           |   |  |   |        |  |  |   | (37,000    | )
|Net Income                                            |  |                 |        |              |  |             |          |             |  |              |          |         |  |            |          |       |  |   |         |   |  |   | 1,033,000  |   |  |   |        |  |  |   | 1,033,000  |  
|                                                      |  |                 |         |              |  |             |           |             |  |              |           |         |  |            |           |       |  |   |          |   |  |   |            |   |  |   |         |  |  |   |            |  
|Balance, June 30, 2000                                |  |                 | 992,814 |              |  |             | 5,141,000 |             |  |              | 1,546,919 |         |  |            | 455,000   |       |  |   |         |   |  |   | (673,000   | ) |  |   |        |  |  |   | 4,923,000  |  
|Subscriptions received                                |  |                 |        |              |  |             |          |             |  |              |          |         |  |            |          |       |  |   |         |   |  |   |           |   |  |   | 143,000 |  |  |   | 143,000    |  
|Acquisition of preferred stock                        |  |                 | (30,000 | )            |  |             | (165,000  | )           |  |              |          |         |  |            |          |       |  |   |         |   |  |   |           |   |  |   |        |  |  |   | (165,000   | )
|Issuance of common stock, net                         |  |                 |        |              |  |             |          |             |  |              | 267,824   |         |  |            | 1,363,000 |       |  |   |         |   |  |   |           |   |  |   |        |  |  |   | 1,363,000  |  
|Net Loss                                              |  |                 |        |              |  |             |          |             |  |              |          |         |  |            |          |       |  |   |         |   |  |   | (3,956,000 | ) |  |   |        |  |  |   | (3,956,000 | )
|                                                      |  |                 |         |              |  |             |           |             |  |              |           |         |  |            |           |       |  |   |          |   |  |   |            |   |  |   |         |  |  |   |            |  
|Balance June 30, 2001                                 |  |                 | 962,814 |              |  | $           | 4,976,000 |             |  |              | 1,814,743 |         |  | $          | 1,818,000 |       |  | $ |         |   |  | $ | (4,629,000 | ) |  | $ | 143,000 |  |  | $ | 2,308,000  |  
|                                                      |  |                 |         |              |  |             |           |             |  |              |           |         |  |            |           |       |  |   |          |   |  |   |            |   |  |   |         |  |  |   |            |  

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

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##### Table of Contents



MAXXIS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows
For the years ended June 30, 2001, 2000, and 1999

|                                     |                                                                                                    |                                                      |                                                   |                                                     |           |          |            |           |           |          |           |            |         |            |           |  
|------------------------------------ | -------------------------------------------------------------------------------------------------- | ---------------------------------------------------- | ------------------------------------------------- | --------------------------------------------------- | --------- | -------- | ---------- | --------- | --------- | -------- | --------- | ---------- | ------- | ---------- | --------- | -
|                                     |                                                                                                    |                                                      |                                                   |                                                     |           | 2001     |            | 2000      |           | 1999    
|                                     |                                                                                                    |                                                      |                                                   |                                                     |           |          |            |           |           |         
|Cash Flows From Operating Activities |                                                                                                    |                                                      |                                                   |                                                     |           |          |            |           |           |          |           |           
|                                     | Net Income                                                                                         |                                                      | $                                                 | (3,956,000                                          | )         |          | $          | 1,033,000 |           |          | $         | (1,536,000 | )      
|                                     | Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities: |                                                      |                                                   |                                                     |           |          |            |           |           |          |           |            |        
|                                     |                                                                                                    | Depreciation and amortization                        |                                                   |                                                     | 1,046,000 |          |            |           | 1,461,000 |          |           |            | 501,000 |           
|                                     |                                                                                                    | Write-off of investment in internet service provider |                                                   |                                                     |          |          |            |           | 100,000   |          |           |            |        |           
|                                     |                                                                                                    | Stock compensation expense                           |                                                   |                                                     |          |          |            |           | (37,000   | )        |           |            | 37,000  |           
|                                     |                                                                                                    | Provision for doubtful receivables, and writeoffs    |                                                   |                                                     | 1,040,000 |          |            |           | 427,000   |          |           |            | 73,000  |           
|                                     |                                                                                                    | Changes in operating assets and liabilities          |                                                   |                                                     |           |          |            |           |           |          |           |            |         |           
|                                     |                                                                                                    |                                                      | Accounts receivable and communications receivable |                                                     |           | (300,000 | )          |           |           | (39,000  | )         |            |         | (1,226,000 | )        
|                                     |                                                                                                    |                                                      | Inventories                                       |                                                     |           | (309,000 | )          |           |           | (739,000 | )         |            |         | (136,000   | )        
|                                     |                                                                                                    |                                                      | Prepaid expenses and other assets                 |                                                     |           | (219,000 | )          |           |           | (127,000 | )         |            |         | (87,000    | )        
|                                     |                                                                                                    |                                                      | Commissions payable                               |                                                     |           | (46,000  | )          |           |           | (303,000 | )         |            |         | 362,000    |          
|                                     |                                                                                                    |                                                      | Accounts payable                                  |                                                     |           | 187,000  |            |           |           | (404,000 | )         |            |         | 1,007,000  |          
|                                     |                                                                                                    |                                                      | Accrued compensation                              |                                                     |           | (742,000 | )          |           |           | 536,000  |           |            |         | 66,000     |          
|                                     |                                                                                                    |                                                      | Sales tax payable                                 |                                                     |           | 139,000  |            |           |           | (140,000 | )         |            |         | 187,000    |          
|                                     |                                                                                                    |                                                      | Accrued expenses                                  |                                                     |           | (460,000 | )          |           |           | 385,000  |           |            |         | 300,000    |          
|                                     |                                                                                                    |                                                      | Deferred revenue                                  |                                                     |           | (516,000 | )          |           |           | 548,000  |           |            |         | 275,000    |          
|                                     |                                                                                                    |                                                      |                                                   |                                                     |           |          |            |           |           |          |           |           
|                                     |                                                                                                    |                                                      |                                                   | Total adjustments                                   |           |          | (180,000   | )         |           |          | 1,668,000 |            |         |            | 1,359,000 |  
|                                     |                                                                                                    |                                                      |                                                   |                                                     |           |          |            |           |           |          |           |           
|                                     |                                                                                                    |                                                      |                                                   | Net cash provided by (used in) operating activities |           |          | (4,136,000 | )         |           |          | 2,701,000 |            |         |            | (177,000  | )
|                                     |                                                                                                    |                                                      |                                                   |                                                     |           |          |            |           |           |          |           |           
|Cash Flows From Investing Activities |                                                                                                    |                                                      |                                                   |                                                     |           |          |            |           |           |          |           |           
|                                     | Capital expenditures                                                                               |                                                      |                                                   | (738,000                                            | )         |          |            | (627,000  | )         |          |           | (641,000   | )      
|                                     | Investment in Internet service provider                                                            |                                                      |                                                   |                                                    |           |          |            |          |           |          |           | (100,000   | )      
|                                     | Liquidation of short-term investments                                                              |                                                      |                                                   |                                                    |           |          |            | 10,000    |           |          |           |           |        
|                                     |                                                                                                    |                                                      |                                                   |                                                     |           |          |            |           |           |          |           |           
|                                     |                                                                                                    |                                                      |                                                   | Net cash used in investing activities               |           |          | (738,000   | )         |           |          | (617,000  | )          |         |            | (741,000  | )
|                                     |                                                                                                    |                                                      |                                                   |                                                     |           |          |            |           |           |          |           |           

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##### Table of Contents



MAXXIS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (continued)
For the years ended June 30, 2001, 2000, and 1999

|                                             |                                                     |                                           |            |           |         |      |           |            |           |   |          |           |         | 
|-------------------------------------------- | --------------------------------------------------- | ----------------------------------------- | ---------- | --------- | ------- | ---- | --------- | ---------- | --------- | - | -------- | --------- | ------- | 
|                                             |                                                     |                                           |            | 2001      |         | 2000 |           | 1999      
|                                             |                                                     |                                           |            |           |         |      |           |           
|Cash Flows From Financing Activities         |                                                     |                                           |            |           |         |      |           |            |           |   |          |          
|                                             | Net proceeds from issuance and acquisition of stock |                                           |            | 1,198,000 |         |      |           | 5,164,000  |           |   |          |          |        
|                                             | Net borrowings (payments) on line of credit         |                                           |            | (65,000   | )       |      |           | (1,325,000 | )         |   |          | 1,390,000 |        
|                                             | Payments on lease obligations                       |                                           |            | (978,000  | )       |      |           | (853,000   | )         |   |          | (825,000  | )      
|                                             | Repurchase of preferred stock                       |                                           |            |          |         |      |           | (223,000   | )         |   |          |          |        
|                                             | Proceeds from issuance of common stock              |                                           |            |          |         |      |           |           |           |   |          | 1,000     |        
|                                             |                                                     |                                           |            |           |         |      |           |            |           |   |          |          
|                                             |                                                     | Net cash provided by financing activities |            |           | 155,000 |      |           |            | 2,763,000 |   |          |           | 566,000 | 
|                                             |                                                     |                                           |            |           |         |      |           |            |           |   |          |          
|Net Increase (Decrease) in Cash              |                                                     |                                           | (4,719,000 | )         |         |      | 4,847,000 |            |           |   | (352,000 | )        
|Cash and Cash Equivalents, Beginning of Year |                                                     |                                           | 4,867,000  |           |         |      | 20,000    |            |           |   | 372,000  |          
|                                             |                                                     |                                           |            |           |         |      |           |            |           |   |          |          
|Cash and Cash Equivalents, End of Year       |                                                     | $                                         | 148,000    |           |         | $    | 4,867,000 |            |           | $ | 20,000   |          
|                                             |                                                     |                                           |            |           |         |      |           |            |           |   |          |          
|Supplemental Cash Flow Disclosures:          |                                                     |                                           |            |           |         |      |           |            |           |   |          |          
|                                             | Cash paid for interest                              |                                           | $          | 448,000   |         |      | $         | 578,000    |           |   | $        |          |        
|                                             |                                                     |                                           |            |           |         |      |           |            |           |   |          |          
|                                             | Cash paid for income taxes                          |                                           | $          |          |         |      | $         |           |           |   | $        |          |        
|                                             |                                                     |                                           |            |           |         |      |           |            |           |   |          |          

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

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##### Table of Contents



MAXXIS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2001, 2000 and 1999

|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note 1 |  | Organization and Presentation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|       |  | Description of Business and Operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|       |  | Maxxis Group, Inc., a Georgia corporation, was incorporated on January
24, 1997 (Inception) and is headquartered in Tucker, Georgia. Maxxis
Group, Inc.s principal business operations are carried out through its
wholly owned subsidiaries, Maxxis 2000, Inc. and Maxxis Telecom, Inc.,
which began operations in March 1997, and Maxxis Nutritionals, Inc.,
which began operations in December 1997. Maxxis Group, Inc., together
with its wholly owned subsidiaries (collectively referred to as the
Company), was founded for the purpose of selling communications
products and services, private label nutritional products, and other
consumable products and services through a multilevel marketing system of
independent associates (IAs) to subscribers throughout the United
States. The Company currently markets long-distance services and
communications services, such as travel cards, prepaid phone cards, 800
service, Internet access, Web page development and hosting services, and
international telecommunications service, as well as private label
nutritional products.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|       |  | The Companys ability to manage its growth and expansion will require it
to implement and continually expand its operational and financial
systems, recruit additional employees, train and manage both current and
new employees, and expand the level of IAs. Growth may place a
significant strain on the Companys operational resources and systems,
and failure to effectively manage growth would have a material effect on
the Companys business. For the year ended June 30, 2001, the Company
incurred a net loss of approximately $4.0 million and experienced net
cash used in operations of approximately $4.1 million. In addition, the
Companys ratio of current assets to current liabilities was .64 at June
30, 2001. These matters may indicate doubt regarding the Companys
ability to continue as a going-concern. To address these issues
management of the Company has implemented financial control plans to
effectively manage the Companys cost structure and to enhance the
Companys customer base. These financial control plans include expense
reduction programs for personnel and operating costs. The Company is
reviewing the existing personnel structure of the Company to identify
opportunities for expense reductions. In addition, the Company is
evaluating inventory management procedures to reduce the cost of
maintaining inventory. Management of the Company believes that these
plans will be effectively implemented by the Company. However, the
ability of the Company to continue is dependent upon the success of
managements plans.

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##### Table of Contents



MAXXIS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
June 30, 2001, 2000 and 1999

|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note 2 |  | Summary of Significant Accounting Policies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|       |  | Principles of Consolidation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|       |  | The consolidated financial statements of the Company include the accounts
of Maxxis Group, Inc. and its subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|       |  | Revenue Recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|       |  | Communications services revenues consist of sales of prepaid phone cards
to IAs, commissions generated from an agreement to resell long-distance
services, long-distance services directly provided by the Company and
from Internet related services. From inception through March 1999, the
Company purchased prepaid phone cards from an independent tariffed
long-distance reseller (the Reseller), and IAs, in turn, purchased
these prepaid phone cards from the Company. Revenues from prepaid phone
cards were recognized when the cards were sold to IAs, net of an estimate
of sales returns for defective or unused cards. Active IAs have the
right to return defective or unused cards for up to 30 days after the
date of purchase. IAs that terminate their relationship with the Company
also have up to one year from the date of purchase to return cards that
are unused and sealed in original packaging, for a partial refund.
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|       |  | Communications services in fiscal year 1999 also include long distance
revenues generated by the Companys agreement with the Reseller under
which the Company received a percentage of the gross long-distance
revenues generated by the Companys customers, less billing adjustments.
The Company recognized long-distance revenues when services were provided
by the Reseller, net of an estimate for billing adjustments. The
Reseller assumed the risk of all bad debts. Amounts due to the Company
from the Reseller are included in communications receivable in the
accompanying balance sheet.                                                                                                                                                                                                                                                                                                                                            
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|       |  | In February 1999, the Company entered into an agreement to lease
telephone switching equipment (the Maxxis Switch). The Maxxis Switch
provided the Company with the ability to directly provide long-distance
services. In March 1999 (March Agreement) the Company entered into an
agreement with two independent tariffed long-distance suppliers to
provide for additional capacity for telecommunications traffic that is
not routed through the Maxxis Switch. In April 1999, the Company began
transferring its existing long-distance customers from the Resellers
network to the Maxxis Switch and began routing traffic through the
long-distance suppliers under the March Agreement. In addition, the Maxxis                                                                                                                                                                                                                         

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##### Table of Contents



MAXXIS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
June 30, 2001, 2000 and 1999

|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note 2 |  | Summary of Significant Accounting Policies (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|       |  | Switch began carrying traffic related to the Companys prepaid phone
cards (the Switch Phone Cards). Active IAs may return defective or
unused phone cards for up to 30 days after the date of purchase for a
refund on the purchase cost.                                                                                                                                                                                                                                                                                                                                                        
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|       |  | The Company recognizes long-distance revenues as services are provided,
net of an estimate for billing adjustments. These estimated billing
adjustments are provided by the Company for potential uncollectible
accounts or disputed billings. The Company assumes the risk of all bad
debts. Amounts due to Company related to direct long-distance services
are included in accounts receivable in the accompanying balance sheets.                                                                                                                                                               
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|       |  | Revenue from Internet Access services is recognized as services are
provided to the IAs over the period for which the services are provided.                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|       |  | Nutritional services revenues consist of sales of private label
nutritional products manufactured by various suppliers and are recorded
as products are shipped to IAs, net of an estimate of returned products.
IAs may return purchased unused nutritional products within 30 days of
purchase for a refund of the purchase cost.                                                                                                                                                                                                                                                                 
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|       |  | Marketing services revenues are recognized as products are shipped to IAs
and primarily consist of revenue from IAs for the sale of distributor
kits and sales aids, which include forms, promotional brochures,
marketing materials, and presentation materials designed to assist IAs in
the conduct of their business. IAs may return purchased marketing
products, including distributor kits and sales aids, within 30 days of
purchase for a refund of the purchase cost.                                                                                                                     
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|       |  | Deferred Revenue                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|       |  | Deferred revenue consists of the annual nonrefundable renewal fee
assessed to IAs, unused time related to Switch Phone Cards, unearned web
site hosting revenues and cash received for unshipped nutritional
products. The annual nonrefundable renewal fee provides IAs with the
right to sell the Companys products and services. This fee is assessed
to IAs after their first year with the Company. The Company recognizes
this revenue on a straight-line basis over the IAs renewal period.
Revenue generated from unused time on the Switch Phone Cards is
recognized as the time is used.
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|       |  | Costs of Goods and Services Sold                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|      
|       |  | Communications services costs primarily include the costs of purchasing
prepaid phone cards from the Reseller in fiscal year 1999, the cost of
long-distance                                                                                                                                                                                                                                                                                                                                                                                                                                        

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##### Table of Contents



MAXXIS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
June 30, 2001, 2000 and 1999

|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note 2 |  | Summary of Significant Accounting Policies (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  | Costs of Goods and Services Sold (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  | network services purchased from the long-distance suppliers, and
depreciation expense related to the Maxxis Switch.                                                                                                                                                                                                                                                                                                                                                                                                                          
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  | Nutritional services costs include the costs of purchasing nutritional
products from third party suppliers.                                                                                                                                                                                                                                                                                                                                                                                                                                  
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  | Marketing service costs include the costs of printing and designing
associate applications, starter kits, associate memberships, and other
sales aids.                                                                                                                                                                                                                                                                                                                                                                                       
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  | Selling and Marketing Expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  | Selling and marketing expenses primarily consist of commissions paid to
IAs based on their sponsorship of the new IAs and on the sale of
communications services and nutritional products.                                                                                                                                                                                                                                                                                                                                                   
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  | General and Administrative Expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  | General and administrative expenses consist of salary expense for the
Companys customer service personnel, office staff, and executive
personnel in addition to the cost of the IAs support services and general
operating expenses.                                                                                                                                                                                                                                                                                                        
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  | Concentrations of Risks                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  | The Companys customers are primarily residential and are not
concentrated in any specific geographic region of the United States. The
Company has agreements with two long-distance providers to provide the
network services required to originate and terminate calls through the
Maxxis Switch and to provide switched services for the telephone traffic
that does not go through the Maxxis Switch. There can be no assurance
that the Company could enter into new contracts with other suppliers if
these agreements were terminated.
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  | The Company markets a line of private label nutritional products. All of
the nutritional products offered and distributed by the Company are
developed and manufactured by third party suppliers. Certain nutritional
products the Company offers are proprietary to such suppliers. The
Company does not have any written contracts or commitments from any of
these suppliers or manufacturers. There can be no assurance that these
suppliers will continue to be reliable suppliers to the Company.                                      

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##### Table of Contents



MAXXIS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
June 30, 2001, 2000 and 1999

|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                 
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note 2 |  | Summary of Significant Accounting Policies (continued)                                                                                                                                                                                                                                                                                                                                                          
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                 
|       |  | The Companys success will depend heavily upon its ability to attract,
maintain, and motivate a large base of IAs who, in turn, sponsor other
IAs and sell the Companys products. The Company anticipates significant
turnover among IAs, which the Company believes, is typical of direct
selling organizations.                                                                                              
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                 
|       |  | Use of Estimates                                                                                                                                                                                                                                                                                                                                                                                                
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                 
|       |  | The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities in the financial statements and the
reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                 
|       |  | Cash and Cash Equivalents                                                                                                                                                                                                                                                                                                                                                                                       
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                 
|       |  | The Company maintains cash accounts in several financial institutions in
the Atlanta area. Balances with a specific institution may at times
exceed insured amounts. The Company considers all highly liquid
investment and deposit accounts with an original maturity of three months
or less to be cash equivalents.                                                                                          
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                 
|       |  | Communications Receivable                                                                                                                                                                                                                                                                                                                                                                                       
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                 
|       |  | A summary of changes in the allowance for doubtful accounts for the years
ended June 30, 2000 and 1999 is as follows:                                                                                                                                                                                                                                                                                           

|                           |            |   |         |          |      |   |         |        | 
|-------------------------- | ---------- | - | ------- | -------- | ---- | - | ------- | ------ | 
|                           |            |   | 2000    |          | 1999
|                           |            |   |         |          |     
|Balance, beginning of year |            | $ | 113,000 |          |      | $ | 40,000  |       
|                           | Provisions |   |         | 427,000  |      |   |         | 73,000 | 
|                           | Recoveries |   |         |         |      |   |         |       | 
|                           | Write-offs |   |         | (540,000 | )    |   |         |       | 
|                           |            |   |         |          |      |   |         |       
|Balance, end of year       |            | $ |        |          |      | $ | 113,000 |       
|                           |            |   |         |          |      |   |         |       

| |  |                                                                                    
| |  | -----------------------------------------------------------------------------------
| |  | All communication receivables were written off during the year ended June
30, 2000.

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##### Table of Contents



MAXXIS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
June 30, 2001, 2000 and 1999

|       |  |                                                                                                                            
|------ |  | ---------------------------------------------------------------------------------------------------------------------------
|Note 2 |  | Summary of Significant Accounting Policies (continued)                                                                     
|       |  |                                                                                                                            
|       |  | Accounts Receivable                                                                                                        
|       |  |                                                                                                                            
|       |  | A summary of changes in the allowance for doubtful accounts for the years
ended June 30, 2001, 2000 and 1999 is as follows:

|                           |            |   |         |            |      |   |         |          |   |   |         |         | 
|-------------------------- | ---------- | - | ------- | ---------- | ---- | - | ------- | -------- | - | - | ------- | ------- | 
|                           |            |   | 2001    |            | 2000 |   | 1999   
|                           |            |   |         |            |      |   |        
|Balance, beginning of year |            | $ | 931,000 |            |      | $ | 189,000 |          |   | $ |        |        
|                           | Provisions |   |         | 1,069,000  |      |   |         | 927,000  |   |   |         | 189,000 | 
|                           | Recoveries |   |         |           |      |   |         |         |   |   |         |        | 
|                           | Write-offs |   |         | (1,516,000 | )    |   |         | (185,000 | ) |   |         |        | 
|                           |            |   |         |            |      |   |         |          |   |   |         |        
|Balance, end of year       |            | $ | 484,000 |            |      | $ | 931,000 |          |   | $ | 189,000 |        
|                           |            |   |         |            |      |   |         |          |   |   |         |        

| |  |                                                                   
| |  | ------------------------------------------------------------------
| |  | Inventories                                                       
| |  |                                                                   
| |  | Inventories consist of the following as of June 30, 2001 and 2000.

|                     |  |      |           |      |  |   |           | 
|-------------------- |  | ---- | --------- | ---- |  | - | --------- | 
|                     |  | 2001 |           | 2000
|                     |  |      |           |     
|Prepaid phone cards  |  | $    | 104,000   |      |  | $ | 133,000   | 
|Sales aids           |  |      | 741,000   |      |  |   | 310,000   | 
|Nutritional products |  |      | 557,000   |      |  |   | 650,000   | 
|                     |  |      |           |      |  |   |           | 
|                     |  | $    | 1,402,000 |      |  | $ | 1,093,000 | 
|                     |  |      |           |      |  |   |           | 

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Inventories are valued at the lower of purchased cost (determined on a
first-in, first-out basis) or market.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | Property and Equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | Property and equipment consist primarily of furniture and fixtures,
office equipment, computer equipment, and leasehold improvements, which
are stated at cost and are depreciated using the straight-line method
over the estimated useful lives of three to five years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | The Company continually evaluates the propriety of the carrying amounts
of long-lived assets as well as the depreciation periods to determine
whether current events and circumstances warrant adjustments to the
carrying values and/or revised estimates of useful lives. In determining
whether the carrying amount of long-lived assets should be assessed, the
Company considers changes in the market value of an asset, changes in the
manner in which the asset is used, physical changes in an asset and
adverse changes in the legal or business climate in which the asset is
used. If any of the above are present, the Company assesses impairment
by comparing undiscounted estimated future cash flows of the asset to the
carrying value of the asset. If the undiscounted future cash flows are
less than

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##### Table of Contents



MAXXIS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
June 30, 2001, 2000 and 1999

|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note 2 |  | Summary of Significant Accounting Policies (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  | Property and Equipment (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  | the carrying amount, the Company calculates the fair value of the asset
by determining the discounted future cash flows. The fair value is then
compared to the carrying amount of the asset. If the fair value is less
than the carrying amount, the difference is considered an impairment
loss.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  | Income Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  | The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income
Taxes, which requires that deferred income taxes be provided based on
the estimated future tax effects of differences between carrying amounts
of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes calculated based on provisions of
enacted tax laws.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  | Income/ (Loss) Per Share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  | The Company calculates earnings per share in accordance with SFAS No.
128, Earnings Per Share, which requires the computation of (loss)/income
per share on both a basic and diluted basis. Basic (loss)/ income
per share is determined using the weighted average number of shares of
outstanding common stock over the course of the fiscal year. Diluted
(loss)/ income per share is computed using the weighted average number of
common stock and share equivalents outstanding considering the dilutive
effects of outstanding stock options and warrants as determined using the
treasury stock method and convertible equity securities using the if
converted method. All outstanding options and warrants issued by the
Company carry exercise prices which are equal to the current market value
of the Companys common stock; therefore, they have no dilutive effect to
(loss)/ earnings per share for the years ended June 30, 2001, 2000 and
1999. The Series A Convertible Preferred Stock is assumed converted at
the later of the date the shares were issued or the beginning of the
period in the determination of diluted weighted average shares.
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  | Capitalized Software Development Costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  | Certain software development costs pertaining to a software application
which is used internally for processing applications and for customer
service have been capitalized as incurred. Capitalization of software
development cost begins upon the establishment of technological
feasibility. The establishment of technological feasibility and the
ongoing assessment of recoverability of capitalized software development
costs require considerable judgement by management with respect                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

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##### Table of Contents



MAXXIS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
June 30, 2001, 2000 and 1999

|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                       
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note 2 |  | Summary of Significant Accounting Policies (continued)                                                                                                                                                                                                                                                                                                                                                                                
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       |  | Capitalized Software Development Costs (continued)                                                                                                                                                                                                                                                                                                                                                                                    
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       |  | to certain external factors, including, but not limited to, anticipated
future revenues, estimated economic life, and changes in software and
hardware technologies. Software development costs are amortized over an
estimated useful life of three years, and amortization expenses were
approximately $50,000, $185,000, and $136,000 for the years ended June
30, 2001, 2000, and 1999.                                           
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       |  | Fair Value of Financial Instruments                                                                                                                                                                                                                                                                                                                                                                                                   
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       |  | The Companys financial instruments consist primarily of cash, accounts
receivable, accounts payable, and debt. The carrying amounts of cash,
accounts receivable, and accounts payable approximate their values
because of the short-term nature of such instruments. The carrying value
of the Companys debt approximates fair value because the terms of the
Companys debt approximate terms currently available on similar debt.
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                       
|Note 3 |  | Property and Equipment                                                                                                                                                                                                                                                                                                                                                                                                                
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       |  | Property and equipment consisted of the following at June 30, 2001 and 2000:                                                                                                                                                                                                                                                                                                                                                          

|                                         |  |      |            |      |  |   |            |  
|---------------------------------------- |  | ---- | ---------- | ---- |  | - | ---------- | -
|                                         |  | 2001 |            | 2000
|                                         |  |      |            |     
|Computer and office equipment, and other |  | $    | 1,354,000  |      |  | $ | 644,000    |  
|Capital leases                           |  |      | 5,759,000  |      |  |   | 5,759,000  |  
|Furniture and fixtures                   |  |      | 178,000    |      |  |   | 177,000    |  
|Leasehold improvements                   |  |      | 131,000    |      |  |   | 98,000     |  
|Construction in progress                 |  |      |           |      |  |   | 6,000      |  
|                                         |  |      |            |      |  |   |            |  
|                                         |  |      | 7,422,000  |      |  |   | 6,684,000  |  
|Less: Accumulated depreciation           |  |      | (2,680,000 | )    |  |   | (1,684,000 | )
|                                         |  |      |            |      |  |   |            |  
|Property and equipment, net              |  | $    | 4,742,000  |      |  | $ | 5,000,000  |  
|                                         |  |      |            |      |  |   |            |  

|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       |  | Depreciation expense was $996,000, $1,276,000, and $365,000 for the years
ended June 30, 2001, 2000, and 1999.                                                                                                                                                                                                                                                                                                                                                                                
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Note 4 |  | Capital Lease Obligations                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|       |  | On September 29, 1998, the Company entered into certain leases for
telephone switching equipment, which are classified as capital lease
obligations. Payments on the lease are due in monthly installments of
$118,000 and carry an imputed rate of interest of approximately 12%.
These leases expire in 2004 and contain purchase options which are
exercisable at the end of the original lease terms. The capital lease
obligation is secured by the intangible and tangible assets of the

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##### Table of Contents



MAXXIS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
June 30, 2001, 2000 and 1999

|       |  |                                                                                                                                                                                                           
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note 4 |  | Capital Lease Obligations (continued)                                                                                                                                                                     
|       |  |                                                                                                                                                                                                           
|       |  | Company. Assets financed under capital leases are included in property
and equipment. Depreciation expense on the assets under capital lease
was approximately $329,000 for the year ending June 30, 2001.
|       |  |                                                                                                                                                                                                           
|       |  | Maturities of capital lease obligations for the years subsequent to June
30, 2001 are as follows:                                                                                                         

|                                    |  |   |            |  
|----------------------------------- |  | - | ---------- | -
|2002                                |  | $ | 1,416,000  |  
|2003                                |  |   | 1,416,000  |  
|2004                                |  |   | 706,000    |  
|                                    |  |   |            |  
|                                    |  |   | 3,538,000  |  
|Less: Amounts representing interest |  |   | (435,000   | )
|                                    |  |   |            |  
|                                    |  |   | 3,103,000  |  
|Less: Current maturities            |  |   | (1,233,000 | )
|                                    |  |   |            |  
|Long-term capital lease obligations |  | $ | 1,870,000  |  
|                                    |  |   |            |  

|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       |  | During the year ended June 30, 2001, the Company, in evaluating the
estimated useful life of the telephone switching equipment, determined
that the appropriate estimated useful life of the asset will now be
approximately fifteen years. Prior to 2001, the Company was depreciating
the asset over an estimated useful life of five years. The Company has
accounted for the change in the estimated useful life as a change in
accounting estimate.
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Note 5 |  | Income Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                            
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|       |  | The Companys deferred tax assets and liabilities are as follows as of
June 30, 2001 and 2000:                                                                                                                                                                                                                                                                                                                                                          

|                        |  |      |            |      |  |   |          |  
|----------------------- |  | ---- | ---------- | ---- |  | - | -------- | -
|                        |  | 2001 |            | 2000
|                        |  |      |            |     
|Property and equipment  |  | $    | (146,000   | )    |  | $ | (146,000 | )
|Organizational costs    |  |      |           |      |  |   | 7,000    |  
|Net operating losses    |  |      | 1,723,000  |      |  |   | 397,000  |  
|Valuation allowance     |  |      | (1,577,000 | )    |  |   | (258,000 | )
|                        |  |      |            |      |  |   |          |  
|Net deferred tax assets |  | $    |           |      |  |   |         |  
|                        |  |      |            |      |  |   |          |  

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Based on uncertainties associated with the future realization of deferred
tax assets, the Company established a valuation allowance against the net
deferred tax assets of the Company. At June 30, 1999, the Company had
net operating loss carryforwards of approximately $1,719,000, of which
$674,000 was utilized in 2000. At June 30, 2001 the Company has a total
net operating loss carryforward of approximately $5,000,000 that will
begin expiring in the year 2012 unless previously utilized.

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##### Table of Contents



MAXXIS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
June 30, 2001, 2000 and 1999

|       |  |                                                                                                                                                                                                 
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note 5 |  | Income Taxes (continued)                                                                                                                                                                        
|       |  |                                                                                                                                                                                                 
|       |  | A reconciliation of the benefit for income taxes at the statutory federal
income tax rate to the Companys tax benefit as reported in the
accompanying statements of operations is stated below:

|                                         |  |      |            |      |  |      |          |   |  |   |          |  
|---------------------------------------- |  | ---- | ---------- | ---- |  | ---- | -------- | - |  | - | -------- | -
|                                         |  | 2001 |            | 2000 |  | 1999
|                                         |  |      |            |      |  |     
|Tax (benefit) computed at
statutory rate |  | $    | (1,121,000 | )    |  | $    | 339,000  |   |  | $ | (522,000 | )
|State income taxes (benefit)             |  |      | (198,000   | )    |  |      | 39,000   |   |  |   | (61,000  | )
|Nondeductible expenses                   |  |      |           |      |  |      | 4,000    |   |  |   | 3,000    |  
|Change in valuation
allowance            |  |      | 1,319,000  |      |  |      | (382,000 | ) |  |   | 580,000  |  
|                                         |  |      |            |      |  |      |          |   |  |   |          |  
|Income tax (benefit)                     |  | $    |           |      |  | $    |         |   |  | $ |         |  
|                                         |  |      |            |      |  |      |          |   |  |   |          |  

|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note 6 |  | Line of Credit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|       |  | On November 22, 1998, the Company entered into a line of credit (the
Line of Credit) with the Maxxis Millionaire Society, a Georgia
partnership in which certain members of the Companys management are
partners. The Line of Credit was amended on May 1, 1999. Pursuant to
the Line of Credit, the Company may borrow up to $2,000,000 at 10% annual
interest. Advances or interest thereon pursuant to the Line of Credit
are payable on demand. As of June 30, 2001 there were no advances or
accrued interest outstanding on this line of credit.
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|Note 7 |  | Commitments and Contingencies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|       |  | Operating Leases                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|       |  | The Company leases certain office equipment and office space under
operating leases. For the years ended June 30, 2001, 2000 and 1999 the
Companys total rental expenses were approximately $150,000 to $200,000,
annually.                                                                                                                                                                                                                                                                                                                             
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|       |  | Minimum lease payments under noncancelable leases for the years
subsequent to June 30, 2001 are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                              

|     |  |   |         | 
|---- |  | - | ------- | 
|2002 |  | $ | 216,000 | 
|2003 |  |   | 185,000 | 
|     |  |   |         | 
|     |  | $ | 401,000 | 
|     |  |   |         | 

| |  |                                                                                                                                                      
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Litigation                                                                                                                                           
|
| |  | The Company is subject to various claims and legal actions which arise in
the ordinary course of business. In the opinion of management, the
ultimate

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##### Table of Contents



MAXXIS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
June 30, 2001, 2000 and 1999

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Litigation (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | resolution of any currently existing such matters will not have a
material adverse effect on the Companys financial position, liquidity,
or results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | Telecom Service Agreements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | The Company entered into agreements for telecommunications services with
two independent tariffed long-distance providers (collectively, the
Suppliers or individually, the Supplier) in January 1999 (the
January Agreement) and March 1999 (the March Agreement). Under the
March Agreement, the Company is obligated to purchase a minimum monthly
amount of telecommunications services.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | Employee Agreements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | The Company has entered into employment agreements with certain executive
officers (the Employment Agreements). Generally, the Employment
Agreements provide for a minimum weekly salary. In addition, the
employee may participate in a bonus program and shall be eligible to
receive quarterly or annual payments of a performance bonus based on the
achievement of targeted levels of performance and such other criteria as
the Board of Directors of the Company shall establish from time to time.
The chief executive officer Employment Agreement provided for an
additional bonus payment on July 1, 1999 and 2000. All unpaid bonuses
are included in accrued compensation in the accompanying balance sheets.                                                                                                                                                                                                                                                      
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | Each of the Employment Agreements has a one year term, and renews daily
until either party fixes the remaining term at one year by giving written
notice. The Company can terminate each employee upon death or disability
(as defined in the Employee Agreements) or with or without cause upon
delivery of a notice of termination. If the employee is terminated
because of death or disability, the employee or his/her beneficiary is
entitled to receive any accrued compensation through the termination date
along with any accrued performance bonus. If the employee is terminated
without cause, the Company is required to pay to the employee severance
payments equal to his/her minimum base salary for each week during the
six-month period following the termination date. If the employee is a
director or officer of the Company or any of its affiliates, the employee
must tender his/her resignation to such position effective as of the
termination date.
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | Pursuant to the Employment Agreements, each employee agrees to maintain
the confidentiality of the Companys trade secrets and confidential
business information. The employee also agrees for a period of one year
following termination or resignation for any reason, not to compete with
or solicit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

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##### Table of Contents



MAXXIS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
June 30, 2001, 2000 and 1999

|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note 7 |  | Commitments and Contingencies (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  | Employee Agreements (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  | employees or customers of the Company or any of its affiliates within a
30-mile radius of the Companys corporate offices. The noncompete period
is reduced to six months if the employee is terminated without cause.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  | Relationship with IAs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  | Because IAs are classified as independent contractors and not as
employees of the Company, the Company does not provide them with the same
level of direction and oversight as Company employees. While the Company
has policies and rules in place governing the business conduct of IAs and
intends to review periodically the sales practices of its IAs, it may be
difficult to enforce such policies and rules. Violation of these
policies and rules might reflect negatively on the Company and may lead
to complaints to or by various federal and state regulatory authorities.
Violation of the Companys policies and rules could subject the Company
and its long-distance suppliers to complaints regarding the unauthorized
switching of suppliers long distance carriers (also known in the
industry as slamming). Such complaints could have a material adverse
effect on the Companys business, financial condition, and results of
operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  | Regulation of Network Marketing and Effect of State Laws                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  | The Companys network marketing system is subject to or affected by
extensive government regulation, including, without limitation, federal
and state regulations governing the offer and sale of business
franchises, business opportunities, and
securities. Various governmental agencies monitor direct selling
activities, and the Company could be required to supply information
regarding its marketing plan to such agencies. Although the Company
believes that its network marketing system is in material compliance with
the laws and regulations relating to direct selling activities, there can
be no assurance that legislation and regulations adopted in particular
jurisdictions in the future will not adversely affect the Companys
business, financial condition, and results of operations. The Company
could also be found to be in noncompliance with existing statues or
regulations as a result of, among other things, misconduct by IAs, over
whom the Company has limited control; the ambiguous nature of certain of
the regulations; and the considerable interpretive and enforcement
discretion given to regulators. Any assertion or determination that the
Company or IAs are not in compliance with existing statues or regulations
could have a material adverse effect on the Companys business, financial
condition, and results of operations. An adverse determination by any
one state on any regulatory matter could influence the decisions of
regulatory authorities in other jurisdictions.

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##### Table of Contents



MAXXIS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
June 30, 2001, 2000 and 1999

|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note 8 |  | Shareholders Equity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  | The Company and certain of its shareholders have entered into a
shareholders agreement whereby the shareholders agreed to certain
restrictions on the transfer or other disposition of the shares of common
stock held by each holder. In the event a shareholder intends to
transfer his/her common stock to a nonpermitted transferee, the Company
and the remaining shareholders have a right of first refusal to purchase
the transferring shareholders common stock at fair market value. In
addition, if the Company terminates a shareholders employment or
engagement as a sales representative or consultant for cause, the Company
has the right to repurchase, at fair market value, an amount of the
shareholders common stock which starts at 100% and declines 20% for each
completed year of service with the Company. If the right of first
refusal or the Companys right to purchase
is exercised, these provisions could have the effect of further
concentrating the stock ownership and voting power of the Company.
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  | In May 1997, the Company sold 72,727 shares of common stock to an
executive officer for $1.65 per share and accepted as payment a $120,000
note receivable from an affiliate of that individual due on the earlier
of (i) May 1, 2002 or (ii) the closing of an underwritten initial public
offering with aggregate net proceeds of at least $5,000,000. The note is
guaranteed by the executive officer, bears interest at 8.75% per year, is
compounded annually, and is classified as a shareholder note receivable
in the shareholders equity section of the balance sheets. During 2000,
the shares were returned to the Company and the related receivable was
forgiven.                                                                                                                                                                                                                                                                                                                                                              
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  | In August 1997, the Company completed a private placement of shares of
common stock at a price of $1.65 per share. Potential investors were
required to complete subscription agreements for the common stock and to
submit cash at the date of subscription. The Company reserved the right
to reject a subscription and to refund amounts to a subscriber at any
time prior to the acceptance of the subscription. At June 30, 1997, the
Company had received paid subscriptions for 218,181 shares of common
stock. Subsequent to June 30, 1997, the Company accepted these
subscriptions and additional subscriptions for 53,014 shares of the
common stock.                                                                                                                                                                                                                                                                                                                                                                             
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  | Effective February 17, 1998, the Company declared a 1-for-11 reverse
stock split for all classes of common stock. The Company also effected a
plan of reorganization pursuant to which each outstanding share of Class
A common stock and Class B common stock was converted to one share of
common stock (Common Stock). All share, per share, and weighted
average share information in the financial statements prior to this has
been restated and now reflects this stock split and reorganization.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

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##### Table of Contents



MAXXIS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
June 30, 2001, 2000 and 1999

|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note 8 |  | Shareholders Equity (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  | On November 26, 1997, the Company entered into a promissory note (the
Note) agreement with various lenders for an aggregate principal amount
up to $200,000, which was secured primarily by the assets of the Company.
The Note accrued interest at 10%, payable monthly beginning on January
1, 1998, and the principal was due on demand. On March 23, 1998, the
Note was exchanged for 36,359 shares of the Companys Series A nonvoting
convertible Preferred Stock (Series A Preferred Stock or Series A)
and warrants (the Warrants) to purchase 36,359 shares of the Companys
Common Stock. The Warrants are exercisable
14 months after the issuance date and provide the right to purchase
Common Stock at $5.50 per share. The Warrants expire seven years after
the date of issuance.                                                                    
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  | Additionally, in February 1998, the Company amended and restated its
articles of incorporation such that the Company is authorized to issue
20,000,000 and 10,000,000 shares of no par value Common Stock and
nonvoting preferred stock (the Preferred Stock), respectively. One
million shares of the Companys Preferred Stock have been designated as
Series A Convertible Preferred Stock. The Series A Convertible Preferred
Stock has a liquidation preference of $5.50 per share (as adjusted for
any combinations, consolidations, stock distributions, or stock dividends
with respect to such shares) plus all declared or accumulated but unpaid
dividends. The Series A shareholders have the right to convert each
share in to a share of Common Stock, pursuant to the articles of
incorporation, at any time beginning 14 months after the date of
issuance.
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  | On September 16, 1998, the board of directors adopted the Maxxis Group,
Inc. 1998 Stock Option Plan which permits the Company to grant options to
purchase shares of Common Stock to company officers, directors, key
employees, advisors, and consultants. In December 1998, the board of
directors granted options to purchase 59,133 shares of Common stock at an
exercise price of $5.50 per share, the estimated fair value at the date
of grant. The options vest based on time as defined in the option
statement. As of June 30, 1999, 20,105 options were vested and
exercisable.                                                                                                                                                                                                                                                                                   
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  | In addition, in December 1998, the board of directors granted options to
purchase 6,819 shares of Common stock at an exercisable price of $-0- per
share. The options vest based on time as defined in the option
agreement. As of June 30, 1999, 3,410 of these options were vested and
exercisable. The Company recorded $37,000 of compensation expense for
these options for the year ended June 30, 1999. During fiscal year 2000,
all 62,543 of these options were cancelled upon termination of the
employee, to whom the options were granted, resulting in the reversal of
previously recorded compensation expense. During the year ended June 30,
2000 the Company granted 119,781 stock options at an exercise price of                                                                                                                                          

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##### Table of Contents



MAXXIS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
June 30, 2001, 2000 and 1999

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $5.50 per option. The options expire within 10 years from the date of
grant and vest over periods from immediate vesting to 10 years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | From January to February of 1999, the Company conducted its public
offering of common stock. Pursuant to this offering, the Company sold
46,450 shares of Common Stock at an offering price of $5.50 per share
pursuant to a registration statement of Form S-1 (Commission File No.
333-38623). The Companys gross proceeds from the offering were
approximately $255,475; the Companys proceeds, net of offering expenses
were approximately $1,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | In 1999, the Company adopted the disclosure provision of SFAS No. 123,
Accounting for Stock-Based Compensation. In accordance with provisions
of SFAS 123, the Company is required to calculate pro forma compensation
cost of all stock options granted using an option-pricing model.
Accordingly, the fair value of the stock option grants has been
determined utilizing the Black-Scholes method using the following
assumptions for 2001 and 2000, respectively: a risk-free interest rate of
approximately 6.43% and 6.43%, dividend yield of 0%, volatility of 50%
and 50%, and an expected life of five years. Using these assumptions,
the fair value of the stock options issued at the date of grant was $0
and $55,387 for 2001 and 2000, respectively. Pro forma compensation
expense for the years ended June 30, 2001 and 2000 would have been
$40,000 and $71,926, respectively. Pro forma net income (loss) was
($3,996,000), $961,074, and ($1,560,000) for the years ended June 30,
2001, 2000 and 1999, respectively. Pro forma earnings (loss) per share
was ($2.35), $.61, and ($.98) for the years
ended June 30, 2001, 2000, and 1999 respectively. For options
outstanding at June 30, 2001 the weighted average exercise price was
$5.50 and the weighted average remaining contractual life was 9 years.
At June 30, 2001, 115,481 options were vested and exercisable.
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | From March, 2000 to May, 2000, the Company sold 992,022 shares of Series
A Convertible Preferred Stock solely to accredited investors at a
purchase price of $5.50 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | From October, 2000 to December, 2000, the Company sold 267,824 shares of
common stock solely to accredited investors at a purchase price of $5.50
per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | During the year ended June 30, 2001 the Company reacquired 30,000 shares
of the Series A Convertible Preferred Stock for $5.50 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

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##### Table of Contents



MAXXIS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
June 30, 2001, 2000 and 1999

|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note 9  |  | Sales Representative Agreements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        |  | The Company has entered into sales representative agreements
(collectively, the Sales Representative Agreements) with ten
independent sales representatives. The Sales Representative Agreements
provide for minimum weekly compensation, and quarterly payments of a
bonus based on the achievement of targeted levels of performance. Unpaid
bonuses are included in accrued compensation in the accompanying balance
sheets. Each sales representative is an independent contractor, and the
Company does not exercise control over the activities of the sales
representatives other than as set forth in the Sales Representative
Agreements.                                                                                                                                                                                                                                                                                                                                                                               
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        |  | Each of the Sales Representative Agreements has a term of one year, and
the term renews daily until either party fixes the remaining term of one
year by giving written notice. The Company can terminate each sales
representative upon death or disability (as defined in the Sales
Representative Agreements) or with or without cause upon delivery to the
sales representative of a notice of termination. If a sales
representative is terminated, the sales representative will receive any
accrued fees through the termination date and any accrued performance
bonus, unless the sales representative is terminated for cause. If a
sales representative is a director or officer of the Company or any of
its affiliates, the sales representative shall tender his resignation to
such position effective as of the termination date. Under the Sales
Representative Agreements, each sales representative agrees to maintain
the confidentiality of the Companys trade secrets and confidential
business information.
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|Note 10 |  | Related Party Transaction                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        |  | During the year ended June 30, 2001 the Company acquired from the Maxxis
Millionaire Society, (a related party), certain business lines of the
Maxxis Millionaire Society that were established through the Company.
The Company paid approximately $1.1 million for the acquisition of the
business lines.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|Note 11 |  | Segment Reporting                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        |  | The Company is a multilevel network marketing company with continuing
operations in three reportable segments: communications, nutritional
products, and marketing services. Income (loss) before interest expense
and income taxes is the Companys primary measure of operating results,
segment profitability and performance. The Company calculates income
(loss) before interest expense and income taxes as gross margin less all
operating expenses, including depreciation and amortization. The Company
believes net income (loss) before interest expense and income taxes is
meaningful to investors because it provides an                                                                                                                                                                                                                                                                                                                                                                                            

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##### Table of Contents



MAXXIS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
June 30, 2001, 2000 and 1999

|        |  |                                                                                                                                                                                      
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note 11 |  | Segment Reporting (continued)                                                                                                                                                        
|        |  |                                                                                                                                                                                      
|        |  | analysis of operating results using the same measure used by the
Companys chief decision makers.                                                                                    
|        |  |                                                                                                                                                                                      
|        |  | Provided below is a reconciliation of the Companys reportable segments
measure of profit or loss to the Companys income before income taxes for
the indicated years ended June 30.

|                            |  |      |            |      |  |      |           |   |  |   |            |  
|--------------------------- |  | ---- | ---------- | ---- |  | ---- | --------- | - |  | - | ---------- | -
|                            |  | 2001 |            | 2000 |  | 1999
|                            |  |      |            |      |  |     
|Segment profit or loss      |  | $    | (3,508,000 | )    |  | $    | 1,644,000 |   |  | $ | (1,180,000 | )
|Interest and other expenses |  |      | (448,000   | )    |  |      | (648,000  | ) |  |   | (356,000   | )
|Other expenses              |  |      |           |      |  |      | 37,000    |   |  |   |           |  
|                            |  |      |            |      |  |      |           |   |  |   |            |  
|Income (loss)               |  | $    | (3,956,000 | )    |  | $    | 1,033,000 |   |  | $ | (1,536,000 | )

| |  |                                                                                                                                                                                                                                                                         
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Companys communications services segment markets long-distance
services and value-added services, such as travel cards, prepaid phone
cards, 800 service, Internet Access, Web page development and hosting
services, and international telecommunications service.
| |  |                                                                                                                                                                                                                                                                         
| |  | The Companys nutritional products segment distributes a line of private
label nutritional and health enhancement products.                                                                                                                                             
| |  |                                                                                                                                                                                                                                                                         
| |  | The Companys marketing services segment markets sales aids, distributor
kits, marketing materials, and support training services.                                                                                                                                      
| |  |                                                                                                                                                                                                                                                                         
| |  | Included in corporate activities are general and administrative expenses
and certain long-term assets related to the corporate group.                                                                                                                                   
| |  |                                                                                                                                                                                                                                                                         
| |  | The Companys segment reporting is as follows on the next page:                                                                                                                                                                                                         

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##### Table of Contents



MAXXIS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)
June 30, 2001, 2000 and 1999

|                          |                               |  |                |            |             |  |           |            |           |  |       |            |   |  |   |            |   |  |   |            |  
|------------------------- | ----------------------------- |  | -------------- | ---------- | ----------- |  | --------- | ---------- | --------- |  | ----- | ---------- | - |  | - | ---------- | - |  | - | ---------- | -
|                          |                               |  | Communications |            | Nutritional |  | Marketing |            | Corporate |  |       |            |  
|                          |                               |  | Services       |            | Products    |  | Services  |            | Group     |  | Total
|                          |                               |  |                |            |             |  |           |            |           |  |      
|Year ended June 30, 1999: |                               |  |                |            |             |  |           |            |           |  |       |            |   |  |   |            |   |  |   |           
|                          | Revenues                      |  | $              | 8,416,000  |             |  | $         | 1,371,000  |           |  | $     | 2,557,000  |   |  | $ |           |   |  | $ | 12,344,000 |  
|                          | Gross Profit                  |  |                | 6,250,000  |             |  |           | 709,000    |           |  |       | 1,610,000  |   |  |   |           |   |  |   | 8,569,000  |  
|                          | Depreciation and amortization |  |                | 388,000    |             |  |           | 1,000      |           |  |       | 2,000      |   |  |   | 110,000    |   |  |   | 501,000    |  
|                          | Operating income (loss)       |  |                | (328,000   | )           |  |           | 129,000    |           |  |       | (344,000   | ) |  |   | (637,000   | ) |  |   | (1,180,000 | )
|                          | Segment assets                |  |                | 7,450,000  |             |  |           | 458,000    |           |  |       | 298,000    |   |  |   | 80,000     |   |  |   | 8,286,000  |  
|                          | Capital expenditures          |  |                | 598,000    |             |  |           | 5,000      |           |  |       | 13,000     |   |  |   | 25,000     |   |  |   | 641,000    |  
|Year ended June 30, 2000: |                               |  |                |            |             |  |           |            |           |  |       |            |   |  |   |            |   |  |   |           
|                          | Revenues                      |  |                | 9,646,000  |             |  |           | 17,003,000 |           |  |       | 2,484,000  |   |  |   |           |   |  |   | 29,133,000 |  
|                          | Gross Profit                  |  |                | 4,354,000  |             |  |           | 13,600,000 |           |  |       | 1,965,000  |   |  |   |           |   |  |   | 19,919,000 |  
|                          | Depreciation and amortization |  |                | 1,215,000  |             |  |           | 4,000      |           |  |       | 27,000     |   |  |   | 215,000    |   |  |   | 1,461,000  |  
|                          | Operating income (loss)       |  |                | 532,000    |             |  |           | 12,591,000 |           |  |       | (9,499,000 | ) |  |   | (1,980,000 | ) |  |   | 1,644,000  |  
|                          | Segment assets                |  |                | 3,151,000  |             |  |           | 7,358,000  |           |  |       | 766,000    |   |  |   | 1,392,000  |   |  |   | 12,667,000 |  
|                          | Capital expenditures          |  |                | 273,000    |             |  |           | 24,000     |           |  |       | 62,000     |   |  |   | 75,000     |   |  |   | 434,000    |  
|Year ended June 30, 2001: |                               |  |                |            |             |  |           |            |           |  |       |            |   |  |   |            |   |  |   |           
|                          | Revenues                      |  |                | 4,375,000  |             |  |           | 2,851,000  |           |  |       | 3,500,000  |   |  |   |           |   |  |   | 10,726,000 |  
|                          | Gross Profit                  |  |                | 1,361,000  |             |  |           | 2,038,000  |           |  |       | 2,801,000  |   |  |   |           |   |  |   | 6,200,000  |  
|                          | Depreciation and amortization |  |                | 870,000    |             |  |           | 3,000      |           |  |       | 19,000     |   |  |   | 154,000    |   |  |   | 1,046,000  |  
|                          | Operating income (loss)       |  |                | (1,491,000 | )           |  |           | 1,313,000  |           |  |       | (670,000   | ) |  |   | (2,660,000 | ) |  |   | (3,508,000 | )
|                          | Segment assets                |  |                | 1,966,000  |             |  |           | 3,425,000  |           |  |       | 646,000    |   |  |   | 1,391,000  |   |  |   | 7,428,000  |  
|                          | Capital expenditures          |  |                | 464,000    |             |  |           | 41,000     |           |  |       | 105,000    |   |  |   | 128,000    |   |  |   | 738,000    |  

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##### Table of Contents



MAXXIS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET

ASSETS

|                                            |                                                                                                                                                                                      |                             |           |                    |           |               |           |            |           | 
|------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | --------------------------- | --------- | ------------------ | --------- | ------------- | --------- | ---------- | --------- | 
|                                            |                                                                                                                                                                                      |                             |           | September 30, 2001 |           | June 30, 2001
|                                            |                                                                                                                                                                                      |                             |           |                    |           |              
|                                            |                                                                                                                                                                                      |                             |           | (unaudited)        |           | (audited)    
|CURRENT ASSETS:                             |                                                                                                                                                                                      |                             |           |                    |           |               |           |           
|                                            | Cash and equivalents                                                                                                                                                                 |                             | $         | 126,000            |           |               | $         | 148,000    |          
|                                            | Accounts Receivable, net of allowance of $1,089,000                                                                                                                                  |                             |           | 399,000            |           |               |           | 341,000    |          
|                                            | Inventories, net                                                                                                                                                                     |                             |           | 1,330,000          |           |               |           | 1,402,000  |          
|                                            | Prepaid expenses                                                                                                                                                                     |                             |           | 251,000            |           |               |           | 276,000    |          
|                                            | Other current assets                                                                                                                                                                 |                             |           |                   |           |               |           |           |          
|                                            |                                                                                                                                                                                      |                             |           |                    |           |               |           |           
|                                            |                                                                                                                                                                                      | Total Current Assets        |           |                    | 2,106,000 |               |           |            | 2,167,000 | 
|Property and Equipment, net                 |                                                                                                                                                                                      |                             | 4,650,000 |                    |           |               | 4,742,000 |           
|Capitalized software development costs, net |                                                                                                                                                                                      |                             | 204,000   |                    |           |               | 396,000   |           
|Other assets                                |                                                                                                                                                                                      |                             | 123,000   |                    |           |               | 123,000   |           
|                                            |                                                                                                                                                                                      |                             |           |                    |           |               |           |           
|                                            | TOTAL ASSETS                                                                                                                                                                         |                             | $         | 7,083,000          |           |               | $         | 7,428,000  |          
|                                            |                                                                                                                                                                                      |                             |           |                    |           |               |           |           
|LIABILITIES AND SHAREHOLDERS EQUITY        |                                                                                                                                                                                      |                             |           |                    |           |               |           |           
|CURRENT LIABILITIES:                        |                                                                                                                                                                                      |                             |           |                    |           |               |           |           
|                                            | Accounts payable                                                                                                                                                                     |                             | $         | 1,196,000          |           |               | $         | 1,001,000  |          
|                                            | Commissions payable                                                                                                                                                                  |                             |           | 24,000             |           |               |           | 114,000    |          
|                                            | Accrued Compensation                                                                                                                                                                 |                             |           | 49,000             |           |               |           | 14,000     |          
|                                            | Taxes payable                                                                                                                                                                        |                             |           | 246,000            |           |               |           | 316,000    |          
|                                            | Accrued liabilities                                                                                                                                                                  |                             |           | 108,000            |           |               |           | 100,000    |          
|                                            | Current maturities of long term leases                                                                                                                                               |                             |           | 1,233,000          |           |               |           | 1,233,000  |          
|                                            | Deferred revenue                                                                                                                                                                     |                             |           | 316,000            |           |               |           | 362,000    |          
|                                            |                                                                                                                                                                                      |                             |           |                    |           |               |           |           
|                                            |                                                                                                                                                                                      | Total Current Liabilities   |           |                    | 3,172,000 |               |           |            | 3,140,000 | 
|                                            |                                                                                                                                                                                      |                             |           |                    |           |               |           |           
|LONG TERM LIABILITIES                       |                                                                                                                                                                                      |                             |           |                    |           |               |           |           
|                                            | Line of Credit                                                                                                                                                                       |                             |           |                   |           |               |           |           |          
|                                            | Contracts                                                                                                                                                                            |                             |           | 264,000            |           |               |           | 110,000    |          
|                                            | Long term lease obligations                                                                                                                                                          |                             |           | 1,608,000          |           |               |           | 1,870,000  |          
|                                            |                                                                                                                                                                                      |                             |           |                    |           |               |           |           
|                                            |                                                                                                                                                                                      | Total Long Term Liabilities |           |                    | 1,872,000 |               |           |            | 1,980,000 | 
|                                            |                                                                                                                                                                                      |                             |           |                    |           |               |           |           
|SHAREHOLDERS EQUITY                        |                                                                                                                                                                                      |                             |           |                    |           |               |           |           
|                                            | Preferred stock, no par value; 10,000,000 shares
authorized, 1,000,000 shares designated as Series A
Convertible Preferred Stock, of which 962,814 shares are
issued and outstanding |                             | $         | 4,976,000          |           |               | $         | 4,976,000  |          
|                                            | Common stock, no par value; 20,000,000 shares authorized,
of which 1,810,743 and 1,814,743 shares were issued and
outstanding at September 30, and June 30, 2001, respectively       |                             |           | 1,796,000          |           |               |           | 1,818,000  |          
|                                            | Subscription receivable                                                                                                                                                              |                             |           | 397,000            |           |               |           | 143,000    |          
|                                            | Treasury Stock, at cost                                                                                                                                                              |                             |           |                    |           |               |           |           |          
|                                            | Accumulated earnings (deficit)                                                                                                                                                       |                             |           | (5,130,000         | )         |               |           | (4,629,000 | )        
|                                            |                                                                                                                                                                                      |                             |           |                    |           |               |           |           
|                                            |                                                                                                                                                                                      | Total Shareholders equity  |           |                    | 2,039,000 |               |           |            | 2,308,000 | 
|                                            |                                                                                                                                                                                      |                             |           |                    |           |               |           |           
|                                            | TOTAL LIABILITIES & STOCKHOLDERS EQUITY                                                                                                                                              |                             | $         | 7,083,000          |           |               | $         | 7,428,000  |          
|                                            |                                                                                                                                                                                      |                             |           |                    |           |               |           |           

F-28



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##### Table of Contents



MAXXIS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)

|                                                   |                                                                                                                                  |                                               |                                              |                                           |         |                    |            |               |         |          |         | 
|-------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------- | -------------------------------------------- | ----------------------------------------- | ------- | ------------------ | ---------- | ------------- | ------- | -------- | ------- | 
|                                                   |                                                                                                                                  |                                               |                                              |                                           |         | THREE MONTHS ENDED
|                                                   |                                                                                                                                  |                                               |                                              |                                           |         |                   
|                                                   |                                                                                                                                  |                                               |                                              |                                           |         | SEP. 30, 2000      |            | SEP. 30, 2001
|                                                   |                                                                                                                                  |                                               |                                              |                                           |         |                    |            |              
|CASH FLOWS FROM OPERATING ACTIVITIES:              |                                                                                                                                  |                                               |                                              |                                           |         |                    |            |              
|                                                   | NET EARNINGS (LOSS)                                                                                                              |                                               | $                                            | (252,000                                  | )       |                    | $          | (501,000      | )      
|                                                   | Adjustments to reconcile net loss to net cash provided by operating activities
Write-off investment in internet service provider |                                               |                                              |                                          |         |                    |            |               |        
|                                                   |                                                                                                                                  | Depreciation and Amortization                 |                                              |                                           | 176,000 |                    |            |               | 284,000 |         
|                                                   |                                                                                                                                  | Provision for doubtful receivables            |                                              |                                           |         |                    |            |               | 18,000  |         
|                                                   |                                                                                                                                  | Compensation expense related to stock options |                                              |                                           |        |                    |            |               |        |         
|                                                   |                                                                                                                                  | Changes in Assets and Liabilities             |                                              |                                           |         |                    |            |               |         |         
|                                                   |                                                                                                                                  |                                               | Communications receivables                   |                                           |         |                   |            |               |         |         |        
|                                                   |                                                                                                                                  |                                               | Accounts Receivable                          |                                           |         | (15,000            | )          |               |         | (58,000  | )      
|                                                   |                                                                                                                                  |                                               | Inventories                                  |                                           |         | (725,000           | )          |               |         | 72,000   |        
|                                                   |                                                                                                                                  |                                               | Prepaid expenses                             |                                           |         | 66,000             |            |               |         | 25,000   |        
|                                                   |                                                                                                                                  |                                               | Other assets                                 |                                           |         | 37,000             |            |               |         |         |        
|                                                   |                                                                                                                                  |                                               | Accounts payable                             |                                           |         | (383,000           | )          |               |         | 407,000  |        
|                                                   |                                                                                                                                  |                                               | Commissions payable                          |                                           |         | (88,000            | )          |               |         | (90,000  | )      
|                                                   |                                                                                                                                  |                                               | Taxes payable                                |                                           |         | (94,000            | )          |               |         | (70,000  | )      
|                                                   |                                                                                                                                  |                                               | Accrued compensation and accrued liabilities |                                           |         | (1,695,000         | )          |               |         | 43,000   |        
|                                                   |                                                                                                                                  |                                               | Deferred Revenue                             |                                           |         | (174,000           | )          |               |         | (46,000  | )      
|                                                   |                                                                                                                                  |                                               |                                              |                                           |         |                    |            |              
|                                                   |                                                                                                                                  |                                               |                                              | Total adjustments                         |         |                    | (2,895,000 | )             |         |          | 585,000 | 
|                                                   |                                                                                                                                  |                                               |                                              |                                           |         |                    |            |              
|                                                   |                                                                                                                                  |                                               |                                              | NET CASH PROVIDED BY OPERATING ACTIVITIES |         |                    | (3,147,000 | )             |         |          | 84,000  | 
|                                                   |                                                                                                                                  |                                               |                                              |                                           |         |                    |            |              
|CASH FLOWS FROM INVESTING ACTIVITIES:              |                                                                                                                                  |                                               |                                              |                                           |         |                    |            |              
|                                                   | Capital expenditures                                                                                                             |                                               |                                              |                                          |         |                    |            | (92,000       | )      
|                                                   | Software development costs                                                                                                       |                                               |                                              | (49,000                                   | )       |                    |            | (192,000      | )      
|                                                   |                                                                                                                                  |                                               |                                              |                                           |         |                    |            |              
|                                                   |                                                                                                                                  |                                               | NET CASH USED BY INVESTING ACTIVITIES        |                                           |         | (49,000            | )          |               |         | (284,000 | )      
|                                                   |                                                                                                                                  |                                               |                                              |                                           |         |                    |            |              
|CASH FLOWS FROM FINANCING ACTIVITIES:              |                                                                                                                                  |                                               |                                              |                                           |         |                    |            |              
|                                                   | Proceeds from the sale of common stock                                                                                           |                                               |                                              | 493,000                                   |         |                    |            |              |        
|                                                   | Repurchase of Common Stock                                                                                                       |                                               |                                              |                                          |         |                    |            | (22,000       | )      
|                                                   | Proceeds from Sale of Customer Base                                                                                              |                                               |                                              |                                          |         |                    |            | 408,000       |        
|                                                   | Payments on purchase of treasury stock                                                                                           |                                               |                                              |                                          |         |                    |            |              |        
|                                                   | Net borrowings (payments) on Line of Credit                                                                                      |                                               |                                              | (65,000                                   | )       |                    |            |              |        
|                                                   | Payments on capital lease obligations                                                                                            |                                               |                                              | (239,000                                  | )       |                    |            | (208,000      | )      
|                                                   |                                                                                                                                  |                                               |                                              |                                           |         |                    |            |              
|                                                   |                                                                                                                                  |                                               | NET CASH PROVIDED BY FINANCING ACTIVITIES    |                                           |         | 189,000            |            |               |         | 178,000  |        
|                                                   |                                                                                                                                  |                                               |                                              |                                           |         |                    |            |              
|NET INCREASE (DECREASE) IN CASH EQUIVALENTS        |                                                                                                                                  |                                               | (3,007,000                                   | )                                         |         |                    | (22,000    | )            
|CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD |                                                                                                                                  |                                               | 4,867,000                                    |                                           |         |                    | 148,000    |              
|                                                   |                                                                                                                                  |                                               |                                              |                                           |         |                    |            |              
|CASH AND CASH EQUIVALENTS, END OF THE PERIOD       |                                                                                                                                  | $                                             | 1,860,000                                    |                                           |         | $                  | 126,000    |              
|                                                   |                                                                                                                                  |                                               |                                              |                                           |         |                    |            |              
|SUPPLEMENTAL CASH FLOW DISCLOSURES:                |                                                                                                                                  |                                               |                                              |                                           |         |                    |            |              
|                                                   | Cash Paid for Interest                                                                                                           |                                               |                                              |                                          |         |                    | $          | 57,000        |        

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##### Table of Contents



MAXXIS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
THREE MONTHS ENDED
(UNAUDITED)

|                                                                        |                            |                        |                |                          |           |                |           |                |         |           |           | 
|----------------------------------------------------------------------- | -------------------------- | ---------------------- | -------------- | ------------------------ | --------- | -------------- | --------- | -------------- | ------- | --------- | --------- | 
|                                                                        |                            |                        |                |                          |           | Sept. 30, 2000 |           | Sept. 30, 2001
|                                                                        |                            |                        |                |                          |           |                |           |               
|REVENUES                                                                |                            |                        |                |                          |           |                |           |               
|                                                                        | Telecommunication services |                        | $              | 1,057,000                |           |                | $         | 965,000        |        
|                                                                        | Nutritional Products       |                        |                | 1,259,000                |           |                |           | 462,000        |        
|                                                                        | Marketing services         |                        |                | 1,022,000                |           |                |           | 648,000        |        
|                                                                        |                            |                        |                |                          |           |                |           |               
|                                                                        |                            |                        | Total revenues |                          |           | 3,338,000      |           |                |         | 2,075,000 |          
|COST OF SERVICES                                                        |                            |                        |                |                          |           |                |           |               
|                                                                        | Telecommunication services |                        |                | 1,032,000                |           |                |           | 561,000        |        
|                                                                        | Nutritional Products       |                        |                | 362,000                  |           |                |           | 97,000         |        
|                                                                        | Marketing services         |                        |                | 137,000                  |           |                |           | 198,000        |        
|                                                                        |                            |                        |                |                          |           |                |           |               
|                                                                        |                            | Total cost of services |                |                          | 1,531,000 |                |           |                | 856,000 |          
|                                                                        |                            |                        |                | GROSS MARGIN             |           |                | 1,807,000 |                |         |           | 1,219,000 | 
|OPERATING EXPENSES                                                      |                            |                        |                |                          |           |                |           |               
|                                                                        | Selling and marketing      |                        |                | 881,000                  |           |                |           | 660,000        |        
|                                                                        | General and Administrative |                        |                | 1,132,000                |           |                |           | 1,057,000      |        
|                                                                        |                            |                        |                |                          |           |                |           |               
|                                                                        |                            |                        |                | Total operating expenses |           |                | 2,013,000 |                |         |           | 1,717,000 | 
|                                                                        |                            |                        |                |                          |           |                |           |               
|OPERATING INCOME                                                        |                            |                        | (206,000       | )                        |           |                | (498,000  | )             
|Interest Income (Expense)                                               |                            |                        | (46,000        | )                        |           |                | (3,000    | )             
|INCOME (LOSS) BEFORE TAXES                                              |                            |                        | (252,000       | )                        |           |                | (501,000  | )             
|                                                                        |                            |                        |                |                          |           |                |           |               
|PROVISION FOR TAXES                                                     |                            |                        |               |                          |           |                |          |               
|                                                                        |                            |                        |                |                          |           |                |           |               
|NET INCOME (LOSS)                                                       |                            | $                      | (252,000       | )                        |           | $              | (501,000  | )             
|                                                                        |                            |                        |                |                          |           |                |           |               
|NET INCOME (LOSS) PER SHARE                                             |                            | $                      | (0.16          | )                        |           | $              | (0.28     | )             
|                                                                        |                            |                        |                |                          |           |                |           |               
|WEIGHTED AVERAGE NUMBER OF SHARES
AND SHARE AND EQUIVALENTS OUTSTANDING |                            |                        | 1,546,919      |                          |           |                | 1,810,743 |               
|                                                                        |                            |                        |                |                          |           |                |           |               

F-30