TABLE OF CONTENTS




|                                                   |                                                                                              |  |  |  |  |  |  | 
|-------------------------------------------------- | -------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                            
|                                                   | ITEM 1. DESCRIPTION OF BUSINESS                                                             
|                                                   | ITEM 2. DESCRIPTION OF PROPERTY                                                             
|                                                   | 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. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION                           
|                                                   | ITEM 7. FINANCIAL STATEMENTS                                                                
|                                                   | ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
|PART III                                          
|                                                   | ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                  
|                                                   | ITEM 10. EXECUTIVE COMPENSATION                                                             
|                                                   | ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                     
|                                                   | ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                     
|                                                   | ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K                                                   
|SIGNATURES                                        
|INDEX TO CONSOLIDATED FINANCIAL STATEMENTS        
|Report of Independent Certified Public Accountants
|                                                   | CONSOLIDATED BALANCE SHEETS                                                                 
|                                                   | CONSOLIDATED STATEMENTS OF OPERATIONS                                                       
|                                                   | CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
YEARS ENDED DECEMBER 31, 2001
AND 2000      
|                                                   | CONSOLIDATED STATEMENTS OF CASH FLOWS                                                       
|                                                   | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2001 and 2000           



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

|      |  |                                                                                                                                       
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------
|( X ) |  | ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF
      THE SECURITIES EXCHANGE ACT OF 1934
      For the year ended December 31, 2001

OR

|       |  |                                                                                                                                                
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|(    ) |  | TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF
      THE SECURITIES EXCHANGE ACT OF 1934
      For the transition period from         to

Commission File Number 1-9043
B.H.I.T. Inc.

(Exact name of Registrant as specified in its charter)

|                                                                        |  |                                                   
|----------------------------------------------------------------------- |  | --------------------------------------------------
|Delaware
(State or other jurisdiction of
incorporation or organization) |  | 36-3361229
(I.R.S. Employer
Identification Number)

|                                                                                     |  |                 
|------------------------------------------------------------------------------------ |  | ----------------
|6950 South Edgerton Road, Brecksville, Ohio
(Address of principal executive offices) |  | 44141
(Zip Code)

(440) 838-4700
Registrants telephone number, including area code

Securities registered pursuant to Section 12 (b) of the Act:

|                                    |  |                                              
|----------------------------------- |  | ---------------------------------------------
|Title of each Class
   Common Stock |  | Name of each exchange on which registeredNone

Securities registered pursuant to Section 12 (g) of the Act:

None         
               
         
         
(Title of Class)

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 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 the Registrants knowledge in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB (X)

The Registrants Revenue for the preceding twelve months was $91,209. Shares
of common stock outstanding as of March 14, 2002: 14,988,051. Aggregate market
value of the Registrants shares of common stock held by non-affiliates as of
such date was approximately $991,674.

DOCUMENTS INCORPORATED BY REFERENCE

Exhibit index located on page 7 of sequentially numbered pages references no
exhibits. Transitional Small Business Disclosure Format Yes ( ) No (X).





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##### Table of Contents



TABLE OF CONTENTS

|           |  |                                                                                      |  |  
|---------- |  | ------------------------------------------------------------------------------------ |  | -
|PART I     |  |                                                                                      |  |  
|Item 1.    |  | Description of Business                                                              |  | 1
|Item 2.    |  | Description of Property                                                              |  | 2
|Item 3.    |  | Legal Proceedings                                                                    |  | 2
|Item 4.    |  | Submission of matters to a Vote of Security Holders                                  |  | 2
|          
|
|          
|
|PART II    |  |                                                                                      |  |  
|Item 5.    |  | Market for Common Equity and Related Shareholder Matters                             |  | 3
|Item 6.    |  | Managements Discussion and Analysis or Plan of Operation                            |  | 3
|Item 7.    |  | Financial Statements                                                                 |  | 4
|Item 8.    |  | Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure |  | 4
|          
|
|          
|
|PART III   |  |                                                                                      |  |  
|Item 9.    |  | Directors and Executive Officers of the Registrant                                   |  | 5
|Item 10.   |  | Executive Compensation                                                               |  | 5
|Item 11.   |  | Security Ownership of Certain Beneficial Owners and
Management                       |  | 6
|Item 12.   |  | Certain Relationships and Related Transactions                                       |  | 6
|Item 13.   |  | Exhibits and Reports on Form 8-K                                                     |  | 7
|          
|
|SIGNATURES |  |                                                                                      |  | 8
|          





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##### Table of Contents









PART I







ITEM 1.    DESCRIPTION OF BUSINESS

GENERAL

The Registrant, B.H.I.T. Inc. (the Company), was originally organized as a
Massachusetts business trust pursuant to a Declaration of Trust filed March 19,
1985, under the name VMS Hotel Investment Trust and subsequently reorganized as
a Delaware corporation on March 13, 1987. The Company changed its name to
B.H.I.T. Inc. in 1998. As the result of a public offering that occurred on
January 13, 1986, the Company received gross proceeds of $98,482,751, net of
volume discounts.

The Companys principal office located at 875 6th Avenue, Suite 1808, New
York, New York 10001 was closed on September 30, 2001, and relocated to 6950
South Edgerton Road, Brecksville, Ohio 44141.

BUSINESS OPERATIONS AND HISTORY

The Company was established to invest in mortgage loans principally to entities
affiliated with VMS Realty Partners. These loans were collateralized by hotel
and resort properties.

After severe losses, the Board of Directors entered into an agreement with
Harvey Polly (Polly), then President and Chief Executive Officer of the
Company, providing, among other things, that he make a cash offer to purchase
100% of the shares of common stock of the Company for $.35 per share. This
offer concluded on January 26, 1995 and resulted in the tender to Polly of
1,288,217 shares. The agreement required Polly to purchase unissued shares
sufficient to allow him to own not less than 3,335,000 shares, and not more
than 40% of the total outstanding shares. Upon the acquisition of these
shares, Polly was the beneficial owner of approximately 27% of the Companys
outstanding stock.

In July 1999, Polly entered into an agreement to sell his stock in the
Company to Vesper Corporation or its nominee. In September 2000, the stock
sale was completed. In connection with this transaction, Polly exercised his
option to acquire 2,650,000 additional shares of the Companys stock. The
Company received $583,000 for these shares. Polly then sold 5,370,563
shares, constituting his entire holdings, to Arrowhead Holdings Corporation
(Arrowhead), the nominee of Vesper Corporation. At the same time, a
charitable entity controlled by Polly and his wife sold 500,000 shares of the
Company to Arrowhead. Upon closing of this transaction, Arrowhead held
5,870,563 shares of the Company or 39% of the outstanding shares of the
Company. Also, the agreement required Polly to purchase the Companys
interest in Metro Franchising Commissary, LLC for $1,000,000. The Company
realized a loss on the sale of $56,799 in September 2000.

Upon completion of the stock sale discussed above, Leo Yarfitz and Willis
Ryckman resigned their position as Directors, and were replaced by James
Benenson, Jr. and James A. Lash, designees of Arrowhead.

The business of the Company is not seasonal and the Company does no foreign
or export business. The Company does not segregate revenue or assets by
geographical region, and such presentation is not applicable and would not be
material to an understanding of the Companys business taken as a whole.

1



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ITEM 2.     DESCRIPTION OF PROPERTY

The Companys principal office is located in Brecksville, Ohio. Offices are
leased and shared with common employees of an affiliate company.

OTHER PROPERTY

In June 2001, the Company and the Limited Partnership dissolved the BHF Merger
Corp. and BNC Santa Barbara Corp. The Company owned a 50% interest in the
Limited Partnership. The fair value of these entities at December 31, 2000 and
June 2001 was $0.







ITEM 3.    LEGAL PROCEEDINGS

The Registrant is not aware of any material pending legal proceedings as of
March 4, 2002, nor were any proceedings terminated during the year ended
December 31, 2001.







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

There were no matters submitted to a vote of security holders during the
quarter ended December 31, 2001.

2



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PART II







ITEM 5.    MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Companys shares of common stock trade on the NASD market (Symbol  VHTI).
The range of high and low closing prices per share for each of the quarters in
the years ended December 31, 2001 and 2000 is as follows:

|         |        |     |      |  |       |             |  |      |       |       |  |  | 
|-------- | ------ | --- | ---- |  | ----- | ----------- |  | ---- | ----- | ----- |  |  | 
|         |        |     |      |  |       | Share Price
|Calendar |        |     |      |  |       |             | 
|Quarter  |        |     |      |  |       | 2001        |  | 2000
|         |        |     |      |  |       |             |  |     
|         | First  |     | High |  | $     | 0.330       |  |      | $     | 0.468 | 
|Quarter  |        | Low |      |  | 0.188 |             |  |      | 0.437 |      
|         | Second |     | High |  |       | 0.320       |  |      |       | 0.468 | 
|Quarter  |        | Low |      |  | 0.219 |             |  |      | 0.375 |      
|         | Third  |     | High |  |       | 0.250       |  |      |       | 0.406 | 
|Quarter  |        | Low |      |  | 0.150 |             |  |      | 0.281 |      
|         | Fourth |     | High |  |       | 0.170       |  |      |       | 0.350 | 
|Quarter  |        | Low |      |  | 0.090 |             |  |      | 0.218 |      

The Companys shares began trading on NASD during the week of October 28, 1996,
prior to that time they traded on the American Stock Exchange. The Company has
not made distributions nor declared dividends in 2001 and 2000. At December
31, 2001, there were 2,222 record holders of common stock.







ITEM 6.     MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents consist of cash and short-term investments. The
Companys cash and cash equivalents balance at December 31, 2001 and 2000 was
$1,471,139 and $1,552,507, respectively. Cash and cash equivalents decreased in
2001 by $81,368, resulting from the net loss of $104,154, offset by a decrease
in prepaid insurance of $14,753, increases in various liabilities totaling
$10,575, and increases in various other assets totaling $2,542.

At this time, there are no material commitments for capital expenditures. The
Companys cash is sufficient to meet its needs for anticipated operating
expenses. The Company deems its liquidity to be adequate.

During 1997, the Company invested $1,000,000 in a mortgage. This mortgage
yields 12% per annum and requires monthly interest payments. Principal payments
made April 1998 and June 2000 were $700,000 and $25,000, respectively. As of
December 31, 2001 and 2000, the outstanding mortgage balance was $275,000. The
due date has been extended by mutual consent on several occasions. The current
due date is April 16, 2002.

3



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LIQUIDITY AND CAPITAL RESOURCES (continued)

During 1998, the Company invested $1,005,000 in a joint venture, Metro
Franchising Commissary, LLC, (Venture). In September 2000, in connection with
the Arrowhead transaction, the interest was sold to Polly for $1,000,000. The
sale resulted in a net loss of $56,799.

RESULTS OF OPERATIONS

Total income for the years ended December 31, 2001 and 2000 was $91,209 and
$58,018, respectively. The increase of $33,191 in total income during 2001 is
the result of interest earned on cash received both from the sale of the
Venture and the sale of additional capital stock to Polly during September
2000.

Total expenses for the years ended December 31, 2001 and 2000 were $195,363 and
$266,328, respectively. The decrease of $70,965 is the result of various
expense reductions, including a reduction in expense associated with the
Arrowhead transaction in 2000, totaling $33,300, and a reduction in fees for
accounting and legal services of $16,300. In addition, the closing of the New
York office and subsequent relocation to a shared office in Ohio resulted in a
savings of $24,600. These reductions were partially offset by an increase of
$3,200 in various other expenses.

During 2000, net income from the Venture totaled $141,295, the sale of the
Venture resulted in a loss of $56,799, and the sale of the Partners Liquidating
Trust realized a gain of $47,759.

The net loss for 2001 was $104,154 ($0.007 per share) and for 2000 was $76,055
($0.006 per share).







ITEM 7.     FINANCIAL STATEMENTS

See the index to Consolidated Financial Statements on Page F-1 of this report
for the financial statements of the Company.







ITEM 8.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE

On December 11, 2000, the Companys Board of Directors held a special meeting
at which they selected Grant Thornton LLP as Certified Public Accountants,
replacing Ernst & Young LLP.

There were no disagreements with Ernst & Young LLP on accounting, financial
disclosures or any other matter.

4



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PART III







ITEM 9.      DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following individuals are Directors and/or Executive Officers of the
Company:



| |                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | James Benenson, Jr., age 65, serves as Chairman of the Board of Directors
since October 1, 2001, and the President and Chief Executive Officer of the
Company since September 2000. Mr. Benenson also serves as Director and Chief
Executive Officer of Vesper Corporation since 1979, and as the Chairman and
Chief Executive Officer of Arrowhead Holdings Corporation since 1983.



| |                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | James A. Lash, age 57, is a Director of the Company since September 2000. Mr.
Lash is also Chairman, since 1976, of Manchester Principal LLC, a venture
capital firm.



| |                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| | Harvey Polly, age 73, served as Chairman of the Board of Directors until he
resigned effective October 1, 2001. No replacement has been named to the
Board.



| |                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Morton I. Kalb, age 68, served as a Director, Vice President and Chief
Financial Officer of the Company until he resigned effective October 1, 2001.
No replacement has been named to the Board.



| |                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | John V. Curci, age 57, serves as Chief Financial Officer since October 1,
2001, and the Vice President and Treasurer of the Company since September
2000. Mr. Curci is also Vice President, Treasurer and Chief Financial Officer
of Vesper Corporation since 1979, and is Vice President, Treasurer and Chief
Financial Officer of Arrowhead Holdings Corporation since 1983.

Effective October 1, 2001, Harvey Polly and Morton Kalb resigned from the
Board of Directors and as Officers of the Company. These resignations were
not requested by the Company and were not the result of any disagreements.







ITEM 10.     EXECUTIVE COMPENSATION

A.     DIRECTOR COMPENSATION



| |                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | No arrangements currently exist with respect to payments to the Directors for
their service on the Companys Board of Directors, and no fees have been paid
during the years 2001 or 2000.

B.     EXECUTIVE COMPENSATION



| |                                                                                
| | -------------------------------------------------------------------------------
| | No salary was paid to the Companys current or former Chief Executive
Officers.



| |                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------
| | There were no long-term compensation awards, payments or options granted or
exercised during the years 2001 and 2000.

5



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B.     EXECUTIVE COMPENSATION (continued)



| |                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------
| | The following table sets forth information concerning the compensation paid
to executive officers of the Company during the years 2001 and 2000:

|               |                       |  |      |      |            |   |        |        |              |  |     |     |  |  |       |     | 
|-------------- | --------------------- |  | ---- | ---- | ---------- | - | ------ | ------ | ------------ |  | --- | --- |  |  | ----- | --- | 
|               |                       |  |      |      |            |   |        |        |              |  |     |     |  |  | Other
|               |                       |  | Year |      | Salary (A) |   | Bonus  |        | Compensation
|               |                       |  |      |      |            |   |        |        |             
|Morton I. Kalb |                       |  |      |      |            |   |        |        |              |  |     |     |  |  |       |    
|               | Former Vice President |  |      | 2001 |            |   | $      | 41,700 |              |  |     | N/A |  |  |       | N/A | 
|               | and CFO               |  |      | 2000 |            |   | $      | 55,000 |              |  |     | N/A |  |  |       | N/A | 
|              
|Celia Zisfein  |                       |  | 2001 |      |            | $ | 21,450 |        |              |  | N/A |     |  |  | N/A   |    
|               | Former Corporate      |  |      | 2000 |            |   | $      | 28,600 |              |  |     | N/A |  |  |       | N/A | 
|               | Secretary             |  |      |      |            |   |        |        |              |  |     |     |  |  |       |     | 



| |  | (A) Mr. Kalb and Ms. Zisfein terminated employment with the
Company effective       October 1, 2001; no post-employment payments
were made to either employee.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------







ITEM 11.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information, as of March 14, 2002, on each
shareholder who is known by the Company to own beneficially more than 5% of the
shares of its Common Stock. There are no shares beneficially owned by any
current director or officer of the Company.

|                       |  |                            |  |                      |  |          |      |  
|---------------------- |  | -------------------------- |  | -------------------- |  | -------- | ---- | -
|                       |  | Name of                    |  | Amount and Nature of |  | Percent 
|Title of Class         |  | Beneficial Owner           |  | Beneficial Ownership |  | of Class
|                       |  |                            |  |                      |  |         
|Shares of Common Stock |  | Arrowhead Holdings         |  | 5,975,563 shares     |  |          | 39.8 | %
|$.01 Par Value         |  | Corporation                |  |                      |  |          |      |  
|                       |  | 6950 South Edgerton Road   |  |                      |  |          |      |  
|                       |  | Brecksville, Ohio, 44141   |  |                      |  |          |      |  
|                      
|                       |  | Directors and Officers (1) |  |                     |  |          |     |  



| |  | (1) Mr. Benenson is the Chairman and Chief Executive Officer of Arrowhead and
holds the majority of the voting stock in Arrowhead. Mr. Benenson disclaims
any beneficial interest in the Common Stock of B.H.I.T. Inc. held by
Arrowhead.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------







ITEM 12.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

During the years ended 2001 and 2000, the Company reimbursed an affiliated
company $13,809 and $23,080, respectively, for health insurance premiums paid
on behalf of the Company. Included in this reimbursement is $8,003, which was
prepaid as of December 2000. These premium payments discontinued on October 1,
2001 upon closing of the New York office.

Effective October 1, 2001, the Companys principal offices relocated to
Brecksville, Ohio, and are shared with an affiliate company, Arrowhead Holdings
Corporation. Various office expenses are shared with the affiliate, including
rent, salaries, benefits, utilities, supplies and similar general and
administrative expenses. The Companys share of expenses in 2001 totaled
$11,721.

6



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ITEM 13.      EXHIBITS AND REPORTS ON FORM 8-K

(a)  EXHIBITS

None

(b)  REPORTS ON FORM 8-K

None

7



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SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.

B.H.I.T. Inc.

|    |  |                                                                                                  |  |       |  |               
|--- |  | ------------------------------------------------------------------------------------------------ |  | ----- |  | --------------
|By: |  | /s/ James Benenson, Jr.Chairman of the Board of Directors,
President and Chief Executive Officer |  | Date: |  | March 26, 2002





|    |  |                                                                                                       |  |       |  |               
|--- |  | ----------------------------------------------------------------------------------------------------- |  | ----- |  | --------------
|By: |  | /s/ John V. CurciVice-President, Treasurer, Chief Financial Officer, and
Principal Accounting Officer |  | Date: |  | March 26, 2002

8



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B.H.I.T. INC.







INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

ITEM 13 (a) (1) and (2)

|                                                   |  |       
|-------------------------------------------------- |  | ------
|Report of Independent Certified Public Accountants |  | F  2 
|                                                  
|Consolidated Balance Sheets as of                  |  |       
|December 31, 2001 and 2000                         |  | F  3 
|                                                  
|Consolidated Statements of Operations              |  |       
|For the Years Ended December 31, 2001 and 2000     |  | F  4 
|                                                  
|Consolidated Statements of Stockholders Equity    |  |       
|For the Years Ended December 31, 2001 and 2000     |  | F  5 
|                                                  
|Consolidated Statements of Cash Flows              |  |       
|For the Years Ended December 31, 2001 and 2000     |  | F  6 
|                                                  
|Notes to Consolidated Financial Statements         |  | F  7 
|                                                   |  | to    
|                                                   |  | F  10

F-1



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Report of Independent Certified Public Accountants

The Stockholders
B.H.I.T. Inc.

We have audited the accompanying consolidated balance sheets of B.H.I.T. Inc.
as of December 31, 2001 and 2000, and the related consolidated statements of
operation, stockholders equity, 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 of America. 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 consolidated financial position of B.H.I.T. Inc. at
December 31, 2001 and 2000 and the consolidated results of its operations and
its cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.

|                      
|----------------------
|/s/ Grant Thornton LLP

Cleveland, Ohio
February 28, 2002

F-2



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B.H.I.T. INC.







Consolidated Balance Sheets

|                                           |                                                                                                                   |   |              |             |      |   |           |             |  
|------------------------------------------ | ----------------------------------------------------------------------------------------------------------------- | - | ------------ | ----------- | ---- | - | --------- | ----------- | -
|                                           |                                                                                                                   |   | December 31,
|                                           |                                                                                                                   |   |             
|                                           |                                                                                                                   |   | 2001         |             | 2000
|                                           |                                                                                                                   |   |              |             |     
|ASSETS                                     |                                                                                                                   |   |              |             |      |   |           |            
|                                           | Cash and cash equivalents                                                                                         |   | $            | 1,471,139   |      |   | $         | 1,552,507   |  
|                                           | Interest receivable on cash and cash
equivalents                                                                  |   |              | 2,935       |      |   |           |            |  
|                                           | Mortgage loan receivable                                                                                          |   |              | 275,000     |      |   |           | 275,000     |  
|                                           | Interest receivable on mortgage loan                                                                              |   |              | 5,500       |      |   |           | 2,750       |  
|                                           | Miscellaneous receivable                                                                                          |   |              | 55          |      |   |           |            |  
|                                           | Prepaid insurance                                                                                                 |   |              |            |      |   |           | 14,753      |  
|                                           | Other assets                                                                                                      |   |              |            |      |   |           | 3,198       |  
|                                           |                                                                                                                   |   |              |             |      |   |           |            
|Total Assets                               |                                                                                                                   | $ | 1,754,629    |             |      | $ | 1,848,208 |            
|                                           |                                                                                                                   |   |              |             |      |   |           |            
|                                          
|LIABILITIES AND STOCKHOLDERS EQUITY       |                                                                                                                   |   |              |             |      |   |           |            
|                                          
|                                           | Accounts payable and other accrued expenses                                                                       |   | $            | 37,599      |      |   | $         | 27,024      |  
|                                          
|Stockholders Equity                       |                                                                                                                   |   |              |             |      |   |           |            
|                                           | Shares of Common Stock, $0.01 par value,
20,000,000 shares authorized, 15,020,808 shares
issued for 2001 and 2000 |   |              | 88,060,847  |      |   |           | 88,060,847  |  
|                                           | Accumulated deficit                                                                                               |   |              | (86,335,628 | )    |   |           | (86,231,474 | )
|                                           | Treasury stock, at cost, for 32,757 shares
of Common Stock                                                        |   |              | (8,189      | )    |   |           | (8,189      | )
|                                           |                                                                                                                   |   |              |             |      |   |           |            
|Total Stockholders Equity                 |                                                                                                                   |   | 1,717,030    |             |      |   | 1,821,184 |            
|                                           |                                                                                                                   |   |              |             |      |   |           |            
|Total Liabilities and Stockholders Equity |                                                                                                                   | $ | 1,754,629    |             |      | $ | 1,848,208 |            
|                                           |                                                                                                                   |   |              |             |      |   |           |            

See accompanying notes to the Consolidated Financial Statements.

F-3



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B.H.I.T. INC.







Consolidated Statements of Operations

|                                                                                                                                                           |                                                        |   |                      |         |                          |          |        |         |   |          |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------ | - | -------------------- | ------- | ------------------------ | -------- | ------ | ------- | - | -------- | -
|                                                                                                                                                           |                                                        |   |                      |         | Years Ended December 31,
|                                                                                                                                                           |                                                        |   |                      |         |                         
|                                                                                                                                                           |                                                        |   |                      |         | 2001                     |          | 2000  
|                                                                                                                                                           |                                                        |   |                      |         |                          |          |       
|INCOME                                                                                                                                                     |                                                        |   |                      |         |                          |          |        |        
|                                                                                                                                                           | Interest income on cash and cash equivalents           |   | $                    | 58,209  |                          |          | $      | 24,716  |  
|                                                                                                                                                           | Interest income on mortgage receivable                 |   |                      | 33,000  |                          |          |        | 33,302  |  
|                                                                                                                                                           |                                                        |   |                      |         |                          |          |        |        
|                                                                                                                                                           |                                                        |   | Total income         |         |                          | 91,209   |        |         |   | 58,018   |  
|                                                                                                                                                           |                                                        |   |                      |         |                          |          |        |        
|EXPENSES                                                                                                                                                   |                                                        |   |                      |         |                          |          |        |        
|                                                                                                                                                           | General and administrative                             |   |                      | 195,363 |                          |          |        | 266,328 |  
|                                                                                                                                                           |                                                        |   |                      |         |                          |          |        |        
|                                                                                                                                                           |                                                        |   | Total expenses       |         |                          | 195,363  |        |         |   | 266,328  |  
|                                                                                                                                                           |                                                        |   |                      |         |                          |          |        |        
|                                                                                                                                                           |                                                        |   | Loss from operations |         |                          | (104,154 | )      |         |   | (208,310 | )
|                                                                                                                                                          
|                                                                                                                                                           | Equity in income of Unconsolidated Joint Venture       |   |                      |        |                          |          |        | 141,295 |  
|                                                                                                                                                          
|                                                                                                                                                           | Gain on sale of interest in Partners Liquidating Trust |   |                      |        |                          |          |        | 47,759  |  
|                                                                                                                                                          
|                                                                                                                                                           | Loss on sale of 50% interest in Joint Venture          |   |                      |        |                          |          |        | (56,799 | )
|                                                                                                                                                           |                                                        |   |                      |         |                          |          |        |        
|                                                                                                                                                           |                                                        |   | Net loss             |         | $                        | (104,154 | )      |         | $ | (76,055  | )
|                                                                                                                                                           |                                                        |   |                      |         |                          |          |        |        
|Basic and diluted net loss per share of Common
Stock (based on weighted average number of
shares outstanding of 14,988,051 in 2001
and 13,078,599 in 2000) |                                                        | $ | (0.007               | )       |                          | $        | (0.006 | )      
|                                                                                                                                                           |                                                        |   |                      |         |                          |          |        |        

See accompanying notes to the Consolidated Financial Statements.

F-4



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##### Table of Contents



B.H.I.T. INC.







Consolidated Statements of Stockholders Equity
Years Ended December 31, 2001
and 2000

|                                                 |                                               |                                    |            |                        |           |        |            |         |         |                |             |          |   |       |        |   |   |   |        |   |   |   |           |          |         | 
|------------------------------------------------ | --------------------------------------------- | ---------------------------------- | ---------- | ---------------------- | --------- | ------ | ---------- | ------- | ------- | -------------- | ----------- | -------- | - | ----- | ------ | - | - | - | ------ | - | - | - | --------- | -------- | ------- | 
|                                                 |                                               |                                    |            | Shares of Common Stock |           |        |            |         |         |                |             |          |   |       |        |   |   |   |        |  
|                                                 |                                               |                                    |            |                        |           |        |            |         |         | Treasury Stock |             |          |   |      
|                                                 |                                               |                                    |            | Shares                 |           |        |            |         |         | Accumulated    |             |          |   |       |        |  
|                                                 |                                               |                                    |            | Issued                 |           | Amount |            | Deficit |         | Shares         |             | Amount   |   | Total
|                                                 |                                               |                                    |            |                        |           |        |            |         |         |                |             |          |   |      
|Stockholders equity (deficit)
December 31, 1999 |                                               |                                    | 12,370,808 |                        |           | $      | 87,477,847 |         |         | $              | (86,155,419 | )        |   |       | 32,757 |   |   | $ | (8,189 | ) |   | $ | 1,314,239 |         
|                                                
|                                                 |                                               | Proceeds from sale of
Common Stock |            |                        | 2,650,000 |        |            |         | 583,000 |                |             |          |  |       |        |   |  |   |        |   |  |   |           |          | 583,000 | 
|                                                
|                                                 | Net loss for the year ended
December 31, 2000 |                                    |            |                       |           |        |            |        |         |                |             | (76,055  | ) |       |        |  |   |   |        |  |   |   |           | (76,055  | )      
|                                                 |                                               |                                    |            |                        |           |        |            |         |         |                |             |          |   |       |        |   |   |   |        |   |   |   |           |         
|                                                
|Stockholders equity (deficit)
December 31, 2000 |                                               |                                    | 15,020,808 |                        |           |        | 88,060,847 |         |         |                | (86,231,474 | )        |   |       | 32,757 |   |   |   | (8,189 | ) |   |   | 1,821,184 |         
|                                                
|                                                 | Net loss for the year ended
December 31, 2001 |                                    |            |                       |           |        |            |        |         |                |             | (104,154 | ) |       |        |  |   |   |        |  |   |   |           | (104,154 | )      
|                                                 |                                               |                                    |            |                        |           |        |            |         |         |                |             |          |   |       |        |   |   |   |        |   |   |   |           |         
|                                                
|Stockholders Equity (deficit)
December 31, 2001 |                                               |                                    | 15,020,808 |                        |           | $      | 88,060,847 |         |         | $              | (86,335,628 | )        |   |       | 32,757 |   |   | $ | (8,189 | ) |   | $ | 1,717,030 |         
|                                                 |                                               |                                    |            |                        |           |        |            |         |         |                |             |          |   |       |        |   |   |   |        |   |   |   |           |         

See accompanying notes to the Consolidated Financial Statements.

F-5



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##### Table of Contents



B.H.I.T. INC.







Consolidated Statements of Cash Flows

|                                                 |                                                                                   |                                                              |                                       |   |                          |        |           |   |           |        |  
|------------------------------------------------ | --------------------------------------------------------------------------------- | ------------------------------------------------------------ | ------------------------------------- | - | ------------------------ | ------ | --------- | - | --------- | ------ | -
|                                                 |                                                                                   |                                                              |                                       |   | Years Ended December 31,
|                                                 |                                                                                   |                                                              |                                       |   | 2001                     |        | 2000     
|                                                 |                                                                                   |                                                              |                                       |   |                          |        |          
|Operating Activities:                            |                                                                                   |                                                              |                                       |   |                          |        |           |  
|                                                 |                                                                                   | Net Loss                                                     |                                       | $ | (104,154                 | )      |           | $ | (76,055   | )     
|                                                
|                                                 | Adjustments to reconcile net loss to net cash flows
used in operating activities: |                                                              |                                       |   |                          |        |           |   |          
|                                                
|                                                 |                                                                                   | Equity in net income of unconsolidated Joint Venture         |                                       |   |                         |        |           |   | (141,295  | )     
|                                                 |                                                                                   | Loss on sale of 50% interest in Joint Venture                |                                       |   |                         |        |           |   | 56,799    |       
|                                                 |                                                                                   | Gain on sale of interest in Partners
Liquidating Trust       |                                       |   |                         |        |           |   | (47,759   | )     
|                                                
|                                                 |                                                                                   | Net change in:                                               |                                       |   |                          |        |           |   |           |       
|                                                 |                                                                                   |                                                              | Interest Receivables                  |   |                          | (5,740 | )         |   |           | 1,416  |  
|                                                 |                                                                                   |                                                              | Prepaid insurance                     |   |                          | 14,753 |           |   |           | 1,490  |  
|                                                 |                                                                                   |                                                              | Other Assets                          |   |                          | 3,198  |           |   |           |       |  
|                                                 |                                                                                   |                                                              | Accounts payable and accrued expenses |   |                          | 10,575 |           |   |           | (8,840 | )
|                                                 |                                                                                   |                                                              |                                       |   |                          |        |           |  
|                                                 |                                                                                   | Net cash used in operations                                  |                                       |   | (81,368                  | )      |           |   | (214,244  | )     
|                                                 |                                                                                   |                                                              |                                       |   |                          |        |           |  
|                                                
|Investing Activities:                            |                                                                                   |                                                              |                                       |   |                          |        |           |  
|                                                 |                                                                                   | Principal collections on mortgage loans                      |                                       |   |                         |        |           |   | 25,000    |       
|                                                 |                                                                                   | Proceeds from sale of interest in
Partners Liquidating Trust |                                       |   |                         |        |           |   | 47,759    |       
|                                                 |                                                                                   | Proceeds from sale of interest in joint venture              |                                       |   |                         |        |           |   | 1,000,000 |       
|                                                 |                                                                                   |                                                              |                                       |   |                          |        |           |  
|                                                 |                                                                                   | Cash provided by investing activities                        |                                       |   |                         |        |           |   | 1,072,759 |       
|                                                 |                                                                                   |                                                              |                                       |   |                          |        |           |  
|Financing Activities:                            |                                                                                   |                                                              |                                       |   |                          |        |           |  
|                                                 |                                                                                   | Proceeds from sale of 2,650,000 shares
of Common Stock       |                                       |   |                         |        |           |   | 583,000   |       
|                                                 |                                                                                   |                                                              |                                       |   |                          |        |           |  
|                                                 |                                                                                   | Cash provided by financing activities                        |                                       |   |                         |        |           |   | 583,000   |       
|                                                 |                                                                                   |                                                              |                                       |   |                          |        |           |  
|(Decrease) increase in cash and cash equivalents |                                                                                   |                                                              | (81,368                               | ) |                          |        | 1,441,515 |  
|                                                
|Cash and cash equivalents at beginning of period |                                                                                   |                                                              | 1,552,507                             |   |                          |        | 110,992   |  
|                                                 |                                                                                   |                                                              |                                       |   |                          |        |           |  
|Cash and cash equivalents at end of period       |                                                                                   | $                                                            | 1,471,139                             |   |                          | $      | 1,552,507 |  
|                                                 |                                                                                   |                                                              |                                       |   |                          |        |           |  

See accompanying notes to the Consolidated Financial Statements.

F-6



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##### Table of Contents



B.H.I.T. INC.







NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2001 and 2000

NOTE 1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation



| |                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | B.H.I.T. Inc. (the Company), was organized under the laws of the State of
Massachusetts, pursuant to a declaration of Trust filed March 19, 1985, for
the purpose of investing in mortgage loans. On March 13, 1987, the Company
was subsequently reorganized as a Delaware Corporation.



| |                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, which are inactive, with no
value. Effective June 14, 2001, these subsidiaries were dissolved. All
intercompany balances and transactions have been eliminated.



| |                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company accounted for its investment in a joint venture using the equity
method, as the Company does not have control over the operations of the joint
venture.



| |                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The business of the Company is not seasonal and the Company does no foreign
or export business. The Company does not segregate revenue or assets by
geographical region, and such presentation is not applicable and would not be
material to an understanding of the Companys business taken as a whole.



| |                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------
| | In July 1999, Harvey Polly (Polly), then Chairman of the Company, entered
into an agreement for the sale of his stock in the Company.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In September 2000, this transaction was closed after the necessary approval
of stockholders was received at the Companys Annual Meeting. In connection
with this transaction, Polly acquired 2,650,000 shares of the Companys stock
under his original agreement with the Company dated August 4, 1994. The
Company received $583,000 for these shares. Polly then sold 5,370,563
shares, constituting his entire holdings, to Arrowhead Holdings Corporation
(Arrowhead), the nominee of Vesper Corporation. At the same time,
Sheltering Palms Foundation, a not-for-profit charitable entity controlled by
Polly and his wife, sold 500,000 shares of the Company to Arrowhead. Upon
closing of this transaction, Arrowhead held 5,870,563 shares of the Company
or 39% of the outstanding shares of the Company.



| |                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As required by the Stock Purchase Agreement with Arrowhead, Polly purchased
the Companys 50% interest in Metro Franchising Commissary, LLC for
$1,000,000. The Company realized a loss on the sale of $56,799, which is
included in the accompanying statements of operations.

F-7



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##### Table of Contents



B.H.I.T. INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years Ended December 31, 2001 and 2000

NOTE 1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Income Taxes



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company utilizes the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are recognized
by applying enacted statutory tax rates, applicable to future years, to
temporary differences between the tax bases and financial statement carrying
values of the Companys assets and liabilities. A valuation allowance is
provided where it is more likely than not that deferred tax assets will not
be realized.

Loss Per Share



| |                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | For 2001 and 2000 basic and diluted loss per share was calculated using
14,988,051 weighted average shares for 2001 and 13,078,599 weighted average
shares for 2000, which were the amounts outstanding each year. There were no
dilutive securities outstanding for the years ended December 31, 2001 and
2000.

Cash and Cash Equivalents



| |                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------
| | The Company considers all highly liquid instruments purchased with a maturity
of three months or less to be cash and cash equivalents.

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 amounts reported in
the financial statements and accompanying notes. Actual results could differ
from these estimates.

Revenue Recognition



| |                                                                                                  
| | -------------------------------------------------------------------------------------------------
| | Interest income from the mortgage portfolio and cash equivalents is recorded
on an accrual basis.

Segment Information



| |                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys current operations primarily relate to servicing its mortgage
loan portfolio. Management allocates its resources to service its mortgage
and cash equivalent investments and seeking profitable investments for its
available funds.

F-8



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##### Table of Contents



B.H.I.T. INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years Ended December 31, 2001 and 2000

NOTE 2.      MORTGAGE LOANS RECEIVABLE



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On August 20, 1997, the Company made a first mortgage loan in the amount of
$1,000,000, which is now secured by a commercial property located in Dallas,
Texas. In addition, the loan is guaranteed by the corporate owner of the
secured property, the maker of the Note (an affiliate company of the owner),
and by the principals of the corporate owners of the property. The loan
bears interest at the rate of 12% per annum and requires monthly interest
payments. The loan was originally due on April 1, 1998. The due date has been
extended by mutual agreement to April 16, 2002. Principal payments were made
in April 1998 and June 2000, totaling $725,000. On December 31, 2001 and
2000, the principal balance due was $275,000.



| |                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------
| | The accrued interest on the mortgage loan as of December 31, 2001 and 2000
was $5,500 and $2,750, respectively.



| |                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of December 31, 2001 the carrying value of the mortgage loan approximated
its fair value. The fair value is determined by calculating the present value
of the future principal and interest payments at a market discount rate and
review of the underlying collateral.

NOTE 3.      INVESTMENT IN JOINT VENTURE



| |                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On May 28, 1998, the Company made an investment of $1,005,000 in Metro
Franchising Commissary, LLC (the Venture), for a 50% interest in the
Venture. In September 2000, in connection with the Arrowhead transaction, the
Company sold its interest in the Venture to Polly for $1,000,000 and realized
a loss of $56,799. This investment resulted in a net profit to the Company of
$141,295 for the nine months ended September 30, 2000.

NOTE 4.      TRANSACTIONS WITH AFFILIATES



| |                                                                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During the years ended 2001 and 2000, the Company reimbursed an affiliated
company $13,809 and $23,080, respectively, for health insurance premiums paid
on behalf of the Company. Included in this reimbursement is $8,003, which
was prepaid as of December 2000. These premium payments discontinued on
October 1, 2001 upon closing the New York office.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As a result of the relocation of the Companys principal offices to
Brecksville, Ohio effective October 1, 2001, the primary place of business of
the majority shareholder, Arrowhead, certain expenses related to salary and
benefits, rent and utilities, and general office administrative costs have
been charged to the Company based on an allocation percentage. The Companys
share of expenses total $11,721 for the period October 1 through December 31,
2001, compared to average quarterly expenses totaling $36,365 for the three
previous quarterly periods.

F-9



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##### Table of Contents



B.H.I.T. INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Years Ended December 31, 2001 and 2000

NOTE 5.     OTHER INVESTMENTS



| |                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In June 2001, the Company and the Limited Partnership dissolved the BHF
Merger Corp. and BNC Santa Barbara Corp. The Company owned a 50% interest in
the Limited Partnership. These entities had no value at December 31, 2000 and
June 2001.

NOTE 6.     LEASE COMMITMENTS



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The lease at the New York office expired and the office closed on September
30, 2001. Effective October 1, 2001, the offices were relocated to
Brecksville, Ohio. The Ohio office rental cost is shared with an affiliate
company. The shared rental expense for the three-month period ended December
31, 2001 was $1,458. The Company is not a party to the Ohio office lease.
Rent expense for the years ended December 31, 2001 and 2000 was $16,783 and
$17,703, respectively.

NOTE 7.     INCOME TAXES



| |                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company reported no income tax expense or benefit for the years ended
December 31, 2001 and 2000 since net operating losses have been generated.



| |                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The following deferred tax assets were offset by a valuation allowance due
to the uncertainty of realizing the income tax benefit associated with the
deferred assets.

|                                              |  |      |             |      |  |   |             |  
|--------------------------------------------- |  | ---- | ----------- | ---- |  | - | ----------- | -
|                                              |  | 2001 |             | 2000
|                                              |  |      |             |      |  |   |             |  
|Tax effect of net operating
loss carryforward |  | $    | 29,604,460  |      |  | $ | 29,563,654  |  
|                                              |  |      |             |      |  |   |             |  
|Valuation allowance                           |  |      | (29,604,460 | )    |  |   | (29,563,654 | )
|                                              |  |      |             |      |  |   |             |  
|Net deferred tax asset                        |  | $    |            |      |  | $ |            |  
|                                              |  |      |             |      |  |   |             |  



| |                                                                                                           
| | ----------------------------------------------------------------------------------------------------------
| | The net change in the deferred tax asset and total valuation allowance was
the result of the loss in 2001.



| |                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The net operating loss carryforwards are scheduled to expire between 2005
and 2021. The utilization of the net operating losses may be subject to any
applicable limitation contained in the Internal Revenue Code.

F-10