<PAGE>

                     U.S. Securities and Exchange Commission
                             Washington, D.C. 20549

                                   Form 10-KSB

[X] ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934 for the fiscal year ended August 31, 2000

[ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
for the transition period from . . . . to . . . .

                         Commission file number 0-26578

                                   LMKI, INC.
                                   ----------
        Exact name of small business issuer as specified in its charter)

            Nevada                                               33-0662114
            ------                                               ----------
(State or other jurisdiction of                               (I.R.S. Employer
 incorporation or organization)                              Identification No.)

                3355 Michelson Drive, Suite 300, Irvine, CA 92612
                -------------------------------------------------
               (Address of principal executive offices) (Zip Code)

                                 (949) 794-3000
                                 --------------
              (Registrant's telephone number, including area code)

         Indicate by check mark whether the Issuer (1) has filed all the reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Issuer 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 there is no disclosure of delinquent filers
in response to Item 405 of Regulation S-B is not contained in this form, and no
disclosure will be contained, to the best of the Issuer'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. [ ]

         State issuer's revenues for its most recent fiscal year.  $7,987,552

         Based upon the closing price of $0.141 per share of Common Stock as
reported on the OTC and OTCBB on January 9, 2001, the aggregate market value of
the Issuer's voting and non-voting stock held by non-affiliates was $2,169,834.
Solely for the purposes of this computation, the Issuer's directors and
executive officers have been deemed to be affiliates. Such treatment is not
intended to be, and should not be construed to be, an admission of the Issuer or
such directors an executive officers that any of such persons are "affiliates",
as that term is defined under the Securities Act of 1934, as amended.

         There were 42,288,367 issued and outstanding shares of the Issuer's
Common Stock, $.001 par value share at August 31, 2000.

                       DOCUMENTS INCORPORATED BY REFERENCE

         If the following documents are incorporated by reference, briefly
describe them and identify the part of the form 10-KSB (e.g., Part I, Part II,
etc.) into which the document is incorporated: (1) any annual report to security
holders; (2) any proxy or information statement; and (3) any prospectus filed
pursuant to the rule 424(b) or (c) of the Securities Act of 1933 ("Securities
Act"). The listed documents should be clearly described for identification
purposes (e.g., annual report to security holders for fiscal year ended December
24, 1990).

None.

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



<PAGE>

                                   LMKI, INC.

                                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 LMKI, Inc. Common Stock and Related Stockholder
                   Matters
       Item 6.   Management's Discussion and Analysis of Financial Condition and
                   Results of Operations
       Item 7.   Financial Statements
       Item 8.   Changes In and Disagreements With Accountants on Accounting and
                   Financial Disclosure.

PART III

       Item 9.   Directors, Executive Officers, Promoters and Control Persons of
                  LMKI, Inc; Compliance with Section 16(a) of the Exchange Act
       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

                                INTRODUCTORY NOTE

         This Annual Report on Form 10-KSB may be deemed to contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company
intends that such forward-looking statements be subject to the safe harbors
created by such statutes. The forward-looking statements included herein are
based on current expectations that involve a number of risks and uncertainties.
Accordingly, to the extent that this Annual Report contains forward-looking
statements regarding the financial condition, operating results, business
prospects or any other aspect of the Company, please be advised that the
Company's actual financial condition, operating results and business performance
may differ materially from that projected or estimated by the Company in
forward-looking statements. The differences may be caused by a variety of
factors, including but not limited to adverse economic conditions, intense
competition, including intensification of price competition and entry of new
competitors and products, adverse federal, state and local government
regulation, inadequate capital, unexpected costs and operating deficits,
increases in general and administrative costs, lower sales and revenue than
forecast, loss of customers, customer returns of products sold to them by the
Company, termination of contracts, technological obsolescence of the Company's
products, technical problems with the Company's products, price increases for
supplies and components, inability to raise prices, failure to obtain new
customers, litigation and administrative proceedings involving the Company, the
possible acquisition of new businesses that result in operating losses or that
do not perform as anticipated, resulting in unanticipated losses, the possible
fluctuation and volatility of the Company's operating results, financial
condition and stock price, losses incurred in litigation and settling cases,
dilution in the Company's ownership of its business, adverse publicity and news
coverage, inability to carry out marketing and sales plans, loss or retirement
of key executives, changes in interest rates, inflationary factors, and other
specific risks that may be alluded to in this Annual Report or in other reports
issued by the Company. In addition, the business and operations of the Company
are subject to substantial risks, which increase the uncertainty inherent in the
forward-looking statements. In light of the significant uncertainties inherent
in the forward-looking information included herein, the inclusion of such
information should not be regarded as a representation by the Company or any
other person that the objectives or plans of the Company will be achieved.

                                       1


<PAGE>

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

OVERVIEW
--------
         The Company is a single source Managed Service Provider (MSP)
specializing in providing broadband networking solutions to small and
medium-sized businesses. We also provide a range of network access solutions
to remote users and branch locations of larger enterprises. We manage and
control a nationwide data communications network that allows us to offer
high-quality integrated turnkey solutions. Our services combine the speed
and efficiency of digital subscriber line, or DSL, technologies with the
reliability and security of our advanced private network. Our services include
Private Networking, Broadband Internet Access, Internet and Intranet based
Web Hosting, Hosted Applications Services, Intelligent Routing and Content
Delivery Services, Network and Systems Management, and Professional Services.


INDUSTRY BACKGROUND DSL MARKET EXPANSION
----------------------------------------
         Technological developments and regulatory changes have caused DSL
technology to emerge as a commercially available, cost-effective means of
providing high-speed data transmission. For telecommuters, and small-and
medium-sized businesses in need of high-speed data communication and Internet
access, a digital subscriber line (DSL) is a less expensive alternative to
integrated services digital network (ISDN) and Tier 1 (T1).

         The deployment of DSL-based solutions by competitive telecommunications
companies has been facilitated by changes in the regulatory framework in recent
years. Under the 1996 Telecommunications Act, traditional telephone companies
are generally required to lease telephone lines to competitive
telecommunications companies on a wholesale basis through resale or unbundling
and to allow these competitive telecommunications companies to locate certain of
their equipment in the traditional telephone companies' central offices. By
using existing facilities and copper lines, DSL providers avoid the considerable
up-front fixed costs necessary to deploy alternative high-speed digital
communications technologies, such as cable, wireless and satellite networks. As
a result, a significant portion of the investment in a DSL network is incurred
only as customers order the service.

         Additionally, it is possible that continued advances in DSL
technologies and transmission speeds, as well as advances in DSL equipment
manufacturing efficiencies, will further reduce the cost of deploying DSL-based
networks.

BUSINESS BROADBAND
------------------
         For a number of reasons, data competitive local exchange carriers
(CLEC) have chosen to use DSL to reach their target market instead of other
access media. One factor is that competing access technologies are not currently
well positioned for small businesses. ISDN, for example, is a relatively slow
broadband service with many hidden charges. Broadband wireless has technology
glitches to fix, and any business deployments of cable modems would require
further network build-outs and upgrades to two-way high-speed service.
Alternatively, DSL takes advantage of unused spectrum in existing copper
telephone wires, the same basic wiring used to supply a home or office with
regular telephone service.

         Although local phone companies are in the best position to offer DSL
since they own the core infrastructure that supports it, they were until very
recently, reluctant to market these services to business customers.

BUSINESS STRATEGY
-----------------
         We have identified an opportunity to deliver products built from the
combination of broadband fiber connectivity from our partner's network,
collocation space within our partner's facility, and "last-mile" broadband
copper connectivity from our local transit partners to our customer's premises.
This platform allows us to offer products that deliver redundant performance
across state of the art networks harnessing the speed of DSL technology and
competing on price and availability with traditional providers.

         By developing our asynchronous transfer mode (ATM) and internet
protocol (IP) solution within large carrier networks such as those of Level (3),
and CLEC local transit loops such as those of Covad and Rhythms Communications,
Inc., we believe we can gain a share of the enterprise wide area networking
market traditionally belonging to providers of dedicated frame relay and leased
line services.



<PAGE>

         Our collocation space contains edge-switches and routing equipment
necessary to support services to house configured servers and applications with
connectivity as part of a bundled package, or simply as an area for clients to
connect their own servers to the high-speed access of our partner's fiber-optic
networks. We are pursuing a Tier-1 service provider business plan without the
costs associated with building the core network infrastructure typically
necessary to support Tier-1 services.

         By keeping costs down while developing a large area of coverage, we
hope to identify ourselves as a profitable next-generation integrated
communications provider operating on a global scale.

OUR COMPETITIVE ADVANTAGES
--------------------------
         We have developed superior sales and technical staff with individuals
with skills and backgrounds that will permit them to succeed in the networking
industry. Additionally, we implement rigorous training schedules for our
employees in an effort to keep them abreast of the latest information and
knowledge from the industry in general and the Company in particular. Our
technical teams are cross-trained wherever possible and encouraged to obtain
technical certification in their respective area of specialization.

OUR BUSINESS MODEL OPTIMIZES COST
---------------------------------
         In an effort to keep costs down, we have attempted to lease rather than
build infrastructure in our initial network deployment. Additionally, by
building our network only at the "edge," we have greater flexibility in solving
multiple internetworking problems, thereby obviating the need to develop
multiple networks or write off existing data communications infrastructure.

OUR EFFICIENCY
--------------
         We have established a network comprised of highly intelligent and
functional network elements such as our application of multi-protocol label
switching (MPLS) meshed with the backbones of Level (3) and the last mile
services of Covad and Rhythms.

         Additionally, we focus on support systems that harness the distributed
intelligence of our carriers and provide the functionality and access of the
carrier through specialized software applications.

OUR FLEXIBLE NETWORK
--------------------
         Our business model optimizes network flexibility by utilizing strategic
relationships with multiple carriers. This allows us to use the latest network
and software technologies focused on meeting the business plan. This advantage
over embedded network elements and operation support systems cannot be
overstated and is the key to successful competition.

OUR STRATEGIC ALLIANCE STRENGTH
-------------------------------
         Relationships with Covad, Rhythms, New Edge Networks, and Level (3)
give us the ability to deliver connectivity and hosting solutions worldwide and
to constantly take advantage of upgrades and new services offered by these
carriers on their networks.

OUR INTEGRATION
---------------
         Our application of MPLS technology and the Cisco products that support
MPLS allow us to seamlessly integrate many different connectivity solutions and
network applications. We use different strategic partners to tailor the optimum
solution for our customer.

OUR AUTOMATION AND ADVANCED TELECOMMUNICATIONS TECHNOLOGY
---------------------------------------------------------
         Our network management tools are automated which leads to less downtime
and lower labor costs. We use the latest equipment, work closely with strategic
partners that are forerunners in their fields and are not hampered by existing
legacy infrastructures.

OUR CUSTOMER-CENTRIC APPROACH
-----------------------------
         We emphasize direct relationships with our customers. These
relationships enable us to learn information from our customers regarding their
needs and preferences and help us expand our offerings to include additional
value-added services based on customer demand. We believe that these customer
relationships increase customer loyalty and reduce turnover. In addition, our
existing customers have provided customer referrals and we believe strong
relationships will result from further customer referrals in the future.



<PAGE>

         Our success depends upon careful planning and the selection of
partners. We meet the customer's needs more effectively by implementing
procedures that we work jointly with our partners to develop. In that these
procedures represent the needs of both the Company and the carriers whose
networks we utilize we believe that we are targeting a key aspect of
successfully providing ongoing customer-focused support.

OUR PRODUCTS
------------
IP TECHNOLOGY
         The Internet protocols are the world's most popular open-system
(nonproprietary) protocol suite because they can be used to communicate across
any set of interconnected networks and are equally well suited for local area
network (LAN) and wide area network (WAN) communications. The Internet protocols
consist of a suite of communication protocols, of which the two best known are
the transmission control protocol (TCP) and the Internet protocol (IP). The
Internet protocol suite not only includes lower-layer protocols (such as TCP and
IP), but it also specifies common applications such as electronic mail, terminal
emulation, and file transfer. IP technology is able to realize the convergence
of traditional voice type applications with current and future data/Internet
type applications. IP provides operational efficiency when managing a single
platform that can carry any type of service application. At an early stage, we
recognized this potential and deployed a worldwide IP network.

         Our Real Private Network(TM) (RPN(TM)) and Virtual Private Network
(VPN) services qualify as Cisco Powered Networks, and are a major step forward
in materializing converged networks in the marketplace. Our main focus in
deploying and managing RPN(TM) is to maintain and guarantee the highest quality
and reliability standards. The non-use of the public Internet, has given us a
competitive edge, therefore we can ensure a better than carrier grade quality.
RPN(TM) service incorporates the speed, security and versatility of DSL
technology with the wide geographical coverage of fiber networks from Level (3).
By combining multiple connectivity methods with a homogenous, managed network,
business customers that do not yet have DSL available in their area can take
advantage of our RPN(TM) services through dedicated OC-n (Optical Carrier-n),
DS-3, T1, ATM, Frame Relay, ISDN and dial up connectivity options.

         Using these multiple technologies gives us a differential advantage
over the competition in that we can mesh together connections that are available
and sensible to our customers at the local and regional level in a private
network environment.

STRATEGIC RELATIONSHIPS
-----------------------
         We have established strategic relationships with several national
communications carriers that provide us with access to transit on their
respective network backbones and last-mile connectivity routes.

         Additionally, we collocate next generation switching and routing
hardware within the infrastructure of these providers and employ network
applications and protocols that allow us to differentiate services and guarantee
service quality, while providing unmatched flexibility, scalability, and
carrier-class reliability.

         We have strategic partnerships with the following providers of national
fiber optic transit, collocation space and last-mile DSL connectivity:

         Level (3): a communications and information services company offering a
         wide selection of IP-based services including broadband transport,
         co-location services and submarine transmission services. We were the
         first service provider to deliver our services over the Level (3)
         Network. The Level (3) Network includes metropolitan networks in 56
         U.S. markets and 21 international markets connected by an approximately
         16,000-mile U.S. inter-city (long-distance) network, an approximately
         4,750 mile European inter-city network and both transpacific and
         transatlantic undersea cables.

         Covad: whose network currently covers more than 25 million homes and
         businesses in major metropolitan statistical areas (MSA's). Covad
         services are available across the United States in 56 of the top
         Metropolitan Statistical Areas (MSA's). Covad services will be
         available in 100 MSA's by the end of 2000. At that time, Covad's
         digital network will reach more than 40 percent of all US homes and 45
         percent of all US businesses. Covad currently has 1000 central offices
         (COs) service ready and expects to have 2,000 COs service ready by the
         end of 2000.



<PAGE>

         Rhythms NetConnections: a North American provider of DSL-based,
         broadband communication services to businesses and consumers serving 43
         markets and covering 74 MSA's. Since Rhythms began its network build in
         September 1997, the company has built 1,225 central offices in just
         over two years. Rhythms believes this is the fastest facility
         deployment of any data competitive local exchange carrier (CLEC) in
         history.

         New Edge Networks: the leading national wholesale DSL provider in
         small, midsize and semi-rural markets. Since its founding last June,
         New Edge Networks has raised more than $300 million from top tier
         private venture firms, global financial institutions and worldwide
         technology firms that include: Accel Partners, Palo Alto, Calif.;
         Crosspoint Venture Partners, Woodside, Calif.; Greylock, Boston, Mass.;
         Meritech Capital Partners, Menlo Park, Calif.; Comdisco Ventures; Intel
         Corporation; Newbridge Networks; Goldman, Sachs & Co.; and, Morgan
         Stanley Dean Witter.

SALES AND MARKETING
-------------------
         Our marketing professionals have developed a methodology to identify
the businesses that would benefit from our services. Once we identify businesses
in a target market, we employ a targeted local marketing strategy utilizing
telemarketing personnel. Using targeted business lists and referrals, our
telemarketers initiate contact with potential customers. Our sales personnel are
trained in customer oriented, solution-based sales techniques and product
knowledge. We have a sales unit that focuses on the larger customers that have a
longer buying cycle. This unit develops business prospects from market research,
referrals from telemarketers and referrals from other customers.

         Immediately upon the resignation of previous executive management on
August 9, 2000, the Company performed a company-wide layoff including retail
based telemarketing staff and the associated support personnel. This has
resulted in a significant decrease of sales related expenses. The remaining
sales force is now focusing on improving existing customers services,
particularly RPN (TM) customers that have additional locations available within
our national footprint. Additionally, we are promoting our higher-margin hosting
and application services to our customers.

         We have started to offer new products and professional services focused
on integrating application-layer solutions within our national RPN(TM) network.
This has resulted in large sales opportunities that have much higher profit
margins than basic connectivity services.

CUSTOMER SUPPORT AND OPERATIONS
-------------------------------
         Our customer support team works to maximize the simplicity and
convenience of data communications and network access for our customers. They
provide our customers with a single point of contact for implementation,
maintenance and operations support.

IMPLEMENTATION
--------------
         We manage the implementation of our service for each customer. We work
together with our strategic partners to ensure that lines are installed, tested,
and in good working order from all customer offices throughout the network.

MAINTENANCE
-----------
         Our network operations center provides network surveillance for all
equipment in our customers' network. We are able to detect and correct many of
our customers' maintenance problems remotely, often before our customer is aware
of the problem. Customer-initiated maintenance and repair requests are managed
and resolved primarily through our help desk. Our information management system,
which generates reports for tracking maintenance problems, allows us to
communicate maintenance problems from the customer service center to our network
operations center 24 hours a day, seven days a week.

OPERATIONS SUPPORT SYSTEMS
--------------------------
         We are in the process of enhancing our operations support systems that
will allow us to better support our customer's communication and technical
support.



<PAGE>

COMPETITION
-----------
         We face competition from many companies with significantly greater
financial resources, well-established brand names and large installed customer
bases. Although we believe competition in many second and third tier cities is
less intense than competition in larger cities, we expect the level of
competition in our markets to intensify in the future.

OTHER DSL PROVIDERS
-------------------
         Certain competitive carriers, including Network Access Solutions,
NorthPoint and Rhythms NetConnections offer DSL-based services. The 1996
Telecommunications Act specifically grants competitive telecommunications
companies, including other DSL providers, the right to negotiate interconnection
agreements with traditional telephone companies, including interconnection
agreements which may be identical in all respects to, or more favorable than,
our agreements. Several of the large telecommunications companies and computer
companies, such as Microsoft and Intel, have made investments in DSL service
providers.

INTERNET SERVICE PROVIDERS
--------------------------
         Several national and regional Internet service providers, including
America Online, XO Communications, Mindspring, PSINet and Verio, have begun
developing high-speed access capabilities to leverage their existing products
and services. These companies generally provide Internet access to residential
and business customers over the traditional telephone companies' networks at
higher speeds. However, some Internet service providers have begun offering
DSL-based access using another carrier's DSL service or, in some cases, building
their own DSL networks. Some Internet service providers combine their
significant and even nationwide marketing presence with strategic or commercial
alliances with DSL-based competitive telecommunications companies.

TRADITIONAL LOCAL TELEPHONE COMPANIES
-------------------------------------
         Many of the traditional local telephone companies, including Pacific
Bell, Bell Atlantic, BellSouth and SBC Communications, are conducting technical
or market trials or have begun deploying DSL-based services. These companies
have established brand names and reputations for high quality in their service
areas, possess sufficient capital to deploy DSL equipment rapidly, have their
own copper telephone lines and can bundle digital data services with their
existing voice services to achieve a competitive advantage in serving customers.
We believe that the traditional telephone companies have the potential to
quickly deploy DSL services. In addition, these companies also offer high-speed
data communications services that use other technologies. We depend on these
traditional local telephone companies to enter into agreements for
interconnection and to provide us access to individual elements of their
networks. Although the traditional local telephone companies are required to
negotiate in good faith in connection with these agreements, future
interconnection agreements may contain less favorable terms and result in a
competitive advantage to the traditional local telephone companies.

NATIONAL LONG DISTANCE CARRIERS
-------------------------------
         National long distance carriers, such as AT&T, MCI WorldCom, and
Sprint, have deployed large-scale data networks, sell connectivity to businesses
and residential customers, and have high brand recognition. They also have
interconnection agreements with many of the traditional telephone companies and
are beginning to offer competitive DSL services.

OTHER FIBER-BASED CARRIERS
--------------------------
         Companies such as Allegiance, ChoiceOne, e.spire, Intermedia and
Williams have extensive fiber networks in many metropolitan areas, primarily
providing high-speed data and voice circuits to small and large corporations.
They also have interconnection agreements with the traditional telephone
companies under which they have acquired collocation space in many large
markets.

CABLE MODEM SERVICE PROVIDERS
-----------------------------
         Cable modem service providers, such as At Home and its cable partners,
are offering or preparing to offer high-speed Internet access over cable
networks to consumers. @Work, a division of At Home, has positioned itself to do
the same for businesses. Where deployed, these networks provide high-speed local
access services, in some cases at speeds higher than DSL service. They typically
offer these services at lower prices than our services, in part by sharing the
capacity available on their cable networks among multiple end users.



<PAGE>

WIRELESS AND SATELLITE DATA SERVICE PROVIDERS
---------------------------------------------
         Several new companies, including Advanced Radio Telecom, Teligent and
WinStar Communications, are emerging as wireless data service providers. In
addition, other companies, including Motorola Satellite Systems and Hughes
Communications, are emerging as satellite-based data service providers. These
companies use a variety of new and emerging technologies to provide high-speed
data services.

         We may be unable to compete successfully against these competitors. The
most significant competitive factors include: transmission speed, service
reliability, breadth of product offerings, cost for performance, network
security, ease of access and use, content bundling, customer support, brand
recognition, operating experience, capital availability and exclusive contracts
with customers, including Internet service providers and businesses with
multiple offices. We believe our services compete favorably within our service
markets with respect to transmission speed, service reliability, breadth of
product offerings, cost for performance, network security, ease of access and
use, content bundling, customer support, and operating experience. Many of our
competitors enjoy competitive advantages over us based on their brand
recognition and exclusive contracts with customers.

INTELLECTUAL PROPERTY
---------------------
         We regard our products, services and technology as proprietary and
attempt to protect them with copyrights, trademarks, trade secret laws,
restrictions on disclosure and other methods. We have not applied for any
patents. There can be no assurance these methods will be sufficient to protect
our technology and intellectual property. We also may enter into confidentiality
agreements with our employees and consultants, and generally control access to
and distribution of our documentation and other proprietary information. Despite
these precautions, it may be possible for a third party to copy or otherwise
obtain and use our products, services or technology without authorization, or to
develop similar technology independently. Effective copyright, trademark and
trade secret protection may be unavailable or limited in certain foreign
countries, and the global nature of the Internet makes it virtually impossible
to control the ultimate destination of our proprietary information.

         There can be no assurance that the steps we have taken will prevent
misappropriation or infringement of our technology. In addition, litigation may
be necessary in the future to enforce our intellectual property rights, to
protect our trade secrets or to determine the validity and scope of the
proprietary rights of others. Such litigation could result in substantial costs
and diversion of resources and could have a material adverse effect on our
business, operating results and financial condition. Some of our information is
a matter of public record and can be readily obtained by our competitors and
potential competitors, possibly to our detriment.

GOVERNMENT REGULATION
---------------------
         A significant portion of the services that we offer will be subject to
regulation at the federal and/or state levels. The Federal Communications
Commission (FCC), and state public utility commissions (PUC) regulate
telecommunications common carriers, which are companies that offer
telecommunications services to the public or to all prospective users on
standardized rates and terms. Our data transport services are common carrier
services.

         The FCC exercises jurisdiction over common carriers, and their
facilities and services, to the extent they are providing interstate or
international communications. The various state utility commissions retain
jurisdiction over telecommunications carriers, and their facilities and
services, to the extent they are used to provide communications that originate
and terminate within the same state. The degree of regulation varies from state
to state.



<PAGE>

         In recent years, the regulation of the telecommunications industry has
been in a state of flux as the United States Congress and various state
legislatures have passed laws seeking to foster greater competition in
telecommunications markets. The FCC and state commissions have adopted many new
rules to implement those new laws and to encourage competition. These changes,
which are still incomplete, have created new opportunities and challenges for
our competitors and us. Certain of these and other existing federal and state
regulations are currently the subject of judicial proceedings, legislative
hearings and administrative proposals that could change, in varying degrees, the
manner in which this industry operates. Neither the outcome of these proceedings
nor their impact upon the telecommunications industry or us can be predicted at
this time. Indeed, future federal or state regulations and legislation may be
less favorable to us than current regulations and legislation and therefore have
a material and adverse impact on our business and financial prospects by
undermining our ability to provide DSL services at competitive prices. In
addition, we may expend significant financial and managerial resources to
participate in proceedings setting rules at either the federal or state level,
without achieving a favorable result.

FEDERAL REGULATION AND LEGISLATION
----------------------------------
         Through our strategic partners, we must comply with the requirements of
a common carrier under the Communications Act of 1934, as amended, to the extent
we provide regulated interstate services. These requirements include an
obligation that our charges, terms and conditions for communications services
must be "just and reasonable" and that we may not make any "unjust or
unreasonable discrimination" in our charges or terms and conditions. The FCC
also has jurisdiction to act upon complaints against common carriers for failure
to comply with their statutory obligations. We are not currently subject to
price cap or rate of return regulation at the federal level and are not
currently required to obtain FCC authorization for the installation, acquisition
or operation of our facilities.

         The FCC has established different levels of regulation for dominant and
non-dominant carriers. Of domestic carriers, only the large traditional local
telephone companies are classified as dominant carriers and all other providers
of domestic common carrier service, including us, are classified as non-dominant
carriers. As a non-dominant carrier, we are subject to less FCC regulation than
are dominant carriers.

         In October 1998, the FCC ruled that DSL and other advanced data
services provided as dedicated access services in connection with interstate
services such as Internet access are interstate services subject to the FCC's
jurisdiction. Accordingly, we could offer DSL services without state regulatory
authority, so long as we do not also provide local or intrastate telephone
services via our network. This decision allows us to provide our DSL services in
a manner that potentially reduces state regulatory obligations. This decision is
currently subject to reconsideration and appeal.

         The 1996 Telecommunications Act, enacted on February 8, 1996, made
comprehensive changes to the Communications Act. It represents a significant
milestone in telecommunications policy by establishing competition in local
telephone service markets as a national policy.

         The 1996 Telecommunications Act removes many state regulatory barriers
to competition and forecloses state and local governments from creating laws
preempting or effectively preempting competition in the local telephone service
market.

         The 1996 Telecommunications Act places substantial interconnection
requirements on the traditional local telephone companies.

         Traditional local telephone companies are required to provide physical
collocation, which allows companies such as us and other inter-connectors to
install and maintain their own network termination equipment in the central
offices of traditional local telephone companies, and virtual collocation only
if requested or if physical collocation is demonstrated to be technically
infeasible. This requirement is intended to enable us, along with other
competitive carriers to deploy our equipment on a relatively convenient and
economical basis.

         Traditional local telephone companies are required to un-bundle
components of their local service networks so that other providers of local
service can compete for a wide range of local service customers. This
requirement is designed to provide us flexibility to purchase only the equipment
we require to deliver our services.



<PAGE>

         Traditional local telephone companies are required to establish
"wholesale" rates for their services to promote resale by competitive local
exchange carriers and other competitors. Traditional local telephone companies
are required to establish number portability, which allows a customer to retain
its existing phone number if it switches from the traditional local telephone
companies to a competitive local service provider.

         Traditional local telephone companies are required to establish dialing
parity, which ensures that customers will not detect a quality difference in
dialing telephone numbers or accessing operators or emergency services of local
competitive service providers. Traditional local telephone companies are
required to provide nondiscriminatory access to telephone poles, ducts, conduits
and rights- of-way. In addition, the 1996 Telecommunications Act requires
traditional local telephone companies to compensate competitive carriers for
traffic originated by them and terminated on the competitive carrier's network.

         The 1996 Telecommunications Act in some sections is self-executing. The
FCC issues regulations interpreting the 1996 Telecommunications Act that impose
specific requirements upon which our competitors and we rely. The outcome of
various ongoing FCC rulemaking proceedings or judicial appeals of such
proceedings could materially affect our business and financial prospects by
increasing the cost or decreasing our flexibility in providing DSL services. The
FCC prescribes rules applicable to interstate communications, including rules 33
implementing the 1996 Telecommunications Act, a responsibility it shares in
certain respects with the state regulatory commissions. As part of its effort to
implement the 1996 Telecommunications Act, the FCC issued an order governing
interconnection in August 1996. A federal appeals court for the Eighth Circuit,
however, reviewed the initial rules and overruled some of their provisions,
including some rules on pricing and nondiscrimination. In January 1999, the
United States Supreme Court reversed elements of the Eighth Circuit's ruling,
finding that the FCC has broad authority to interpret the 1996
Telecommunications Act and issue rules for its implementation, specifically
including authority over pricing methodology. The Supreme Court upheld the FCC's
directive to the traditional local telephone companies to combine individual
elements for competitors, and to allow competitors to pick and choose among
provisions in existing interconnection agreements. The Supreme Court also found
that the FCC's interpretation of the rules for establishing individual elements
of a network system was not consistent with standards prescribed in the 1996
Telecommunications Act, and required the FCC to reconsider and better justify
its delineation of individual elements. The pick and choose rule permits a
competitive carrier to select individual provisions of existing interconnection
agreements yet still tailor its interconnection agreement to its individual
needs by negotiating the remaining provisions. The FCC implemented a public
rulemaking seeking comment on these issues, including particularly, which
network elements should be offered on an unbundled basis by traditional local
telephone companies, and a decision is expected later this year. Although the
FCC has tentatively concluded that local copper telephone lines should continue
to remain available as an unbundled element, there is no certainty as to the
FCC's outcome on this issue or as to other network elements that the traditional
local telephone companies will be required to un-bundle. Moreover, this
proceeding, as well as a companion FCC rulemaking, addresses related issues of
significant importance to us, including:

         o        the manner in which copper telephone lines should be subject
                  to unbundling;

         o        compatibility among DSL services and between DSL and non-DSL
                  services; and

         o        the sharing of copper telephone lines between DSL data
                  services offered by one provider and voice services offered by
                  another provider.

         In addition, some traditional telephone companies may take the position
that they have no obligation to provide individual elements of their network
systems, including copper telephone lines, until the FCC issues new rules, which
could adversely affect our ability to expand our network in accordance with our
roll-out plan and therefore adversely affect our business.



<PAGE>

         In March 1998, several traditional local telephone companies petitioned
the FCC for relief from certain regulations applicable to the DSL and other
advanced data services that they provide, including their obligations to provide
copper telephone lines and resold DSL services to competitive carriers. In
August 1998, the FCC concluded that DSL services are telecommunications services
and, therefore, the traditional local telephone companies are required to allow
interconnection of their facilities and equipment used to provide data transport
functionality, un-bundle local telecommunications lines and offer for resale DSL
services. In the same proceeding, the FCC issued a notice of proposed rulemaking
seeking comments on its tentative conclusion that traditional local telephone
companies should be permitted to create separate affiliates to provide the DSL
34 services. Under the separate affiliate proposal, traditional local telephone
companies would be required to provide wholesale service to other DSL carriers
at the same rates, terms and conditions that it provided to its separate
affiliate. The outcome of this proceeding remains uncertain. Any final decision
in this proceeding that alters our relationship with the traditional local
telephone companies could adversely affect our ability to provide DSL services
at a competitive price.

         In March 1999, the FCC adopted regulations that require the traditional
local telephone companies to permit other carriers to collocate all equipment
necessary for interconnection. This requirement includes equipment that we use
to provide DSL data services. The FCC also adopted limits on the construction
standards and other conditions for collocation that may be imposed by
traditional local telephone companies. These rules should reduce our collocation
costs and expedite our ability to provide service to new areas. There is no
guarantee that these new rules will be implemented fully by the traditional
local telephone companies. Therefore, the benefits of these rules may be delayed
pending interpretation and enforcement by state and federal regulators. These
rules are currently subject to appeal by several traditional local telephone
companies.

         The 1996 Telecommunications Act also directs the FCC, in cooperation
with state regulators, to establish a universal service fund that will provide
subsidies to carriers that provide service to individuals that live in rural,
insular, and high-cost areas. A portion of carriers' contributions to the
universal service fund also will be used to provide telecommunications related
facilities for schools, libraries and certain rural health care providers. The
FCC released its initial order in this context in June 1997, which requires all
telecommunications carriers to contribute to the universal service fund. The
FCC's implementation of universal service requirements remains subject to
judicial and additional FCC review. Additional changes to the universal service
regime, which could increase our costs, could have an adverse affect on us.

STATE REGULATION
----------------
         In October 1998, the FCC deemed data transmission to the Internet as
interstate services subject only to federal jurisdiction. However, this decision
is currently subject to reconsideration and appeal. Also, some of our services
that are not limited to interstate access potentially may be classified as
intrastate services subject to state regulation. All of the states where we
operate, or intend to operate, require some degree of state regulatory
commission approval to provide certain intrastate services and maintain ongoing
regulatory supervision. In most states, intrastate tariffs are also required for
various intrastate services, although our services are not subject to price or
rate of return regulation. Actions by state public utility commissions could
cause us to incur substantial legal and administrative expenses and adversely
affect our business.

         To date, we have been able to obtain authorizations to operate as a
competitive local exchange carrier in 41 states and the District of Columbia,
and we have filed for competitive local exchange carrier status in the remaining
states. Although we expect to obtain certifications in all states, there is no
guarantee that these certifications will be granted or obtained in a timely
manner.



<PAGE>

LOCAL GOVERNMENT REGULATION
---------------------------
         In certain instances, our strategic partners may be required to obtain
various permits and authorizations from municipalities, such as for use of
rights-of-way, in which we operate local distribution facilities. Whether
various actions of local governments over the activities of telecommunications
carriers such as ours, including requiring payment of franchise fees or other
surcharges, pose barriers to entry for competitive local exchange carriers that
violate the 1996 Telecommunications Act or may be preempted by the FCC is the
subject of litigation. While we are not a party to this litigation, we may be
affected by the outcome. If municipal governments impose conditions on granting
permits or other authorizations or if they fail to act in granting such permits
or other authorizations, the cost of providing DSL services may increase or
negatively impact our ability to expand our network on a timely basis and
adversely affect our business.

TELEMARKETING REGULATIONS
-------------------------
         Our marketing depends primarily on the telemarketing sales channel.
Telemarketing sales practices are regulated both federally, and at the state
level. The Federal Telephone Consumer Protection Act of 1991 (the TCPA)
prohibits telemarketing firms from initiating telephone solicitations to
residential telephone subscribers before 8:00 a.m. or after 9:00 p.m. local
time, and prohibits the use of automated telephone dialing equipment to call
certain telephone numbers. In addition, the TCPA requires telemarketing firms to
maintain a list of residential customers that have stated that they do not want
to receive telephone solicitations and, thereafter, to avoid making calls to
such customers' telephone numbers.

         The federal Telemarketing and Consumer Fraud and Abuse Prevention Act
of 1994 (the TCFAPA) broadly authorizes the Federal Trade Commission (the FTC)
to issue regulations prohibiting misrepresentation in telemarketing sales. In
August 1995, the FTC issued new telemarketing sales rules. Generally, these
rules prohibit misrepresentation regarding the cost, terms, restrictions,
performance, or duration of products or services offered by telephone
solicitation and otherwise specifically address other perceived telemarketing
abuses in the offering of prizes and the sale of business opportunities or
investments. we train our telephone service representatives to comply with the
TCPA and program its call management system to avoid telephone calls during
restricted hours or to individuals maintained on the company's "do not call"
list.

         A number of states have enacted or are considering legislation to
regulate telemarketing. For example, telephone sales in certain states cannot be
final unless a written contract is delivered to and signed by the buyer and may
be cancelled within three business days. Several states require telemarketers to
obtain licenses and post bonds. We do not process card payments for any of our
customers and do not currently operate in any states where these requirements
are imposed. From time to time, bills are introduced in Congress, which, if
enacted, would regulate the use of credit information. We cannot predict whether
this legislation will be enacted and what effect, if any, it would have on the
telemarketing industry.

SUBSIDIARIES
------------
         We have three wholly owned subsidiaries: Landmark Communications, Inc.,
a Nevada Corporation doing business as Landmark Long Distance Inc. in the State
of California; Color Networks, Inc., a California corporation; and Mobilenetics
Corp., a California corporation.

EMPLOYEES
---------
         We employ fifty-seven (57) full-time employees as of January 9, 2001.
None of our employees is represented by collective bargaining agreements and we
consider relations with our employees to be good.

MAJOR SUPPLIERS
---------------
         We are dependent on the telecommunications carriers and other carriers
and suppliers to connect our network. We rely on traditional telecommunications
carriers to transmit our traffic over local and long distance networks. These
networks may experience disruptions that are not easily remedied.

         Additionally, we depend on certain suppliers of hardware and software.
If our suppliers fail to provide us with network services, equipment or software
in the quantities, at the quality levels and at the times we require, or if we
cannot develop alternative supply sources, it will be difficult, if not
impossible, for us to provide our services.



<PAGE>

         Our success depends on negotiating and entering into strategic partner
interconnection agreements with providers of communications bandwidth. We must
enter into and renew interconnection agreements with providers of communications
bandwidth in each of our target markets in order to provide service in that
market. These agreements govern, among other things, the price and other terms
regarding our location of equipment in the offices of providers of
communications bandwidth which house telecommunications equipment and from which
local telephone service is provided, known as central offices, and our lease of
copper telephone lines that connect those central offices to our customers.
Delays in obtaining interconnection agreements would delay our entrance into
target markets and could have a material adverse effect on our business and
prospects. Our interconnection agreements generally have limited terms of one to
two years and we cannot assure you that new agreements will be negotiated or
that existing agreements will be extended on terms favorable to us.

         We face risks associated with our lease of bandwidth from network
suppliers. We lease our bandwidth from Level (3) Communications. We are
dependent upon their ability to satisfy their obligations to us. If they cannot,
we will incur significant expenses to utilize other sources of bandwidth. We
also have risks attendant with their ability to build-out their networks under
construction and our access to that bandwidth.

         We are subject to a variety of risks relating to our recent lease of
fiber-based telecommunications bandwidth from our various global network
suppliers, including our strategic alliance with Level (3), and the delivery,
operation and maintenance of such bandwidth. Such risks include, among other
things, the following:
         o        the risk that financial, legal, technical and/or other matters
                  may adversely affect such suppliers' ability to perform their
                  respective operation, maintenance and other services relating
                  to such bandwidth, which may adversely affect our use of such
                  bandwidth;

         o        the risk that we will not have access to sufficient additional
                  capital and/or financing on satisfactory terms to enable us to
                  make the necessary capital expenditures to take full advantage
                  of such bandwidth;

         o        the risk that such suppliers may not continue to have the
                  necessary financial resources to enable them to complete, or
                  may otherwise elect not to complete, their contemplated
                  build-out of their respective fiber optic telecommunications
                  systems; and

         o        the risk that such build-out may be delayed or otherwise
                  adversely affected by presently unforeseeable legal, technical
                  and/or other factors.

         We cannot assure that we will be successful in overcoming these risks
or any other problems encountered in connection with our lease of sufficient
bandwidth.

PATENTS, TRADEMARKS, LICENSES
-----------------------------
         The Company currently holds no patents but has two trademark
applications on file with the U.S. Patent and Trademark Office for RPN(TM)and
Real Private Network(TM).

COST OF COMPLIANCE WITH ENVIRONMENTAL REGULATIONS
-------------------------------------------------
         The Company currently has no costs associated with compliance with
environmental regulations. However, there can be no assurances that the Company
will not incur such costs in the future.

ITEM 2.  DESCRIPTION OF PROPERTY
         Effective February 15, 2000, the Company began leasing approximately
33,000 square feet of office space in Irvine, California at a monthly rental
rate of approximately $55,500 per month. This facility serves as the primary
place of business. The lease expires on March 31, 2001. The Company is in the
process of looking for new space substantially reducing the monthly rental rate.

ITEM 3.  LEGAL PROCEEDINGS
         The Company may from time to time be involved in various claims,
lawsuits, disputes with third parties, actions involving allegations of
discrimination, or breach of contract actions incidental to the operation of its
business. The Company is not currently involved in any such litigation, which it
believes could have a materially adverse effect on its financial condition or
results of operations.



<PAGE>

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
         There were no matters submitted to a vote of security holders during
the fourth quarter of the year ended August 31, 2000.


                                     PART II

ITEM 5.  MARKET PRICE OF THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
         MATTERS
         The following table sets forth the high and low bid prices for shares
of the Company Common Stock for the periods noted, as reported by the National
Daily Quotation Service and the NASDAQ Bulletin Board. Quotations reflect
inter-dealer prices, without retail mark-up, markdown or commission and may not
represent actual transactions.

                                                            BID  PRICES
                                                         HIGH          LOW
--------------------------------------------------------------------------------
         YEAR ENDED AUGUST 31, 1999

         First Quarter                                  $ 0.031       $ 0.031
         Second Quarter                                   0.090         0.020
         Third Quarter                                    1.000         0.060
         Fourth Quarter                                   9.125         0.531

         YEAR ENDED AUGUST 31, 2000

         First Quarter                                    5.875         2.750
         Second Quarter                                  15.375         5.875
         Third Quarter                                   15.500         3.625
         Fourth Quarter                                   7.937         1.187

         YEAR ENDED AUGUST 31, 2001

         First Quarter                                    1.812         0.312
         Second Quarter (through Jan. 8, 2001)            0.469         0.120


NUMBER OF SHAREHOLDERS
----------------------
         The number of beneficial holders of record of the Common Stock of the
Company as of the close of business on January 8, 2001 was approximately 457.
Many of the shares of the Company's Common Stock are held in a "street name" and
consequently reflect numerous additional beneficial owners.

DIVIDEND POLICY
---------------
         To date, the Company has declared no cash dividends on its Common
Stock, and does not expect to pay cash dividends in the next term. The Company
intends to retain future earnings, if any, to provide funds for operation of its
business.

RECENT SALES OF UNREGISTERED SECURITIES
---------------------------------------
         In December 1998, the Board of Directors authorized the issuance of
4,000,000 shares of common stock to the Company's then CEO in exchange for
compensation and 500,000 shares of common stock to two individuals for
professional services. Management of the Company valued the shares granted to
its CEO at $.015 per share, which represented a 50% discount from the closing
bid price of the Company's common stock at the date of issuance. Management of
the Company estimated the value of the company's shares granted after
considering the historical trend of the trading prices for its common stock and
the limited volume of shares being traded. Management of the Company valued the
grants to its service providers at $.031 per share, which represented the
closing bid price of the Company's common stock at the date of grant. This
issuance was conducted under an exemption under Section 4(2) of the Securities
Act of 1933.

         In March 1999, the Board of Directors authorized the issuance of
400,000 shares of common stock to two individuals in exchange for professional
services. Management of the Company valued the share grants at $0.09 per share,
which represented the closing bid price of the Company's common stock at the
date of grant. This issuance was conducted under an exemption under Section 4(2)
of the Securities Act of 1933.



<PAGE>

         Also in March 1999, the Board of Directors authorized the issuance of
1,000,000 shares of common stock to a related party in exchange for
communication software developed specifically for the Company. Management of the
Company valued the share grant at $0.09 per share, which represented the closing
bid price of the Company's common stock at the date of grant. This issuance was
conducted under an exemption under Section 4(2) of the Securities Act of 1933.

         In June 1999, the Company acquired Mobilenetics Corp. ("Mobilenetics"),
in a business combination accounted for as a purchase. The Company issued
10,000,000 shares of its restricted common stock in exchange for all of the
outstanding shares of Mobilenetics. The shares issued for Mobilenetics were
valued at $1,400,000 ($0.14 per share), which represented 50% of the closing bid
price of the Company's common stock on the date of issuance. Management of the
Company estimated the value of the Company's shares exchanged after considering
the restricted nature of the stock, the historical trend of the trading prices
for its common stock and the limited volume of shares being traded. The issuance
was conducted under an exemption under Section 4(2) of the Securities Act of
1933.

         In June 1999, the Board of Directors authorized the issuance of 229,000
shares of common stock to four employees for compensation and one individual in
exchange for professional services. Management of the Company valued the share
grants at $0.531 per share, which represented the closing bid price of the
Company's common stock at the date of grant. This issuance was conducted under
an exemption under Section 4(2) of the Securities Act of 1933.

         The Company issued 75,000 shares of common stock valued at $600,000
(based on the closing bid price of the Company's common stock on the date of
grant) in connection with its acquisition of Color Networks. This issuance was
conducted under an exemption under Section 4(2) of the Securities Act of 1933.

         In November 1999, the Company sold 2,500 shares of Preferred A to an
accredited investor for proceeds of $2,278,200 (net of commissions paid in the
amount of $221,900). In connection with this transaction, the Company issued to
this investor warrants to purchase 250,000 shares of common stock at $4.25 per
share. The warrants expire on November 2004. In addition, the Company issued
conditional warrants to the investor to purchase up to 2,500 shares of Preferred
A at $1,000 per share and reserve warrants to purchase 50,000 shares of the
Company's common stock at $4.25 per share for each 500 shares of Preferred A
purchased. The conditional warrants expire on November 23, 2004. This issuance
was conducted under an exemption under Section 4(2) of the Securities Act of
1933.

         During February 2000, the Company issued 1,500 shares of Preferred A in
connection with the above investor exercising its conditional warrants for
$1,380,000 (net of commission paid in the amount of $120,000) and issued reserve
warrants to purchase 150,000 shares of common stock at $4.25 per share and are
exercisable through February 2005. In addition, the Company issued warrants to
purchase an additional 25,000 shares of the Company's common stock at $6.625 per
share that vested on the date of grant and are exercisable through May 2005.
This issuance was conducted under an exemption under Section 4(2) of the
Securities Act of 1933.

         During May 2000, the Company issued 1,000 shares of Preferred A in
connection with the above investor exercising its conditional warrants for
$920,000 (net of commissions paid in the amount of $80,000) and issued reserve
warrants to purchase 100,000 shares of common stock at $4.25 per share and are
exercisable through May 2005. This issuance was conducted under an exemption
under Section 4(2) of the Securities Act of 1933.

         In January 2000, the Company issued 3,900 shares of common stock (net
of 5,000 shares inadvertently issued and subsequently cancelled during fiscal
2000) valued at $29,794 (based on the closing bid price of the Company's common
stock on the date of grant) to employees for wages. This issuance was conducted
under an exemption under Section 4(2) of the Securities Act of 1933.

         In May 2000, the Company issued 3,000 shares of common stock valued at
$11,904 (based on the closing bid price of the Company's common stock on the
date of grant) to outside consultants. Subsequent to the issuance, the stock was
returned to the Company due to the contract being renegotiated with the Company.
This issuance was conducted under an exemption under Section 4(2) of the
Securities Act of 1933.

         In June 2000, the Company issued 11,800 shares of common stock valued
at $46,445 (based on the closing bid price of the Company's common stock on the
date of grant) to an outside consultant for services rendered. This issuance was
conducted under an exemption under Section 4(2) of the Securities Act of 1933.



<PAGE>

         In July 2000, the Company issued 343,539 shares of common stock in
connection with the conversion of 1000 shares of Preferred A plus accrued
dividends, totaling $36,345, at the conversion price of $3.02 per share in
accordance with the terms of the preferred stock. This issuance was conducted
under an exemption under Section 4(2) of the Securities Act of 1933.

         In August 2000, the Company issued 738,462 shares of common stock for
$600,000 in cash. In addition, the Company issued to the investor, warrants to
purchase 36,923 shares of common stock at an exercise price of $1.37 per share
and exercisable through August 2003. The warrants vested on the date of granted.
This issuance was conducted under an exemption under Section 4(2) of the
Securities Act of 1933.

         During fiscal 2000, the Company issued 5,000,000 shares of common stock
in connection with the exercise of options for $71,000 of which, $15,500 was
received subsequent to August 31, 2000. This issuance was conducted under an
exemption under Section 4(2) of the Securities Act of 1933.

ITEMS 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

         The following discussion contains certain forward-looking statements
that are subject to business and economic risks and uncertainties, and the
Company's actual results could differ materially from those forward-looking
statements. The following discussion regarding the financial statements of the
Company should be read in conjunction with the financial statements and notes
thereto.

GENERAL OVERVIEW
         The Company's operating results have fluctuated in the past and may in
the future fluctuate significantly, depending upon a variety of factors,
including the timely deployment and expansion of new network architectures, the
incurrence of related capital costs, variability and length of the sales cycle
associated with the Company's product and service offerings, the receipt of new
value-added network services and consumer services subscriptions and the
introduction of new services by the Company and its competitors. Additional
factors that may contribute to variability of operating results include: the
pricing and mix of services offered by the Company; customer retention rate;
market acceptance of new and enhanced versions of the Company's services;
changes in pricing policies by the Company's competitors; the Company's ability
to obtain sufficient supplies of sole or limited-source components; user demand
for network and Internet access services; balancing of network usage over a
24-hour period; the ability to manage potential growth and expansion; the
ability to identify, acquire and integrate successfully suitable acquisition
candidates; and charges related to acquisitions. In response to competitive
pressures, the Company may take certain pricing or marketing actions that could
have a material adverse affect on the Company's business. As a result,
variations in the timing and amounts of revenue could have a material adverse
affect on the Company's quarterly operating results. Due to the foregoing
factors, the Company believes the period-to-period comparisons of its operating
results are not necessarily meaningful and that such comparisons cannot be
relied upon as indicators of future performance. In the event that the Company's
operating results in any future period fall below the expectations of securities
analysts and investors, the trading price of the Company's common stock would
likely decline.

REVENUE
         Revenue totaled $7,987,552 for the year ending August 31, 2000, a
$6,389,476 increase over revenue of $1,598,076 for the same period last year. We
have billed but not recognized approximately $1,355,000 of deferred revenue, as
the services have not yet been performed as of August 31, 2000. These increases
reflect the growth in revenue from Private Networking, Broadband Internet
Access, Internet and Intranet based Web Hosting, Hosted Application Services,
Intelligent Routing and Content Delivery Services, Network and Systems
Management, Professional Services, from marketing arrangements with new
strategic partners, and sale of equipment to support these product offerings.

COST OF SALES
         Cost of sales increased for the year ending August 31, 2000 to
$5,670,287, an increase of $4,747,698 from $922,589 for the year ending August
31, 1999. Cost of sales consists primarily of access charges from local exchange
carriers, backbone and Internet access costs, and the cost of customer equipment
to support network systems. Gross profits decreased from 42% in 1999 to 29% in
2000. The Company expects its gross profits to increase. In an effort to reduce
the monthly minimum usage fees of Internet service provider access, the Company
is continuously negotiating new contracts with various providers to obtain more
competitive pricing.



<PAGE>

SELLING EXPENSE
         Selling expense consists primarily of personnel expenses, including
salary and commissions, and costs for customer support functions. Marketing and
sales expense was $3,734,492 for the year ending August 31, 2000 and $111,903
for the year ending August 31, 1999, which represents a $3,622,589 increase. The
increase reflects an expansion of the direct sales organization necessary to
support increased DSL revenue volumes. In August 2000, the Company laid off all
retail Internet sales personnel under a decision made by the current executive
management. This layoff will contribute significantly to the reduction of
selling expense as the sales focus changes from reselling retail based business
class DSL connectivity to higher margin Managed Services, including Real Private
Network(TM) (RPN(TM)) technology, Internet and Intranet based Web Hosting,
Hosted Application Services, Intelligent Routing and Content Delivery Services,
Network and Systems Management, and Professional Services.

GENERAL AND ADMINISTRATIVE EXPENSE
         General and administrative expense consists primarily of personnel
expense, rent and professional fees. General and administrative expense was
$14,228,013 for the year ending August 31, 2000 and $1,406,209 for the year
ending August 31, 1999, which represents a $12,821,804 increase. As of August
31, 2000, general and administrative expense primarily consisted of $3,216,652
in administrative wages, technical support engineers and related taxes and
benefits; $480,600 in amortization of goodwill; $464,244 in depreciation
expense; $394,865 in operating equipment leases; $2,475,775 in systems
implementation and costs; $1,018,876 for professional fees; $495,204 in rent
expense; $1,205,441 in telephone expenses; $3,022,007 of non-cash charged for
the issuance of common stock and options for services rendered and for
compensation, $240,000 in severance expense, and $1,214,349 in other operating
expenses. The Company has determined that the Goodwill and certain related
assets have no future value and therefore have reflected the loss on impairment
of $4,060,948 in the current fiscal year. Currently, the Company is taking
aggressive steps to decrease future general and administrative expenses,
reflecting increased operational efficiencies.

INTEREST EXPENSE
         Interest expense was $773,300 for the year ending August 31, 2000 and
$18,736 for the year ending August 31, 1999. The increase is related to interest
on new capital leases of $67,212, interest on the Company's line of credit of
$30,000, interest on notes payable from related parties of $164,184, interest on
convertible note payable of $30,000, a non-cash charge in the amount of $428,571
for a beneficial conversion feature on a convertible note and warrants valued at
$53,333 in connection with the issuance of the convertible note.

NET LOSS
         The Company incurred a net loss for the year ending August 31, 2000 of
$20,481,888 compared to $863,361 for the year ending August 31, 1999. The
Company's near term focus is to become profitable by negotiating provider costs
and reducing all expenses to minimum levels. However, we believe that we will
still incur losses in the near term and we cannot assure that the Company will
be profitable in the future.

         ASSETS AND LIABILITIES Assets increased by $3,994,335 from $2,940,043
as of August 31, 1999 to $6,934,378 as of August 31, 2000. The increase was due
primarily to increases in accounts receivable of $795,354, net property and
equipment of $4,673,276 and decrease in cash of $112,815 and other assets of
$1,361,480. Liabilities increased by $15,134,267 from $2,033,558 as of August
31, 1999 to $17,167,825 as of August 31, 2000. The increase was primarily to
increases in accounts payable and accrued expenses of $11,477,993, line of
credit of $600,000, convertible note payable of $1,000,000, payroll and payroll
related liabilities of $423,607, notes payable-related parties of $1,222,493,
capital leases of $146,101 and other liabilities of $264,073. The increase in
accounts payable and accrued expenses are associated with the increase in
Internet service provider fees, third party costs associated with the
implementation of software systems and systems costs and the costs of third
party proprietary licenses. During the current fiscal year the Company borrowed
from lines of credit and increased its notes payable from shareholders.

STOCKHOLDERS' (DEFICIT) EQUITY
         Stockholders' equity decreased by $11,139,932 from $906,485 as of
August 31, 1999 to a deficit of ($10,233,447) as of August 31, 2000. The
decrease is attributable to the current year net loss of $20,481,888 and
dividends accrued on Preferred stock of $167,500, offset by the estimated fair
market value of the non-cash issuance of common stock, options and warrants of
$3,847,185, the issuance of Preferred A and common stock for $5,233,700 in cash,
and the beneficial conversion feature of the convertible note payable of
$428,571.



<PAGE>

LIQUIDITY AND CAPITAL RESOURCES
GENERAL
         Overall, the Company had negative cash flows of $112,815 in fiscal year
2000 resulting from $7,213,111 of cash provided by the Company's financing
activities, offset by $1,977,398 of cash used in operating activities and
$5,348,528 of cash used in investing activities.

CASH FLOWS FROM OPERATIONS
         Net cash used in operation activities of $1,977,398 in fiscal year 2000
was primarily due to the net loss of $20,481,888 and an increase in accounts
receivable or $795,354; decrease in other assets of $16,341; offset partially by
the increase of operating liabilities, principally accounts payable and accrued
expenses of $10,210,142, payroll and related taxes of $423,607; accrued interest
to related parties of $140,051; the fair market value of stock issued for salary
of $29,794; the fair market value of stocks, options and warrants issued in
exchange for services rendered of $2,992,213; warrants issued in connection with
the convertible note payable of $53,333, beneficial conversion recorded as
interest in connection with the convertible note payable of $428,571;
depreciation and amortization expense of $944,844; and the loss on impairment of
long-lived assets of $4,060,948.

CASH FLOWS FROM INVESTING
         Net cash used in investing activities of $5,348,528 in fiscal year 2000
funded purchases of property and equipment of $5,030,457, purchase of other
assets of $78,441 and increase in deposits of $239,630.

CASH FLOWS FROM FINANCING
         Net cash provided by financing activities of $7,213,111 in fiscal year
2000 was primarily due to the proceeds from issuance of common stock of
$655,500; issuance of convertible preferred stock of $4,578,200, net of offering
costs of $421,900; borrowings on convertible note payable and line of credit of
$1,600,000; borrowings on notes payable to related parties of $787,440; offset
primarily by repayments on notes payable and capitalized leases obligations of
$408,029.

         To date, we have satisfied our cash requirements primarily through debt
and equity financings and capitalized lease financings. The Company's principal
uses of cash are to fund working capital requirements and to service our capital
lease and debt financing obligations. The Company believes that it will generate
positive cash flow from operations within the next twelve-month period. There
can be no assurances that the Company will be successful in securing additional
financing, and if secured, it will be sufficient to satisfy working capital
needs.

LONG-TERM FINANCING
         The Company believes that its anticipated funds from operations will be
insufficient to fund its working capital and other requirements through August
31, 2001. Therefore, the Company will be required to seek additional funds
either through debt or equity financing to finance its long-term operations
("Additional Funds"). Should the Company fail to raise the Additional Funds, the
Company will have insufficient funds for the Company's intended operations for
the next twelve months that may have a material adverse effect on the Company's
long-term results of operations.

CONTINGENT LIABILITIES
         As of August 31, 2000, the Company has been billed approximately
$2,744,000 from a third party, for consulting services in connection with the
implementation of certain software programs. Since the Company decided not to
pursue further implementation of such programs, the Company has expensed the
entire amount under general and administrative expense in the accompanying
statement of operations. The Company has retained the services of an outside
consultant to examine the appropriateness of such services and related charges.
As of August 31, 2000, the Company has accrued approximately $2,744,000 but has
Made no payment towards this liability nor has the final payment amount been
settled.

         As of May 31, 2000, the Company entered into an agreement with a
software vendor for software licenses and promotional support with the intention
of reselling these licenses to customers as part of our Managed Service
offering. To date, the Company has not received the promotional support services
portion of this agreement and has declared that the related assets do not
provide any future benefit to the Company. As a result, the Company has
recognized an impairment of $1,260,718 in the current fiscal year. The debt
remains on the balance sheet within accounts payable and is currently being
negotiated with the vendor.



<PAGE>

         The Company has recorded an accrual for the past due payroll taxes of
August 31, 2000 due to the under-payment of the Company's payroll tax liability.
As a result, the Company has accrued approximately $441,000 related to payroll
taxes in the accompanying balance sheet at August 31, 2000. The Company
anticipates having this matter settled by August 31, 2001.

GOING CONCERN
         The Company's independent certified public accountants have stated in
their report included in this Form 10-KSB, that the Company has incurred
operating losses in the last two years, has a working capital deficit and a
significant stockholders deficit. These conditions raise substantial doubt about
the Company's ability to continue as a going concern.

CAPITAL EXPENDITURES
         The Company has no capital expenditures of significance planned for the
next twelve months.

INFLATION
         Management believes that inflation has not had a material effect on the
Company's results of operations.

ITEM 7.  FINANCIAL STATEMENTS
         The consolidated financial statements and supplementary financial
information that are required to be filed under this item are presented as an
exhibit. Exhibits and Reports on Form 10-KSB in this document, and are
incorporated herein by reference.

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE
         On November 30, 2000, the Company filed on Form 8-K, reporting a change
of its accountants. Timothy L Steers, CPA was previously the principal
accountant for LMKI. On November 28, 2000 Timothy Steers, CPA was disengaged by
LMKI as the principal accountant and Corbin & Wertz was engaged as the principal
accountant to audit LMKI for the year ending August 31, 2000. The decision to
change accountants was approved by the Company's Board of Directors. Corbin and
Wertz did not provide any consultation to LMKI prior to being engaged as the
Company's principal accountant.

         During the fiscal years ended August 31, 1998, 1999 and through the
date of this report, there was no disagreements with Timothy L Steers, CPA on
any matters of accounting principals or practices, financial statement
disclosure or audit scope or proceeding, which disagreement, if not resolved to
the satisfaction of Timothy Steers, CPA, would have caused them to make
reference to the matter of such disagreement in connection with the Form 8-K,
dated November 28, 2000.

         The Company had requested that Timothy L. Steers, CPA provide a letter
addressed to the Securities and Exchange Commission stating whether it agrees
with the above statements. A copy of that letter is filed with the Form 8-K,
dated November 30, 2000, incorporated herein by reference.

<PAGE>

                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
         COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

         The following table sets forth the names and ages of the current
directors and executive officers of the Company, the principal offices and
positions with the Company held by each person and the date such person became a
director or executive officer of the Company. The Board of Directors elects the
executive officers of the Company annually. The directors serve one-year terms
until their successors are elected. The executive officers serve terms of one
year or until their death, resignation or removal by the Board of Directors.
There are no family relationships between any of the directors and executive
officers. In addition, there was no arrangement or understanding between any
executive officer and any other person pursuant to which any person was selected
as an executive officer.

The directors and executive officers of the Company are as follows:

Name                       Age   Position(s)
--------------------------------------------------------------------------------

Bryan L. Turbow            32    Director, Chief Executive Officer, President,
                                   Chief Technology Officer

Chris Capadouca            36    Chief Information Officer

Barry W. Hall              52    Director, Chairman of the Board

Teresa M. Throenle         38    Director


         The following is a brief summary of the business experience of our
executive officers and directors:

         BRYAN L. TURBOW has been a member of our Board of Directors since
October 1999. In 1986 Mr. Turbow founded Mobilenetics and was its President and
sole stockholder. Mobilenetics was a telecommunications consulting and systems
integration company that merged with LMKI in June 1999.

         CHRIS CAPADOUCA brings to the Company more than 13 years of experience
in the information technology (IT) field and a particular expertise in
enterprise architecture and systems management. Before joining LMKI, Mr.
Capadouca was an Enterprise Architect for EDS E.Solutions Customer Relationship
Management (CRM) Practice, where he was responsible for architecture leadership
and providing subject matter expertise to CRM engagements. Prior to EDS, Mr.
Capadouca was a Manager of Technology and Lead Architect at MCI Systemhouse, the
former consulting arm of MCI WorldCom purchased by EDS in February 1999. At MCI
Systemhouse, Mr. Capadouca's responsibilities included enterprise-wide
architecture strategy development and the implementation of distributed systems
technologies for Fortune 500 clients.

         BARRY W. HALL is currently Executive Vice President, Chief Financial
Officer of Styleclick, Inc, a NASDAQ-listed e-commerce services provider and
on-line distributor of consumer products. Mr. Hall is the former CFO of
EarthLink Network, Inc., one of the nation's leading publicly-traded Internet
Service Providers and former Chairman and Chief Executive Officer of California
Amplifier, Inc., a publicly-traded manufacturer and marketer of wireless
communications components and subsystems. During his career, Mr. Hall has also
served as Chief Financial Officer of L.A. Cellular (now AT&T Wireless). Mr. Hall
holds a BA in Mathematics and an MBA from San Diego State University. Prior to
business school, Mr. Hall served as a First Lieutenant in the United States
Marine Corp and was selected for the rank of Captain.

         TERESA M. THROENLE is the Chief Financial Officer, SeaWest Financial
Corporation, a financing company with a current loan portfolio of $125 million
and a growth rate of 600% per year over the last three years and profitability
growth of over 1200%. Ms. Throenle possesses over fourteen years of experience
in executive financial management. Prior to joining SeaWest, Ms. Throenle
founded Insight Financial Management, Inc., instructed for the University of
Southern California-Business Expansion Network and taught for the Women's
Enterprise Development Corp. Ms. Throenle holds a Master of Business
Administration from Pepperdine University and a Bachelor of Science in
Professional Accounting from California State University, Long Beach. Her
professional affiliations include candidate membership in the California Society
of Certified Public Accountants and the Association of Certified Fraud
Examiners.



<PAGE>

AGREEMENTS
         We entered into an employment agreement with Chris Capadouca in May
2000, pursuant to which he agreed to serve as our Chief Information Officer.
This employment agreement has a three-year term and provided for base salary of
$150,000, allowances for bonuses based upon goals and fringe benefits. The
agreement provides for a maximum of twelve months of severance compensation, as
defined, in certain cases of termination.

         We entered into an employment agreement with Leonard Kajimoto in June
2000, pursuant to which he agreed to serve as our Vice President of Operations.
This employment agreement has a three-year term and provided for base salary of
$140,000, allowances for bonuses based upon goals and fringe benefits. The
agreement provides for a maximum of twelve months of severance compensation, as
defined, in certain cases of termination.

         We entered into a severance agreement effective August 8, 2000 and
restated and amended November 15, 2000, with our former Chairman and CEO
as follows:

         o        the Company agreed to pay the former Chairman and CEO a
                  severance amount of $120,000 payable in twelve equal monthly
                  installments beginning August 10, 2000. During fiscal 2000,
                  the Company has made payments in the amount of $10,000 in
                  connection with the severance liability. As of August 31,
                  2000, the Company has accrued the remaining undiscounted
                  amount of $110,000 in accrued liabilities in the accompanying
                  balance sheet;

         o        subsequent to August 31, 2000, the Company and the former
                  Chairman and CEO agreed to offset a note payable to the former
                  Chairman and CEO with certain accounts receivable in the
                  amount of $600,000 from SpeeDSL, a related party;

         o        subsequent to August 31, 2000, the former Chairman and CEO
                  agreed to return 15,000,000 shares of common stock and the
                  Company would adjust his note payable to $2,127,000;

         o        subsequent to August 31, 2000, the Company agreed to secure
                  the note payable to the former Chairman and CEO with 5,000,000
                  shares of common stock from the current Chief Executive
                  Officer; and

         o        subsequent to August 31, 2000, the Company agreed the former
                  Chairman and CEO agreed to cancel 2,000,000 options, which
                  were outstanding at August 31, 2000.

         Effective August 8, 2000 the Company entered into a severance agreement
with its former Chief Operating Officer ("COO"). The agreement requires the
Company to pay the former COO a severance amount of $120,000 payable in twelve
equal monthly installments beginning August 10, 2000. During fiscal 2000, the
Company has made payments in the amount of $10,000 in connection with the
severance liability. At August 31, 2000 the Company has accrued the remaining
undiscounted amount of $110,000 in accrued liabilities in the accompanying
balance sheet.

         In conjunction with these severance agreements, the former CEO and COO
executed irrevocable proxies for third parties to vote their shares.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
       Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires our directors and executive officers and persons who hold more than 10%
of a registered class of our equity securities to file with the Securities and
Exchange Commission initial reports of ownership and reports of changes in
ownership of our equity securities. These individuals are required to furnish us
with copies of all Section 16(a) forms they file. To our knowledge, based solely
on review of the copies of such reports furnished to us and written
representations that no other reports were required during the year ended August
31, 2000, all Section 16(a) filing requirements applicable to these individuals
were complied with.

         During November 2000, it was discovered that the former CFO and
beneficial owner (as defined by the Securities Exchange Act of 1934), had
profited from purchases and subsequent sales of the Company's common stock held
for less than six (6) months (a "short-swing" profit). Pursuant to Section 16(b)
of the Securities Exchange Act of 1934, the Company acted to recover these
profits from the former CFO. As a result, the Company received $16,380, which
has been credited to additional paid-in capital as a contribution to
shareholders' deficit.



<PAGE>

ITEM 10.  EXECUTIVE COMPENSATION
         The Summary Compensation Table below sets forth information for
services in all capacities, which we paid or accrued for the fiscal years ended
August 31, 2000, 1999 and 1998. Other than as set forth herein, no executive
officer's salary and bonus exceeded $100,000 in any of the applicable years. The
following information includes the annual dollar value of salaries, bonus
awards, the number of stock options granted and certain other compensation, if
any, whether paid or declared.

<TABLE>
                               SUMMARY COMPENSATION TABLE
<CAPTION>
                                                                                LONG-TERM
                                                 ANNUAL                       COMPENSATION
                                 FISCAL       COMPENSATION       RESTRICTED    SECURITIES
                               YEAR ENDED   -----------------      STOCK       UNDERLYING       LTIP
NAME AND PRINCIPAL POSITION    AUGUST 31    SALARY($)  (BONUS)     AWARDS       OPTIONS        PAYOUTS  OTHER
---------------------------    ----------   ---------  -------   ----------   ------------     -------  -----
<S>                               <C>       <C>           <C>     <C>           <C>               <C>     <C>
William Kettle (1)                2000      $120,000      -          -              -             -       -
Chairman of the Board             1999      $   -         -          -          3,000,000(5)      -       -
Of Directors and                  1998      $   -         -       4,000,000     4,000,000         -       -
Chief Executive Officer

Bryan L. Turbow (2)               2000      $120,000      -          -              -             -       -
Director                          1999      $120,000      -          -              -             -       -
President and                     1998      $   -         -          -              -             -       -
Chief Technology Officer

Adela M. Kettle (3)               2000      $120,000      -          -              -             -       -
Director                          1999      $   -         -          -              -             -       -
Chief Operations Officer          1998      $   -         -          -              -             -       -

John Diehl (4)                    2000      $120,000      -          -            200,000         -       -
Director                          1999      $   -         -          -            500,000         -       -
Chief Financial Officer           1998      $   -         -          -              -             -       -

Chris Capadouca                   2000      $150,000      -          -            350,000         -       -
Director                          1999      $   -         -          -              -             -       -
Chief Information Officer         1998      $   -         -          -              -             -       -

Leonard Kajimoto                  2000      $140,000      -          -            150,000         -       -
Vice President, Operations        1999      $   -         -          -              -             -       -
                                  1998      $   -         -          -              -             -       -
</TABLE>

---------------
(1)      During the year ended August 31, 2000, Mr. William Kettle resigned from
         his position as Chairman of the Board and Chief Executive Officer.

(2)      During the year ended August 31, 2000, Mr. Bryan L. Turbow was
         appointed Interim Chief Executive Officer upon the resignation of Mr.
         William Kettle.

(3)      During the year ended August 31, 2000, Mrs. Adela M. Kettle resigned
         from her position as Director and Chief Operations Officer.

(4)      During the year ended August 31, 2000, Mr. John Diehl resigned from his
         position as Director and Chief Financial Officer.

(5)      During fiscal 2000, Mr. Kettle agreed to cancel 1,000,000 of his stock
         options outstanding.



<PAGE>

OPTION/SAR GRANTS IN LAST FISCAL YEAR
         The following table provides information on option grants for the
fiscal year ended August 31, 2000 to individuals named in our Summary
Compensation table above. No stock appreciation rights ("SAR's") were awarded in
fiscal 2000.

<TABLE>
                                INDIVIDUAL GRANTS
<CAPTION>
                                          % OF TOTAL
                                        OPTIONS GRANTED         EXERCISE
                       OPTIONS           TO EMPLOYEES           PRICE PER       EXPIRATION
NAME                  GRANTED(#)        IN FISCAL YEAR            SHARE            DATE
---------------       ----------        ---------------         ---------       ----------
<S>                     <C>                   <C>                <C>             <C>
John Diehl(1)           200,000                8%                $4.531          11/25/01
Chris Capadouca         350,000               14%                $7.000          04/16/03
Leonard Kajimoto        150,000                6%                $3.940          05/30/03
</TABLE>

-----------
(1)      During fiscal 2000, Mr. John Diehl resigned as Director and Chief
         Financial Officer. As a result of his resignation the granted options
         cannot not be exercised after 30 days.

<TABLE>
               AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
                      AND FISCAL YEAR END OPTION/SAR VALUE
<CAPTION>
                                                     NUMBER OF SECURITY
                             NUMBER                  UNDERLYING UNEXERCISED       VALUE OF UNERCISABLE
                             OF                      OPTIONS/SARS AT FISCAL       IN THE MONEY OPTIONS/SARS
                             SHARES       VALUE      YEAR END                     AT FISCAL YEAR END (2)
       NAME                  ACQUIRED    REALIZED    EXERCISABLE/UNEXERCISABLE    EXERCISABLE/UNEXERCISABLE
       -------------------   ---------  ----------   -------------------------    -------------------------
       <S>                   <C>        <C>             <C>                        <C>          <C>
       William Kettle        4,000,000  $8,376,000      2,000,000 /    -           $3,562,000 / $    -
       John Diehl              500,000  $4,765,500        200,000 /    -           $    -     / $    -
       Chris Capadouca           -      $   -             100,000 / 250,000        $    -     / $    -
       Leonard Kajimoto          -      $   -               -     / 150,000        $    -     / $    -
</TABLE>


DIRECTOR'S COMPENSATION
-----------------------
       The directors of the Company are presently receiving no compensation for
time and responsibilities.

2000/1999 STOCK OPTION PLANS
----------------------------
         In February 2000, the Company's Board of Directors and majority
shareholders approved the LMKI, Inc. 2000 Stock Option Plan ("the 2000 plan"),
effective March 1, 2000. An aggregate of 5,000,000 shares of common stock are
reserved for issuance under the 2000 plan. The exercise price for each option
shall be equal to 85% to 110% of the fair market value of the common stock on
the date of grant, as defined, and shall vest over no more than a five-year
period. The plan shall terminate ten years after its adoption by the Board of
Directors and may be terminated by the Board of Directors on any earlier date,
as defined.

         During fiscal 2000, the Board of Directors granted to various
employees, pursuant to the 2000 plan, an aggregate of 1,101,300 options (net of
407,570 options that were issued and cancelled during fiscal 2000) at exercise
prices ranging from $1.30 to $10.875 (based on the closing bid price of the
Company's common stock on the date of each grant). The options vest through
August 2003 and are exercisable through August 2005.

         On November 7, 1999 the Company's Board of Directors and majority
shareholders approved the LMKI, Inc. Amended and Restated 1999 Stock Option
Plan ("the 1999 plan"), effective April 13, 2000. An aggregate of 5,000,000
shares of common stock are reserved for issuance under the 1999 plan. The
exercise price for each option shall be equal to 85% to 110% of the fair market
value of the common stock on the date of grant, as defined, and shall vest over
no more than a five-year period. The plan shall terminate ten years after its
adoption by the Board of Directors and may be terminated by the Board of
Directors on any earlier date, as defined.



<PAGE>

         During fiscal 2000, the Board of Directors granted to various
employees, pursuant to the 1999 plan, an aggregate of 1,276,560 options (net of
643,800 options that were issued and cancelled during fiscal year 2000) at
exercise prices ranging from $4.531 to $15.00 (based on the closing bid price of
the Company's common stock on the date of each grant). The options vest through
January 2003 and are exercisable through January 2005. In addition, the Board of
Directors granted to various employees, pursuant to the 1999 plan, an aggregate
of 103,600 options (net of 13,000 issued and cancelled during fiscal year 2000)
at an exercise price of $4.00 resulting in $55,012 of compensation expense to be
charged to the Company over the two year vesting period under APB 25, of which,
none was charged during fiscal 2000.


ITEM 11. SECURITY OWNERSHIP OF EXECUTIVE OFFICERS, DIRECTORS AND BENEFICIAL
         OWNERS OF GREATER THAN 5% OF OUR COMMON STOCK

         The following table sets forth information with respect to the
beneficial ownership of our common stock owned, as of January 8, 2001 by:

         o        holders of more than 5% of our common stock;
         o        each of our directors;
         o        our executive officers; and
         o        all directors and executive officers of the Company as a group

         As of August 31, 2000, an aggregate of 42,288,367 shares of our common
stock were issued and outstanding. For purposes of computing the percentages
under this table, it is assumed that all options and warrants to acquire our
common stock which have been issued to the directors, executive officers and the
holders of more that 5% of our common stock and are fully vested or will become
fully vested within 60 days of the date of this Annual Report have been
exercised by these individuals and the appropriate number of shares of our
common stock have been issued to these individuals.

                                               LMKI, INC. COMMON STOCK
                                        --------------------------------------
NAME AND ADDRESS OF                      AMOUNT AND NATURE OF       PERCENT OF
 BENEFICIAL OWNER                       BENEFICIAL OWNERSHIP(1)        CLASS
-------------------                     -----------------------     ----------
William J. Kettle                               2,970,000               7.1%
3355 Michelson Dr., Suite 300
Irvine, CA  92626

Bryan L. Turbow                                12,000,000              28.4%
3355 Michelson Dr., Suite 300
Irvine, CA  92626

John W. Diehl                                     875,000(2)            2.1%
3355 Michelson Dr., Suite 300
Irvine, CA  92626

Christopher A. Capadouca                          350,000(3)             *
3355 Michelson Dr., Suite 300
Irvine, CA  92626

Barry W. Hall                                     150,000(4)             *
3355 Michelson Dr., Suite 300
Irvine, CA  92626

Teresa M. Throenle                                  25,000(5)            *
3355 Michelson Dr., Suite 300
Irvine, CA  92626

All directors and executive
officers of the Company as
a group                                         16,370,000             38.7%
-------------
*  Less than one percent (1%)

1.   Beneficial ownership has been determined in accordance with Rule 13d-3
     under the Securities Exchange Act of 1934. Unless otherwise noted, we
     believe that all persons named in the table have sole voting and investment
     power with respect to all shares of common stock beneficially owned by
     them.

2.   Includes 200,000 shares of our common stock issuable upon exercise of
     vested options. Represents options issued 11/26/1999 in accordance with the
     1999 Stock Option Plan.



<PAGE>

3.   Includes 350,000 shares of our common stock issuable upon exercise of
     vested options. Represents options issued 4/17/2000 in accordance with the
     2000 Stock Option Plan.

4.   Includes 150,000 shares of our common stock issuable upon exercise of
     vested options. Represents options issued 8/14/2000 in accordance with the
     2000 Stock Option Plan.

5.   Includes 25,000 shares of our common stock issuable upon exercise of vested
     options. Represents options issued 5/31/2000 in accordance with the 2000
     Stock Option Plan.


ITEM 12. TRANSACTIONS WITH OFFICERS AND DIRECTORS AND OTHER BUSINESS
         RELATIONSHIPS
         In May 1998, the Company issued 2,000,000 shares of common stock to the
then Chairman and CEO in exchange for $100 and a communications equipment lease.
Management of the Company valued the shares grants at $.075 per share, which
represented an 86.7% discount from the closing bid price of the Company's
common stock at the date of grant. Management of the Company estimated
the value of the Company's shares granted after considering the historical trend
of the trading prices for its common stock and the limited volume of shares
being traded. The Company recorded capitalized lease costs totaling $40,200
during the year ended August 31, 1998 as a result of these grants.

         In December 1998, the Board of Directors authorized the issuance of
4,000,000 shares of common stock to the then Chairman and CEO of the Company in
exchange for compensation. Management of the Company valued the shares granted
to its chairman at $.015 per share, which represented a 50.0% discount from the
closing bid price of the Company's common stock at the date of issuance.
Management of the Company estimated the value of the Company's shares granted
after considering the historical trend of the trading prices for its common
stock and the limited volume of shares being traded. The Company recorded
compensation expense totaling $62,000 during the year ended August 31, 1999 as a
result of the grant.

         Also in March 1999, the Company issued 1,000,000 shares of common stock
to the son of the then Chairman and CEO in exchange for communication software
developed specifically for the Company. Management of the Company valued the
shares grants at $.09 per share, which represented no discount form the closing
bid price of the Company's common stock at the date of grant. The Company
recorded capitalized software costs totaling $90,000 during the year ended
August 31, 1999 as a result of this grant.

         During fiscal year 1999, the then Chairman and CEO advanced $797,680
to the Company for working capital purposes. The notes payable bear interest
at 10% per annum.

         During fiscal 2000, the then Chairman and CEO of the Company entered
into a verbal contract with SpeeDSL, which is owned and operated by the son of
the then Chairman and CEO, to be a reseller of access services. During fiscal
2000, the Company invoiced SpeeDSL approximately $593,000 for access services
fees, of which, $580,000 is included in accounts receivable in the accompanying
Balance Sheet at August 31, 2000. Cost incurred by LMKI for such services were
approximately $988,000, including approximately $395,000 of physical routers
that are at customer locations, which the Company intends to recover or be
reimbursed for from SpeeDSL.

        During fiscal 2000, the Company borrowed approximately $1,535,990 from
certain officers and stockholders.  The borrowings bear interest at rates
ranging from 8% to 21%.




<PAGE>

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

INDEX TO FINANCIAL STATEMENTS

                                                                     PAGE
                                                                     -----
Reports of Independent Audtors' . . . . . . . . . . . . . . . . . .   F-1

Consolidated balance sheet. . . . . . . . . . . . . . . . . . . . .   F-3

Consolidated statements of operations for two years
ended August 31, 2000 and 1999. . . . . . . . . . . . . . . . . . .   F-4

Consolidated statements of stockholders' deficit
for two years ended August 31, 2000 and 1999. . . . . . . . . . . .   F-5

Consolidated statements of cash flows for two years
ended August 31, 2000 and 1999. . . . . . . . . . . . . . . . . . .   F-6

Notes to consolidated financial statements. . . . . . . . . . . . .   F-8




<PAGE>

INDEX TO EXHIBITS

EXIBIT NO       DESCRIPTION

   1.          Notice of $35 million investment agreement from Swartz
               Private Equity, LLC, dated December 02, 1999.

   2.          Notice of $5 million Private Placement Commitment, dated
               December 3, 1999.

   3.          Notice from The Nasdaq Stock Market ("Nasdaq") on the
               Company's application, dated July 28, 2000.

   4.          Notice of Chairman, Chief Executive Officer and Chief
               Operations Officer Resignations, date August 16, 2000.


   5.          Exhibits and Reports on Form 8-K

               (a) Exhibit Table:

                   EX-27  Financial Data Schedule

               (b) Form 8-K:

                   1.      Resignation of registrant's Director,
                           dated, November 3, 2000.

                   2.      Notice of amended agreement with former
                           Chairman and Chief Executive Officer,
                           dated, November 28, 2000.

                   3.      Notice of change of accounting firms
                           dated, November 30, 2000.

                   The above reports on Form 8-K have been filed during
                   the last quarter (June 1, 2000 through August 31, 2000).






<PAGE>

                                  [SIGNATURES]

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

Date: January 16, 2001

In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.

LMKI, INC. (Registrant)

Signature                           Title                       Date
---------                           -----                       ----

/S/ Bryan L. Turbow                 Director and                January 16, 2001
--------------------------------    Chief Executive Officer
Bryan L. Turbow


/S/ Teresa M. Throenle              Director                    January 16, 2001
--------------------------------
Teresa M. Throenle




<PAGE>

                          INDEPENDENT AUDITORS' REPORT



To the Board of Directors and Shareholders of LMKI, Inc:

         We have audited the accompanying consolidated balance sheet of LMKI,
Inc. (the "Company") and subsidiaries as of August 31, 2000 and the related
consolidated statements of operations, stockholders' deficit 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 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 audit provides reasonable
basis for our opinion.

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of LMKI, Inc.
at August 31, 2000 and the results of their operations and their cash flows for
the year then ended, in conformity with accounting principles generally accepted
in the United States of America.

         The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As disclosed in Note
1, the Company has incurred significant operating losses in the last two years,
has a working capital deficit of $13,345,607, negative cash flows from
operations, liabilities from the underpayment of payroll taxes, non-compliance
with certain restrictive covenants and a stockholders' deficit of $10,233,447 at
August 31, 2000. These factors, among others, raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are described in Note 1. The consolidated financial statements
do not include any adjustments that may result from the outcome of this
uncertainty.


                                                     /s/ CORBIN & WERTZ


Irvine, California
January 10, 2001
                                     F-1




<PAGE>

                          INDEPENDENT AUDITORS' REPORT



To the Board of Directors and Shareholders of LMKI, Inc:

         We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of LMKI, Inc. (the "Company") and
subsidiaries for the year ended Augsut 31, 1999. 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 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 audit provides reasonable
basis for our opinion.

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of LMKI, Inc. and subsidiaries for the year ended August 31, 1999, in
conformity with accounting principles generally accepted in the United States
of America.


                                                     /s/ TIMOTHY L. STEERS, CPA



Portland, Oregon
May 12, 2000
                                     F-2




<PAGE>

                                    LMKI Inc.
                           Consolidated Balance Sheet


                                                                  August 31,
                                                                --------------
                                                                     2000
                                                                --------------
ASSETS
  Current assets:
    Cash                                                        $      12,877
    Accounts receivable, net of allowance for
      doubtful accounts of $50,000                                  1,633,204
                                                                --------------
         Total current assets                                       1,646,081

    Property and equipment, net                                     4,935,343

    Deposits and other assets                                         352,954
                                                                --------------
                                                                $   6,934,378
                                                                ==============

LIABILITIES AND STOCKHOLDERS' DEFICIT
  Current liabilities:
    Accounts payable and accrued liabilities                    $  12,477,312
    Line of credit                                                    600,000
    Convertible note payable                                        1,000,000
    Accrued payroll and related liabilities                           557,356
    Accrued dividends payable                                         131,155
    Accrued interest payable to related parties                       143,163
    Current portion of capital lease obligations                       82,702
                                                                --------------
         Total current liabilities                                 14,991,688

  Obligations under capital lease, net of current portion             155,964
  Related party notes payable                                       2,020,173
                                                                --------------
         Total liabilities                                         17,167,825
                                                                --------------

  Stockholders' deficit:
    Series A 6% convertible preferred stock,
     $.001 par value; 5,000 shares authorized,
     4,000 issued and outstanding; liquidation
     preference and accrued dividends of $4,131,155                         4
    Common stock, $.001 par value;
     50,000,000 shares authorized,
     42,288,367 shares issued and outstanding                          42,289
    Additional paid-in capital                                     15,397,404
    Accumulated deficit                                           (25,673,144)
                                                                --------------
         Total stockholders' deficit                              (10,233,447)
                                                                --------------
                                                                $   6,934,378
                                                                ==============

                      See independent auditors' reports and
             accompanying notes to consolidated financial statements
                                     F-3




<PAGE>
<TABLE>

                                        LMKI, INC.
                           Consolidated Statements of Operations
<CAPTION>

                                                              Years Ended August 31,
                                                          -----------------------------
                                                              2000            1999
                                                          -------------   -------------
<S>                                                       <C>             <C>
Net sales                                                 $  7,987,552    $  1,598,076

Cost of goods sold                                           5,670,287         922,589
                                                          -------------   -------------
    Gross profit                                             2,317,265         675,487
                                                          -------------   -------------

Operating expenses:
     Selling                                                 3,734,492         111,903
     General and administrative                             14,228,013       1,406,209
     Loss on impairment of long-lived assets                 4,060,948             -
                                                          -------------   -------------
         Total operating expenses                           22,023,453       1,518,112

                                                          -------------   -------------
Loss from operations                                       (19,706,188)       (842,625)

Interest expense                                               773,300          18,736
                                                          -------------   -------------

Loss before provision for income taxes                     (20,479,488)       (861,361)

Provision for income taxes                                       2,400           2,400
                                                          -------------   -------------

Net loss                                                  $(20,481,888)   $   (863,361)
                                                          =============   =============

Net loss available to common stockholders per share       $      (0.68)   $      (0.03)
                                                          =============   =============

Basic/diluted weighted average common shares
  outstanding                                               36,524,870      28,792,000
                                                          =============   =============
</TABLE>

                      See independent auditors' reports and
             accompanying notes to consolidated financial statements
                                     F-4




<PAGE>

<TABLE>

                                                  LMKI, Inc.
                               Consolidated Statements of Stockholders' Deficit
<CAPTION>

                                   Common Stock       Preferred Stock    Additional                     Total
                                  ----------------    ----------------     Paid-in    Accumulated   Stockholders'
                                  Shares    Amount    Shares    Amount     Capital      Deficit        Deficit
                               ----------------------------------------------------------------------------------
<S>                             <C>         <C>         <C>     <C>      <C>          <C>            <C>
Balance at August 31, 1998      19,986,666  $19,987        -    $   -    $   115,155  $   (99,995)   $    35,147

Estimated fair market value
 of common stock issued
 for services rendered             800,000      800        -        -         97,600          -           98,400
Estimated fair market value
 of common stock issued
 for compensation               4,329,000     4,329        -        -        132,370          -          136,699
Estimated fair market value
 of common stock issued
 for equipment                   1,000,000    1,000        -        -         89,000          -           90,000
Estimated fair market value
 of common stock issued for
 purchase of Mobilenetics       10,000,000   10,000        -        -      1,390,000          -        1,400,000
Estimated fair market value
 of options issued for
 services                              -        -          -        -         10,000          -           10,000
Net loss                               -        -          -        -            -       (863,761)      (863,761)
                                ----------  -------  ---------  -------  -----------  -------------  ------------
Balance at August 31, 1999      36,115,666   36,116        -        -      1,834,125     (963,756)       906,485

Issuance of Series A 6%
 convertible preferred Stock
 for cash, net of commission
 paid of $421,900                      -        -        5,000       5     4,578,195          -        4,578,200
Preferred stock dividend
 imputed due to beneficial
 conversion feature of
 preferred stock                       -        -          -       -       4,060,000   (4,060,000)           -
Accrued preferred stock
 dividends                             -        -          -       -             -       (167,500)      (167,500)
Conversion of preferred
 stock, including $36,345
 of accrued dividends              343,539      344     (1,000)     (1)       36,002          -           36,345
Estimated fair market value
 of warrants issued with
 convertible note payable             -         -          -       -          53,333          -           53,333
Interest imputed due to
 beneficial conversion
 feature of convertible
 note payable                          -        -          -       -         428,571          -          428,571
Estimated fair market value
 of common stock issued for
 purchase of Color Networks         75,000       75        -       -         599,925          -          600,000
Estimated fair market value
 of options and warrants
 issued for services and
 acquisitions                          -        -          -       -       3,065,768          -        3,065,768
Issuance of common stock
 for cash                          738,462      738        -       -         599,262          -          600,000
Estimated fair market value
 of common stock issued for
 compensation                        3,900        4        -       -          29,790          -           29,794
Estimated fair market value
 of common stock issued for
 services                           11,800       12        -       -          46,433          -           46,445
Exercise of stock options        5,000,000    5,000        -       -          66,000          -           71,000
Net loss                               -        -          -       -             -     (20,481,888)  (20,481,888)
                                ---------------------------------------------------------------------------------
Balance at August 31, 2000      42,288,367  $42,289      4,000  $    4   $15,397,404  $(25,673,144) $(10,233,447)
                                =================================================================================

                                     See independent auditors' reports and
                            accompanying notes to consolidated financial statements
</TABLE>
                                                    F-5




<PAGE>

                                   LMKI, INC.
                      Consolidated Statements of Cash Flows

                                                       Year ended August 31,
                                                   -----------------------------
Cash flow from operating activities:                   2000            1999
                                                   -------------   -------------
Net loss                                           $(20,481,888)   $   (863,761)
Adjustments to reconcile net loss to net
  cash used in operating activities:
    Depreciation                                        464,244          36,585
    Amortization of goodwill                            480,600          88,353
    Loss on impairment of long-lived assets           4,060,948             -
    Estimated fair market value of stock,
     options and warrants issued for services         2,992,213          10,000
    Estimated fair market value of stock
     issued for wages                                    29,794         235,099
    Beneficial conversion on convertible
     note payable                                       428,571             -
    Warrants issued in connection with
     convertible note payable                            53,333             -
    Changes in operating assets and liabilities:
      Net of acquisitions:
        Accounts receivable                            (795,354)       (676,509)
        Other assets                                     16,341             -
        Accounts payable and accrued liabilities     10,210,142         412,588
        Accrued payroll and related liabilities         423,607         125,660
        Other accrued liabilities                           -             1,903
        Accrued interest on related party
         notes payable                                  140,051           3,112
                                                   -------------   -------------
  Net cash used in operating activities              (1,977,398)       (626,970)
                                                   -------------   -------------
Cash flows from investing activities:
  Cash acquired in acquisition of Mobilenetics              -             3,512
  Deposits                                             (239,630)            -
  Purchases of other assets                             (78,441)            -
  Purchases of property and equipment                (5,030,457)            -
                                                   -------------   -------------
  Net cash (used in) provided by
   investing activities                              (5,348,528)          3,512
                                                   -------------   -------------
Cash flow from financing activities:
  Net proceeds from issuance of common stock and
    exercise of stock options                           655,500             -
  Net proceeds from issuance of convertible
    preferred stock, net of commission of $421,900    4,578,200             -
  Net change in line of credit                          600,000             -
  Proceeds from related party notes payable             787,440         797,680
  Proceeds from convertible note payable              1,000,000             -
  Repayment on related party notes payable             (313,497)            -
  Repayment on capitalized leases                       (94,532)            -
  Repayment on short-term and long-term debt                -           (52,302)
                                                   -------------   -------------
  Net cash provided by financing activities           7,213,111         745,378
                                                   -------------   -------------
Net (decrease) increase in cash                        (112,815)        121,920
Cash at beginning of year                               125,692           3,772
                                                   -------------   -------------
Cash at end of year                                $     12,877    $    125,692
                                                   =============   =============
Supplemental cash flow disclosures:
  Cash paid during the year for interest           $    151,000    $     15,624
                                                   =============   =============
  Cash paid during the year for taxes              $      2,400    $        -
                                                   =============   =============

                      See independent auditors' reports and
             accompanying notes to consolidated financial statements

                                     F-6




<PAGE>

Supplemental disclosure on non-cash investing and financing activities:
-----------------------------------------------------------------------

During the year ended August 31, 2000, the Company incurred capital lease
obligations in the amount of $240,633 for the acquisition of property and
equipment.

See accompanying notes to consolidated financial statements for additional
non-cash investing and financing activities.






                      See independent auditors' reports and
             accompanying notes to consolidated financial statements

                                     F-7




<PAGE>

                                   LMKI, Inc.
                   Notes to Consolidated Financial Statements
                     For the year ended August 31, 2000.

NOTE 1.  ORGANIZATION AND BASIS OF PRESENTATION

Organization and Operations
---------------------------
         LMKI, Inc. (the "Company" or "LMKI") is a Nevada corporation engaged in
providing high-speed Internet access, data, voice and video streaming services
to individuals and businesses.

Going Concern
-------------
         The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern, which contemplates, among
other things, the realization of assets and satisfaction of liabilities in the
normal course of business. The Company has negative working capital of
$13,345,607, negative cash flows from operations, liabilities from underpayment
of payroll taxes (see Note 6), a stockholders deficit of $10,233,447,
significant losses from operations through August 31, 2000 and non-compliance
with restrictive covenants, among other matters, that raise substantial doubt
about its ability to continue as a going concern.

         The Company's continued existence is dependent upon several factors
including the Company's ability to fund operations and restructure liabilities
and debt.

         The Company's near and long-term operating strategies focus on
exploiting existing and potential competitive advantages while eliminating or
mitigating competitive disadvantages. In response to current market conditions
and as a part of its ongoing corporate strategy, the Company is pursuing several
initiatives intended to increase liquidity and better position the Company to
compete and operate under current market conditions.

         Several completed and ongoing initiatives, which the Company hopes to
accomplish, are as follows:

o        Since August 2000, the Company has refocused its target market
         including its type of clients and services provided. The Company is
         shifting away from low margin single line users towards multiple line
         users that require additional managed services. This market strategy
         should increase profitability.

o        Also since August 2000 the Company has significantly reduced its work
         force. These head count reductions relate to the market strategy
         referred to above and are expected to significantly reduce overall
         operating expense on an annualized basis.

o        Additionally, the Company is aggressively pursuing other cost cutting
         programs to achieve positive cash flow from operations in the very near
         future.

o        The Company is currently working on restructuring liabilities and debt
         to maximize cash flows. The Company is also exploring various
         fundraising alternatives.

o        Since July 2000 (under previous executive management) the Company has
         been delinquent on paying payroll taxes (see Note 6). The Company is in
         the process of negotiating a repayment plan.

         Current market conditions have affected and are continuing to affect
the Company's operating results and liquidity. The Company operates within an
industry that is subject to rapid technological change and intense competition.
During the months ahead, the Company will be forced to make difficult decisions
regarding, among other things, the future direction and capital structure at the
Company. The Company has retained financial and legal advisors who are reviewing
the financial alternatives available to the Company.

                                     F-8




<PAGE>

         Management of the Company hopes that the results of operations combined
with available working capital, including a commitment obtained subsequent to
August 31, 2000 from a financial institution for funds (see Note 12), will be
sufficient to fund future operations. In the absence of significant revenues,
profits, and increased working capital, the Company intends to fund operations
through additional debt and equity financing arrangements which management
believes may be insufficient to fund its capital expenditures, working capital,
and other cash requirements for the fiscal year ending August 2001. Therefore,
the Company may be required to seek additional funds to finance its long-term
operations. The successful outcome of future activities cannot be determined at
this time and there are no assurances that, if achieved, the Company will have
sufficient funds to execute its intended business plan or generate positive
operations results.

         These circumstances raise substantial doubt about the Company's ability
to continue as a going concern. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

Basis of Presentations
----------------------
         The consolidated financial statements include the accounts of LMKI,
Inc. and its wholly owned subsidiaries; Mobilenetics Corp. ("Mobilenetics"),
Landmark Communications, Inc. ("Landmark") and Color Networks, Inc. ("Color
Networks"). All significant intercompany balances and transactions have been
eliminated in consolidation.

NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 certain estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements, and
reported amounts of revenue and expenses during the reporting period. Actual
results could differ materially from those estimates. Significant estimates made
by management are, among others, provisions for losses on accounts receivable
and payroll tax liabilities.

Fair Value of Financial Instruments
-----------------------------------
         The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 107 ("SFAS 107"): "Disclosures About Fair
Value of Financial Instruments." SFAS 107 requires disclosure of fair value
information about financial instruments when it is practicable to estimate that
value. The carrying amounts of the Company's financial instruments as of August
31, 2000 approximate their respective fair values because of the short-term
nature of these instruments. Such instruments consist of cash, accounts
receivable, accounts payable, accrued expenses, line of credit and notes
payable. The fair value of related party notes payable is not determinable as
the borrowings are with a related party.

Property and Equipment
----------------------
         Property and equipment is stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the
depreciable assets, which range from three to seven years. Equipment under
capital lease obligations is depreciated over the shorter of the estimated
useful life or the term of the lease. Management evaluates useful lives
regularly in order to determine recoverability taking into consideration current
technological conditions. Repairs and maintenance are charged to expense as
incurred while improvements are capitalized. Upon the sale or retirement of
property and equipment, the accounts are relieved of the cost and the related
accumulated depreciation, with any resulting gain or loss included in the
statement of operations. As of August 31, 2000, the Company assessed certain
equipment to be impaired and wrote off these remaining balances (see below).

Intangible Assets
-----------------

         Intangible assets included goodwill that represented the excess of the
purchase price over the estimated fair value (see Note 3). Goodwill was
amortized using the straight-line method over a period of 5 years. Regularly,

                                     F-9




<PAGE>

the Company assesses the intangible assets for impairment based on
recoverability of the balances from expected future operating cash flows on an
undiscounted basis. As of August 31, 2000, the Company assessed the goodwill to
be impaired and wrote off the remaining balances (see below).

Impairment of Long-Lived Assets
-------------------------------

         The Company evaluates the recoverability of long-lived assets in
accordance with Statement of Financial Accounting Standards No. 121 ("SFAS No.
121"), "Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed of." SFAS No. 121 requires recognition of impairment of
long-lived assets in the event the net book value of such assets exceeds the
future undiscounted cash flows attributable to such assets. At August 31, 2000,
management determined that the Company's long-lived assets have been impaired as
follows:

o        Management wrote down the value of certain property and equipment
         obtained in connection with the acquisition of Color Networks (see Note
         3). Due to the goodwill associated with the acquisition being impaired
         and the related assets providing no future benefit, the Company
         recognized an impairment loss of approximately $135,000 on the related
         property and equipment (see Notes 3 and 4), in the accompanying
         statement of operations.

o        Management wrote off the value of all of its intangible assets in
         fiscal year 2000. The Company recognized impairment losses of
         approximately $2,667,000 (see Note 5), in the accompanying statement of
         operations.

o        Based upon the uncertainties in the realizability in certain other
         assets, the Company wrote off the value of software licenses in fiscal
         year 2000. The Company recognized an impairment loss of approximately
         $1,261,000 (see Note 6) in the accompanying statement of operations.

         Management believes that the impairment losses recognized on long-lived
assets, including property and equipment, intangible assets, and other assets,
are adequate. There can be no assurance, however, that market conditions will
not change which could result in additional future long-lived asset impairments.

Deferred Revenue
----------------

         Deferred revenue represents billings in advance for fees related to
high-speed Internet access, data, voice and video services relating to future
periods. The Company recognizes deferred revenue in the statement of operations
as the service is provided. The Company has billed but not recognized
approximately $1,355,000 of deferred revenue as the related services have not
yet been performed as of August 31, 2000.

Revenue Recognition
-------------------

         Fees for high-speed Internet access, data, voice and video services are
recognized as services are provided.

Advertising
-----------

         The Company expenses the cost of advertising when incurred as selling
expense. Advertising expenses were approximately $173,000 and $11,000 for the
fiscal years ended August 31, 2000 and 1999, respectively.

Income Taxes
------------

         The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." Under
SFAS 109 deferred tax assets and liabilities are recognized for the expected tax
consequences of attributable differences between the tax bases and reported
amounts of assets and liabilities. Deferred tax assets and liabilities are
computed using enacted tax rates expected to apply to taxable income in the
years in which temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities from a change in tax rates is
recognized in income in the period that includes the enactment date. A valuation
allowance is provided for significant deferred tax assets when it is more likely
than not that such assets will not be recovered.

                                     F-10


<PAGE>

Loss Per Share
--------------

         The Company has adopted Statement of Accounting of Financial Accounting
Standards No. 128 ("SFAS 128") "Earnings per Share." Under SFAS 128, basic
earnings per share is computed by dividing income available to common
shareholders by the weighted-average number of common shares assumed to be
outstanding during the period of computation. Diluted earnings per share is
computed similar to basic earnings per share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the potential shares had been issued and if the additional common
shares were dilutive. The Company net loss has been increased for the effect of
accrued dividends to preferred stockholders and the effect of the preferred
stockholder beneficial conversion feature (see Note 11). Stock options and
warrants outstanding are not considered common stock equivalents, as the affect
on net loss per share would be anti-dilutive.

Stock-Based Compensation
------------------------

         The Company accounts for non-employee stock based compensation under
Statement of Financial Accounting Standard No. 123 ("SFAS 123"), SFAS 123
defines a fair value based method of accounting for stock based compensation.
However, SFAS 123 allows an entity to continue to measure compensation cost
related to stock and stock options issued to employees using the intrinsic
method of accounting prescribed by Accounting Principles Board Opinion No.
25("APB 25"), "Accounting for Stock issued to Employees". Under APB 25,
compensation cost, if any, is recognized over the respective vesting period
based on the difference, on the date of grant, between the fair value of the
Company's common stock and the grant price. Entities electing to remain with the
accounting method of APB 25 must make pro forma disclosures of net income and
earnings per share, as if the fair value method of accounting defined in SFAS
123 had been applied. The Company has elected to account for its stock based
compensation to employees under APB 25 (see Note 8).

         In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation," an
interpretation of APB 25. FIN 44 clarifies the application of APB 25 for (a) the
definition of employee for purposes of applying APB 25 (b) the criteria for
determining whether a plan qualifies as a non-compensatory plan, (c) the
accounting consequence for various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 is effective July 1, 2000,
but certain provisions cover specific events that occur after either December
15, 1998, or January 12, 2000. The adoption of FIN 44 did not have a material
effect on the financial statements.

Concentration Risk
------------------

         The Company grants credit to customers within the United States and do
not require collateral. The Company's ability to collect receivables is affected
by economic fluctuations in the geographic areas served by the Company. Reserves
for uncollectible amounts are provided, based on past experience and a
specific analysis of the accounts, which management believes are sufficient. Two
customers accounted for approximately 25% of total product sales for fiscal
2000. There were no such sales concentrations for fiscal 1999. At August 31,
2000 one customer accounted for approximately 15% of accounts receivable.

Risks and Uncertainties
-----------------------

         The Company operates in a highly competitive industry that is subject
to intense competition, government regulation and rapid technological change.
The Company's operations are subject to significant risk and uncertainties
including financial, operational, technological, regulatory and other risks
associated with an emerging business, including the potential risk of business
failure.

                                     F-11




<PAGE>

Segment Information
-------------------

         The Company adopted Statement of Financial Accounting Standards No. 131
("SFAS No. 131"), "Disclosures about Segments of an Enterprise and Related
Information," during fiscal 1999. SFAS 131 establishes standards for the way
that public companies report information about operating segments and related
disclosures about products and services, geographic areas and major customers in
annual consolidated financial statements. The Company views its operations and
manages its business as principally one segment.

Comprehensive Income
--------------------

         The Company has adopted Financial Accounting Standards No. 130 ("SFAS
130"), "Reporting Comprehensive Income." SFAS 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. The adoption of SFAS 130 has not
materially impacted the Company's financial position or results of operations as
the Company has no items of comprehensive income.

Recent Accounting Pronouncements
--------------------------------

         The FASB issued Statement of Financial Accounting Standards No. 133
("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging
Activities," SFAS 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities on the balance sheet
at their fair value. This statement, as amended by SFAS 137, is effective for
financial statements for all fiscal quarters of all fiscal years beginning after
June 15, 2000. The Company has not yet determined the impact, if any, the
adoption of this standard will have on its results of operations, financial
position or cash flows.

         In March 2000, the Emerging Issues Task Force reached a consensus on
Issue No. 00-2, "Accounting for Web Site Development Costs" ("EITF 00-2") to be
applicable to all web site development costs incurred for the quarter beginning
after June 30, 2000. The consensus state that for specific web site development
costs, the accounting for such costs should be accounted for under AICPA
Statement of Position 98-1 (SOP 98-1), "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use." The Company does not expect
the adoption of EITF 00-2 to have a material effect on its financial statements.

         In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101 ("SAB 101"), "Revenue Recognition," which outlines the
basic criteria that must be met to recognize revenue and provides guidance for
presentation of revenue and for disclosure related to revenue recognition
policies in financial statements filed with the Securities and Exchange
Commission. The effective date of this pronouncement is the fourth quarter of
the fiscal year beginning after December 15, 1999. The Company believes that
adopting SAB 101 will not have a material impact on its financial position and
results of operations.

Reclassifications
-----------------

         Certain reclassifications were made to prior period amounts, enabling
them to conform to current period presentation.

NOTE 3.  BUSINESS COMBINATIONS

         Effective June 1, 1999, the Company acquired Mobilenetics Corp.
("Mobilenetics"), in a business combination accounted for as a purchase.
Mobilenetics is a provider of communications consulting and systems integration
services that primarily involve Internet and network solutions. It services a
diverse base of customers that are located primarily in California. Prior to the
business combination, the majority stockholder of Mobilenetics was a stockholder
of the Company and Mobilenetics provided communications equipment to the Company
under a capitalized lease agreement. The Company issued 10,000,000 shares of its
restricted common stock in exchange for all of the outstanding shares of
Mobilenetics. The shares issued for Mobilenetics were valued at $1,400,000
($0.14 per share), which represented 50% of the closing bid price of the
Company's common stock on the date of issuance (see Note 8). Management of the
Company estimated the value of the Company's shares exchanged after considering
the restricted nature of the stock, the historical trend of the trading prices
for its common stock and the limited volume of shares being traded.

                                     F-12


<PAGE>

         The acquisition of Mobilenetics is summarized as follows:

         Assets acquired                                         $  141,810
         Liabilities assumed                                       (508,872)
                                                                 -----------
         Fair value of net assets acquired                         (367,062)
         Fair value of consideration tendered                     1,400,000
                                                                 -----------
         Goodwill assigned to acquisition                        $1,767,062
                                                                 ===========

       The results of operations of Mobilenetics are included in the
accompanying consolidated financial statements as of June 1, 1999. The following
pro forma summary presents consolidated results of operations as if Mobilenetics
had been acquired as of the beginning of the Company's 1999 fiscal year:

                                                                   Year ended
                                                                   August 31,
                                                                      1999
                                                                  ------------
         Net sales                                                $ 2,433,400
         Net loss                                                  (1,043,500)

         Loss per common share                                           (.04)


         The above amounts are based upon certain assumptions and estimates,
which the Company believes are reasonable. The pro forma results of the
operations do not purport to be indicative of the results which would have been
obtained had the business combination occurred as of September 1, 1998 or which
may be obtained in the future. The balance of the goodwill at August 31, 2000
was written off when the Company determined that the goodwill was not
recoverable from future cash flows of the Mobilenetics assets (see Note 2).

         Effective December 6, 1999, the Company acquired Color Networks, Inc.
("Color Networks"), in a business combination accounted for as a purchase. Color
Networks is a provider of communications consulting and systems integration
services. It services a diverse base of customers that are located primarily in
California. The Company issued 75,000 shares of restricted common stock (see
Note 8) in consideration for 100% of the issued and outstanding shares of common
stock of Color Networks. The fair market value of the stock issued was $8.00 per
share (based on the closing bid price of the Company's common stock on date of
grant), for consideration totaling $600,000. In addition, the Company issued
options to two officers of Color Networks to purchase 15,000 shares of common
stock of the Company at an exercise price of $8.00 per share with a fair market
value of $120,000 (estimated by the Company based on the Black-Scholes option
pricing model). The options vested immediately and expire December 5, 2004. Due
to Color Networks operations being immaterial to those of the Company for the
three months ended September 1999 through December 6, 1999, no pro forma
financial statements are presented for the year ended August 31, 2000.

       The acquisition of Color Networks can be summarized as follows:

       Assets acquired                                           $    411,884
       Liabilities assumed                                         (1,160,434)
                                                                 -------------
       Fair value of net assets acquired                             (748,550)
       Fair value of consideration tendered                           720,000
                                                                 -------------
       Goodwill assigned to acquisition                          $  1,468,550
                                                                 =============

         The results of operations of Color Networks are included in the
accompanying consolidated financial statements from December 6, 1999. The
balance of the goodwill at August 31, 2000 was written off when the Company
determined that the goodwill was not recoverable from future cash flows of the
Color Networks assets (see Note 2).

                                     F-13




<PAGE>

NOTE 4.  PROPERTY AND EQUIPMENT

         Property and equipment consists of the following as of August 31, 2000:

         Computer equipment                                         $ 3,867,999
         Equipment                                                    1,636,584
         Furniture & fixtures                                            21,127
         Leasehold improvements                                          12,046
                                                                    ------------
                                                                    $ 5,537,756
         Less: Accumulated depreciation and
               Impairment loss                                         (602,413)
                                                                    ------------
                                                                    $ 4,935,343
                                                                    ============

         Depreciation expense related to property and equipment, including
equipment under capital leases, was $464,244 and $36,585 for the fiscal years
ended August 31, 2000 and 1999, respectively.

NOTE 5.  INTANGIBLE ASSETS

         Intangible assets consisted of goodwill associated with the
acquisitions of Color Networks and Mobilenetics (see Note 3). The Company
assessed the intangible assets for impairment at year-end based on
recoverability of the balances from expected future operating cash flows on an
undiscounted basis. As of August 31, 2000, the Company assessed the goodwill to
be impaired and wrote off the remaining balances (see Notes 2 and 3).

                                                 Mobilenetics     Color Networks
                                                 ------------     --------------

         Goodwill                                $ 1,767,062      $   1,468,550
         Accumulated amortization                   (441,765)          (127,188)
                                                 ------------     --------------
                                                   1,325,297          1,341,362
         Less impairment loss                     (1,325,297)        (1,341,362)
                                                 ------------     --------------
         Balance, August 31, 2000                $         -      $           -
                                                 ============     ==============

         Total amortization expense related to Goodwill was $480,600 and $88,353
for the fiscal years ended August 31, 2000 and 1999, respectively.

NOTE 6.  COMMITMENTS AND CONTINGENCIES

Leases
------

         The Company is a lessee of certain property and equipment under capital
lease agreements that expire on various dates through August 2004. Terms of the
leases require monthly payments ranging from $830 to $2,420, including interest
ranging from 18% to 28%. The asset and liability under capital lease are
recorded at the lower of the present value of the minimum lease payments or the
fair market value of the related assets.

         In addition, the Company leases certain property and equipment under
operating lease agreements, which expire on various dates through August 2004
and provide for monthly lease payments ranging from $630 to $55,500. The Company
lease for its facilities expires on March 31, 2001; however, the Company is in
the process of negotiating a lease for a new facility.

         The future minimum annual lease payments under these agreements as of
August 31, 2000 are as follows:

                                     F-14




<PAGE>
<TABLE>
<CAPTION>
                                                      CAPITAL          OPERATING
                                                      LEASES             LEASES            TOTAL
                                                     ----------        ----------       ----------
         <S>                                         <C>               <C>              <C>
         2001                                        $  126,000        $1,720,000       $1,846,000
         2002                                           117,000         1,271,000        1,388,000
         2003                                            59,000           433,000          492,000
         2004                                            10,000             8,000           18,000
         2005                                              -                 -                -
         Thereafter                                        -                 -                -
                                                     -----------       -----------      -----------
         Total minimum lease payments                $  312,000        $3,432,000       $3,744,000
                                                                       ===========      ===========
         Less: amount representing interest              73,334
                                                     -----------
         Present value of minimum lease payments        238,666
         Less:  current portion                          82,702
                                                     -----------
         Long-term capitalized lease obligation      $  155,964
                                                     ===========
</TABLE>

         Rent and equipment expense under operating leases for the fiscal years
ended August 31, 2000 and 1999 was $890,069 and $11,050, respectively. Interest
expense incurred pursuant to the capital lease obligations was $67,212 and
$7,216 for the fiscal years ended August 31, 2000 and 1999, respectively.

         The following is an analysis of the leased equipment under capital
leases as of August 31, 2000, which is included in property and equipment (see
Note 4).

                                    Computer equipment              $  285,020
                                    Accumulated depreciation           (55,970)
                                                                    -----------
                                                                    $  229,050
                                                                    ===========

Line of Credit
--------------

         In February 2000, the Company entered into a revolving line of credit
agreement (the "Line") with a financial institution. The Line bears interest
at the prime rate (8.75% at August 31, 2000) plus 2% per annum. The Line is
secured by substantially all of the Company's assets. The terms of the agreement
provide for borrowings of up to the lesser of $600,000 or the aggregate of 80%
of eligible accounts receivable, as defined. At August 31, 2000, the Company's
outstanding borrowings totaled $600,000. The Line requires the Company to
maintain certain net worth and solvency ratio covenants, which the Company was
not in compliance with as of August 31, 2000. The Line matures on February 15,
2001. Interest expense incurred on the line totaled $30,000 for the fiscal year
ended August 31, 2000.

Convertible Note Payable
------------------------

         In May 2000, the Company entered into a convertible note agreement (the
"Note") with a financial institution for $1,000,000 which is secured by
substantially all of the Company's assets. The Note, bearing interest at the
prime rate (8.75% at August 31, 2000) plus 2%, was due August 3, 2000, and is
convertible to common stock if not paid by August 3, 2000, at a share price
equal to the lesser of the share price on the date of the agreement or at a 30%
discount of the share price on the date of conversion. Due to the beneficial
conversion feature, the Company recorded imputed interest of $428,571 in the
accompanying statement of operations. In connection with this transaction, the
Company also issued to the financial institution warrants to purchase 15,686
shares of the Company's common stock with an estimated fair market value of
$53,333 (estimated by the Company based on the Black-Scholes option pricing
model) that was recorded as a debt discount and amortized to interest expense
through the maturity date of the note (see Note 8). As of August 31, 2000, the
outstanding balance on the Note was $1,000,000. The Note requires the Company to
maintain certain net worth and solvency ratio covenants, which the Company was
not in compliance with as of August 31, 2000. Interest expense incurred on the
Note totaled $30,000 for the fiscal year ended August 31, 2000.

                                     F-15




<PAGE>

Related Party Notes Payable
---------------------------

Stockholders
------------

         From time to time, the Company borrows funds from several of its
stockholders for working capital purposes under unsecured notes payable. During
fiscal 2000, the Company had principal borrowings of $784,056 from various
stockholders and made principal repayments of $123,497. Certain notes require
monthly payments ranging from $5,000 to $40,000 with all principal and interest
due on maturity dates through February 2001. The remaining notes require
principal and interest on demand. The notes accrue interest ranging from 8% to
21%. The outstanding balance on these notes totaled $695,222 plus accrued
interest of $16,324, which is included in accrued interest payable at August 31,
2000. Interest expense incurred for the fiscal years ended August 31, 2000 and
1999 was $46,495 and $2,370, respectively. As of the date of the report, certain
notes totaling $635,222 were in default.

Former Employee
---------------

         From time to time, the Company had borrowed funds from its then
Chairman and Chief Executive Officer ("CEO"), who resigned August 8, 2000, for
working capital purposes. During the fiscal year ended August 31, 2000, the
Company had principal borrowings of $751,934 from the former Chairman and CEO
and made principal repayments of $190,000. The note, as amended, requires
monthly payments ranging from $125,000 to $252,000 with all principal and
interest due by September 15, 2001 and accrues interest at 8%. The outstanding
balance of this note totaled $1,324,951, plus accrued interest of $126,839 that
is included in accrued interest payable at August 31, 2000. The note is
subordinated to the line of credit (see above). Interest expense incurred for
the fiscal years ended August 31, 2000 and 1999 was $117,689 and $9,150,
respectively. As of the report date this note is in default. For subsequent
amendments to this note, see the severance agreement footnote below.

Severance Agreements
--------------------

         We entered into a severance agreement effective August 8, 2000 and
restated and amended November 15, 2000, with our former Chairman and CEO, as
follows:

         o        the Company agreed to pay the former Chairman and CEO a
                  severance amount of $120,000 payable in twelve equal monthly
                  installments beginning August 10, 2000. During fiscal 2000,
                  the Company has made payments in the amount of $10,000 in
                  connection with the severance liability. At August 31, 2000,
                  the Company has accrued the remaining undiscounted amount of
                  $110,000 in accrued liabilities in the accompanying balance
                  sheet;
         o        subsequent to August 31, 2000, the Company and the former
                  Chairman and CEO agreed to offset a note payable to the former
                  Chairman and CEO with certain accounts receivable in the
                  amount of $600,000 from SpeeDSL, a related party (see Note
                  10);
         o        subsequent to August 31, 2000, the former Chairman and CEO
                  agreed to return 15,000,000 shares of common stock and the
                  Company would adjust his note payable to $2,127,000 (see
                  Former Employee);
         o        subsequent to August 31, 2000, the Company agreed to secure
                  the note payable to the former Chairman and CEO with 5,000,000
                  shares of common stock from the current Chief Executive
                  Officer; and
         o        subsequent to August 31, 2000, the Company agreed the former
                  Chairman and CEO agreed to cancel 2,000,000 options, which
                  were outstanding at August 31, 2000.

         Effective August 8, 2000 the Company entered into a severance agreement
with its former Chief Operating Officer ("COO"). The agreement requires the
Company to pay the former COO a severance amount of $120,000 payable in twelve
equal monthly installments beginning August 10, 2000. During fiscal 2000, the
Company has made payments in the amount of $10,000 in connection with the
severance liability. At August 31, 2000 the Company has accrued the remaining
undiscounted amount of $110,000 in accrued liabilities in the accompanying
balance sheet.

                                     F-16




<PAGE>

Legal
-----

         The Company may from time to time be involved in various claims,
lawsuits, disputes with third parties, actions involving allegations or
discrimination, or breach of contract actions incidental to the normal
operations of its business. The Company is currently not involved in any such
litigation which management believes could have a material adverse effect on its
financial position or results of operations.

Accounts Payable
----------------

         As of August 31, 2000, the Company has been billed approximately
$2,744,000 from a third party for consultation services in connection with the
implementation of certain software programs. Since the Company decided not to
pursue further implementation of such programs, it has expensed the entire
amount included in general and administrative expense in the accompanying
statement of operations for the year ended August 31, 2000. The Company has
retained the services of an outside consultant to examine the appropriateness of
such services and related charges. As of August 31, 2000, the Company has not
made any payments related to this charge and has accrued approximately
$2,744,000 in accounts payable in the accompanying balance sheet.

         During fiscal 2000, the Company entered into an agreement with a third
party for software licenses and promotional support for approximately
$1,261,000, with the intent to resell the related licenses to customers. As of
August 31, 2000, the Company had not yet received the promotional support
services portion of the agreement and has determined that the related asset does
not provide any future benefit to the Company. As a result, the Company has
recognized an impairment loss of approximately $1,261,000 (see Note 2), which
is included in the accompanying statement of operations for the year ended
August 31, 2000. In addition, the Company has not made any payments pursuant
to this agreement and has accrued approximately $1,261,000 in accounts payable
in the accompanying balance sheet at August 31, 2000. The Company is currently
in the process of trying to renegotiate the amount due with the third party.

Accrued Payroll Taxes
---------------------

         The Company has recorded an accrual for past due payroll taxes as of
August 31, 2000 due to the under-payment of the Company's payroll tax liability.
As a result, the Company has accrued approximately $441,000 related to payroll
taxes under accrued payroll and related liabilities in the accompanying balance
sheet at August 31, 2000. The Company anticipates having this matter settled by
August 31, 2001.


NOTE 7.  INCOME TAXES

         A reconciliation of income taxes computed at the federal statutory rate
of 34% to the provision for income taxes is as follows for the years ended
August 31:


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

         Tax at statutory rates                      $(6,886,600)     $(314,198)
         Differences resulting from:
            State taxes                                    2,400          2,400
            Non-deductible and other
               items                                   2,347,200          4,798
            Changes in allowance for
               deferred tax assets                     4,539,400        309,400
                                                     ------------     ----------
         Provision for income taxes                  $     2,400      $   2,400
                                                     ============     ==========

         The valuation allowance increased by approximately $4,539,400 and
$309,400 during the years ended August 31, 2000 and 1999, respectively. No
current provision for income taxes is required for the years ended August 31,
2000 and 1999 since the Company incurred taxable losses during such years.

                                     F-17




<PAGE>

         Net deferred income taxes are as follows as of August 31, 2000:

         Deferred tax liabilities:
          Depreciation and amortization                           $  (123,200)
                                                                  ------------

         Deferred tax assets:
          Net operating losses                                      5,132,200
          State taxes                                                   9,400
          Reserves and accruals                                       561,600
                                                                  ------------
         Total deferred tax assets                                  5,703,200
         Less:  Allowance for deferred tax assets                  (5,580,000)
                                                                  ------------
         Net deferred income taxes                                $      -
                                                                  ============

         The Company has approximately $13,360,000 and $6,672,000 in Federal
and California State net operating loss carry forwards as of August 31, 2000,
which, if not utilized, expire through 2020 and 2005, respectively.

         The utilization of the net operating loss carry-forwards might be
limited due to restrictions imposed under federal and state laws upon a change
in ownership. The amount of the limitation, if any, has not been determined at
this time. A valuation allowance is provided when it is more likely than not
that some portion or all of the deferred tax assets will not be realized. As a
result of the Company's continued losses and uncertainties surrounding the
realization of the net operating loss carry forwards, management has determined
that the realization of the deferred tax assets is questionable. Accordingly,
the Company has recorded a valuation allowance equal to the net deferred tax
asset amount as of August 31, 2000.


NOTE 8.  STOCKHOLDERS' EQUITY

Preferred Stock
---------------

         The Company's articles of incorporation authorize up to 10,000,000
shares of $.001 par value preferred stock. Shares of preferred stock may be
issued in one or more classes or series at such time and in such quantities the
board of directors may determine. All shares of any one series shall be equal in
rank and identical in all respects. As of November 23, 1999, the board of
directors has designated 5,000 shares as Series A 6% Convertible Preferred Stock
("Preferred A"). Each Preferred A share has a liquidation preference of $1,000
per share plus accrued dividends and is convertible at anytime into such number
of fully paid and non-assessable shares of common stock as is determined by
dividing $1,000 plus the amount of any accrued and unpaid dividends by the
conversion price in effect at the time of conversion, as defined. As of August
31, 2000, 4,000 shares of Preferred A have been issued and are outstanding.

         In November 1999, the Company sold 2,500 shares of Preferred A to an
accredited investor for proceeds of $2,278,200 (net of commissions paid of
$221,900). Since the Preferred A is immediately convertible at the option of
the shareholder, the Company has recorded a beneficial conversion of $1,560,000
as a preferred stock dividend in the accompanying statements of stockholders'
deficit for the year ended August 31, 2000. In connection with this transaction,
the Company issued to this investor warrants to purchase 250,000 shares of
common stock at $4.25 per share. The warrants expire in November 2004. In
addition, the Company issued conditional warrants to the investor to purchase
up to 2,500 shares of Preferred A at $1,000 per share and committed to issue
reserve warrants to purchase 50,000 shares of the Company's common stock at
$4.25 per share for each 500 shares of Preferred A purchased under the
conditional warrants. The conditional warrants expire in November 2004.

         During February 2000, the Company issued 1,500 shares of Preferred A in
connection with the above investor exercising certain conditional warrants for
$1,380,000 (net of commission paid of $120,000) and issued reserve warrants to
purchase 150,000 shares of common stock at $4.25 per share that are exercisable
through February 2005. Since the Preferred A is immediately convertible at the

                                     F-18




<PAGE>

option of the shareholder at a price lower than the closing bid price on the
date of conversion in accordance with the terms of the preferred stock, the
Company has recorded a beneficial conversion of $1,500,000 as a preferred stock
dividend in the accompanying statement of stockholders' deficit for the year
ended August 31, 2000. In addition, the Company issued warrants to purchase
an additional 25,000 shares of the Company's common stock at $6.625 per share
that vested on the date of grant and are exercisable through May 2005.

         During May 2000, the Company issued 1,000 shares of Preferred A in
connection with the above investor exercising its remaining conditional warrants
for $920,000 (net of commissions paid of $80,000) and issued reserve warrants to
purchase 100,000 shares of common stock at $4.25 per share that are exercisable
through May 2005. Since the Preferred A is immediately convertible at the option
of the shareholder at a price lower than the closing bid price on the date of
conversion in accordance with the terms of the preferred stock, the Company
recorded a beneficial conversion or $1,000,000 as a preferred stock dividend in
the accompanying statement of stockholders' deficit for the year ended
August 31, 2000.

         During fiscal 2000, the Company accrued $167,500 of dividends in
connection with the outstanding Preferred A shares, of which, $36,345 were
converted into common stock in connection with the conversion of 1,000 shares of
Preferred A (see below). At August 31, 2000, accrued dividends payable totaled
$131,155.

Common Stock
------------

         In December 1998, the Board of Directors authorized the issuance of
4,000,000 shares of common stock to the Company's then Chairman and CEO in
exchange for compensation and 500,000 shares of common stock to two individuals
in exchange for professional services. Management of the Company valued the
shares granted to its then Chairman and CEO at $0.015 per share, which
represented a 50.0% discount from the closing bid price of the Company's common
stock at the date of issuance.  Management of the Company estimated the value
of these shares after considering the historical trend of the trading prices
for its common stock and the limited volume of shares being traded. Management
of the Company valued the grants to its service providers at $0.031 per share,
which represented the closing bid price of the Company's common stock at the
date of grant. The Company recorded compensation expense and service expense
totaling $62,000 and $15,500, respectively, during the year ended August 31,
1999 as a result of these grants.

         In March 1999, the board of directors authorized the issuance of
400,000 shares of common stock to two individuals in exchange for professional
services. Management of the Company valued the share grants at $0.09 per share,
which represented the closing bid price of the Company's common stock at
the date of grant. The Company recorded service expense totaling $36,000 during
the year ended August 31, 1999 as a result of these grants.

         Also in March 1999, the board of directors authorized the issuance of
1,000,000 shares of common stock to a related party in exchange for
communication software developed specifically for the Company. Management of the
Company valued the share grant at $0.09 per share, which represented the closing
bid price of the Company's common stock at the date of grant. The Company
capitalized software costs totaling $90,000 during the year ended August 31,
1999 as a result of this grant.

         In June 1999, the Company consummated on acquisition of Mobilenetics
Corp. The Company issued 10,000,000 shares of common stock inconsideration for
100% of the issued and outstanding shares of Mobilenetics Corp. The shares were
valued at $1,400,000 ($0.14 per share), which represented 50% of the closing bid
price of the Company's common stock on the date of issuance (see Note 3).
Management of the Company estimated the value of the Company's shares exchanged
after considering the restricted nature of the stock, the historical trend of
the trading prices for its common stock and the limited volume of the shares
being traded. The former sole shareholder of Mobilenetics Corp. is now the CEO
of the Company.

         In June 1999, the Board of Directors authorized the issuance of 229,000
shares of common stock to four employees for compensation and to one individual
in exchange for professional services. Management of the Company valued the
share grants at $0.531 per share, which represented the closing bid price of the
Company's common stock at the date of grant. The Company recorded service
expense totaling $68,499 and $53,100, respectively, during the year ended August
31, 1999 as a result of these grants.

                                     F-19




<PAGE>

         The Company issued 75,000 shares of common stock valued at $600,000
(based on the closing bid price of the Company's common stock on the date of
grant) in connection with its acquisition of Color Networks (see Note 3).

         In January 2000, the Company issued 3,900 shares of common stock (net
of 5,000 shares inadvertently issued and subsequently cancelled during fiscal
2000) valued at $29,794 (based on the closing bid price of the Company's common
stock on the date of grant) to employees for compensation.

         In May 2000, the Company issued 3,000 shares of common stock valued at
$11,904 (based on the closing bid price of the Company's common stock on the
date of grant) to outside consultants. Subsequent to the issuance, the stock was
returned to the Company and the related expense was reversed due to the contract
being renegotiated with the Company.

         In June 2000, the Company issued 11,800 shares of common stock valued
at $46,445 (based on the closing bid price of the Company's common stock on the
date of grant) to an outside consultant for services rendered.

         In July 2000, the Company issued 343,539 shares of common stock in
connection with the conversion of 1,000 shares of Preferred A plus accrued
dividends in the amount of $36,345, at the conversion price of $3.02 per share,
in accordance with the terms of the preferred stock.

         In August 2000, the Company issued 738,462 shares of common stock for
$600,000 in cash. In addition, the Company issued to the investor, warrants to
purchase 36,923 shares of common stock at an exercise price of $1.37 per share
and exercisable through August 2003. The warrants vested on the date of grant.

         During fiscal 2000, the Company issued 5,000,000 shares of common stock
in connection with the exercise of options for $71,000, of which $15,500 was
received subsequent to August 31, 2000 and is included in other assets in the
accompanying balance sheet.

Stock Options
-------------

         In February 2000, the Company's board of directors and majority
shareholders approved the LMKI, Inc. 2000 Stock Option Plan ("the 2000 plan"),
effective March 1, 2000. An aggregate of 5,000,000 shares of common stock are
reserved for issuance under the 2000 plan. The exercise price for each option
shall be equal to 85% to 110% of the fair market value of the common stock on
the date of grant, as defined, and shall vest over no more than a five-year
period. The plan shall terminate ten years after its adoption by the board of
directors and may be terminated by the board of directors on any earlier date,
as defined.

         During fiscal 2000, the board of directors granted to various
employees, pursuant to the 2000 plan, an aggregate of 1,101,300 options (net of
107,570 options that were issued and cancelled during fiscal year 2000) at
exercise prices ranging from $1.30 to $10.875 (based on the closing bid price of
the Company's common stock on the date of each grant). The options vest through
August 2003 and are exercisable through August 2005.

         In November 1999, the Company's board of directors and majority
shareholders approved the LMKI, Inc. Amended and Restated 1999 Stock Option
Plan ("the 1999 plan"), effective April 13, 2000. An aggregate of 5,000,000
shares of common stock are reserved for issuance under the 1999 plan. The
exercise price for each option shall be equal to 85% to 110% of the fair market
value of the common stock on the date of grant, as defined, and shall vest over
no more than a five-year period. The plan shall terminate ten years after its
adoption by the board of directors and may be terminated by the board of
directors on any earlier date, as defined.

         During fiscal 2000, the board of directors granted to various
employees, pursuant to the 1999 plan, an aggregate of 1,276,560 options (net of
643,800 options that were issued and cancelled during fiscal year 2000) at
exercise prices ranging from $4.531 to $15.00 (based on the closing bid price of
the Company's common stock on the date of each grant). The options vest through
January 2003 and are exercisable through January 2005. In addition, the board of
directors granted to various employees, pursuant to the 1999 plan, an aggregate
of 103,600 options (net of 13,000 issued and cancelled during fiscal year 2000)
at an exercise price of $4.00 resulting in $55,012 of compensation expense to be
charged to the Company over the two year vesting period under APB 25, of which,
none was charged during fiscal 2000.

                                     F-20


<PAGE>

         From time to time, the Company issues non-plan stock options pursuant
to various agreements and other compensatory agreements to employees and third
parties.

         In December 1998, the Company granted options to purchase 3,000,000
shares of common stock at an exercise price of $0.031 per share (based on the
closing bid price of the Company's common stock on the date of grant), to its
then Chairman and CEO. The options vested on the date of grant and were
exercisable through December 2003. During fiscal 2000, 1,000,000 of these
options were cancelled.

         In December 1998, the Company granted options to purchase 500,000
shares of common stock, at an exercise price of $0.031 per share (based on the
closing bid price of the Company's common stock on the date of grant) to its
then CFO. The options vested on the date of grant and were exercisable through
December 2003. During fiscal 2000, the option holder exercised these options.

         In December 1998, the Company granted options to purchase 500,000
shares of common stock at an exercise price of $0.031 per share, with a fair
market value of $10,000 (estimated by the Company based on the Black-Scholes
option pricing model under SFAS 123) to a consultant. The options vested on the
date of grant and were exercisable through December 2003. During fiscal 1999 the
Company recognized total service expense of $10,000 in the accompanying
statements of operations. During fiscal 2000, the option holder exercised the
options.

         In November 1999, the Company granted options to purchase 200,000
shares of common stock, at an exercise price of $4.531 per share with a fair
market value of $868,000 (estimated by the Company based on the Black-Scholes
option pricing model under SFAS 123), to a consultant. The options vest over a
one-year period from the date of grant and are exercisable through November
2001. During fiscal 2000, the Company recognized consulting expense of $651,000
in the accompanying statements of operations. The consultant subsequently became
a board member.

         In December 1999, the Company granted options to purchase 15,000 shares
of common stock, at a exercise price of $8.00 per share, with a fair market
value of $120,000 (estimated by the Company based on the Black-Scholes option
pricing model under SFAS 123) to certain officers of Color Networks related to
the acquisition of Color Networks. The options vested on the date of grant and
are exercisable through December 2004. The Company recorded the fair market
value of $120,000 as part of the purchase price of Color Networks (see Note 3).

         During fiscal 2000, the Company granted options to purchase 50,000
shares of common stock, at an exercise prices ranging from $4.01 to $12.50 per
share, with a fair market value of $539,350 (estimated by the Company based on
the Black-Scholes option pricing model under SFAS 123) to consultants. The
options vested on the date of grant and are exercisable through May 2005. During
fiscal 2000, the Company recognized total consulting expense of $539,350 in the
accompanying statements of operations.

         In April 2000, the Company granted options to purchase 100,000 shares
of common stock pursuant to a public relations service agreement, at an exercise
price of $40.00 per share, with an estimated fair market value of $225,000
(estimated by the Company based on the Black-Scholes option pricing model under
SFAS 123) to a consultant. The options vested on the date of grant and are
exercisable through March 2005. During fiscal 2000, the Company recognized total
marketing expense of $225,000 in the accompanying statements of operations.

         In August 2000, the Company granted options to purchase 63,000 shares
of common stock at an exercise price of $1.437 per share, with an estimated fair
market value of $87,570 (estimated by the Company based on the Black-Scholes
option pricing model under SFAS 123) to a consultant. The options vest over a
six-month period and are exercisable through August 2005. The Company will
recognize total consulting expense of $87,570 over the vesting period, none of
which was recognized during fiscal year 2000.

                                     F-21


<PAGE>

         Following is a status of the stock options outstanding at August 31,
2000 and 1999 and the changes during the years then ended:

<TABLE>
<CAPTION>
                                                      2000                                  1999
                                          --------------------------------     --------------------------------
                                                          Weighted Average                     Weighted Average
                                           Options        Exercise Price         Options       Exercise Price
                                          -----------     ----------------     -----------     ----------------
<S>                                       <C>                 <C>                <C>                <C>
Outstanding, beginning of year             8,000,000          $0.020             4,000,000          $0.010
  Granted                                  3,673,830          $5.843             4,000,000          $0.031
  Exercised                               (5,000,000)         $0.014                 -                -
  Expired/Forfeited                       (1,764,370)         $1.893                 -                -
                                          -----------     ----------------      -----------    ----------------
Outstanding, end of year                   4,909,460          $3.711             8,000,000          $0.020
                                          ===========     ================      ===========    ================

Exercisable, end of year                   2,970,360          $3.352             8,000,000          $0.020
                                          ===========     ================      ===========    ================
Weighted average fair value
 of options granted                                           $4.66                                 $0.02
                                                          ================                     ================
</TABLE>

         2,000,000 of the options outstanding at August 31, 2000 have an
exercise price of $0.031, with an average remaining contractual life of 3.3
years. 2,000,000 of these options are exercisable at August 31, 2000. 811,400
of the options outstanding at August 31, 2000 have exercise prices between
$1.30 and $4.00, with a weighted average exercise price of $3.14 and a
weighted average remaining contractual life of 2.8 years. 20,000 of these
options are exercisable at August 31, 2000. 1,357,500 of the options
outstanding at August 31, 2000 have exercise prices between $4.01 and $8.00,
with a weighted average exercise price at $5.48 and a weighted average
remaining contractual life of 1.75 years. 525,000 of these options are
exercisable at August 31, 2000. The remaining 740,560 options have exercise
prices between $8.01 and $40.00, with a weighted average exercise price
of $14.70 and a weighted average remaining contractual life of 1.40 years.
425,360 of these options are exercisable at August 31, 2000.

         The fair value of each option granted during 2000 and 1999 to
consultants and outside service providers is estimated using the Black-Scholes
option pricing model on the date of grant using the following assumptions: (i)
no dividend yield, (ii) average volatility of 390 percent and 61.5 percent,
respectively, (iii) weighted average risk free interest rate of approximately
6.25 percent and 5.77 percent, respectively, and (iv) average expected life of 3
years and 5 years, respectively.

         Had compensation costs for the Company's 2000 and 1999 options granted
to employees been determined consistent with SFAS 123, the Company's net loss
and net loss per share for the years ended August 31, 2000 and 1999 would
approximate the pro forma amounts below:

<TABLE>
<CAPTION>
                                                 2000                                1999
                                    ------------------------------       ----------------------------
                                     As Reported       Pro forma         As Reported       Pro forma
                                    -------------    -------------       -----------      -----------
       <S>                          <C>              <C>                 <C>              <C>
       Net loss                     $(20,481,888)    $(24,528,622)       $ (863,361)      $ (983,361)
                                    =============    =============       ===========      ===========
       Basic and diluted
        loss per common
        share                       $      (0.68)    $      (0.79)       $    (0.03)      $    (0.03)
                                    =============    =============       ===========      ===========
</TABLE>

Stock Warrants
--------------

         From time to time, the Company issues warrants pursuant to various
consulting agreements.

         During fiscal 2000, pursuant to various brokerage service agreements
with outside consultants, the Company issued warrants to purchase 558,952 shares
of the Company's common stock. The exercise prices per share were initially

                                     F-22


<PAGE>

equal to the average closing bid price for the five days before each grant
ranging from $4.025 to $14.50. If the average closing bid price for the
Company's common stock for the five days before an investment agreement is
entered into is less than the initial price, then the exercise price shall be
reset to equal the market price of the closing date or if the date of exercise
is more than six months after the date of issuance, the exercise price shall be
reset to the lesser of the exercise price in effect or lowest reset price for
the five days ending on such anniversary date. The lowest rest price ranges from
$5.425 to $14.50 as of August 31, 2000. As these warrants were issued in
connection with fund raising activities, no consulting expense was recognized
in the statement of operations.

         In June 2000, pursuant to marketing agreements with outside
consultants, the Company issued warrants to purchase 200,000 shares of the
Company's common stock, at exercise prices ranging from $6.00 to $8.00 per
share, with estimated fair market value of $755,000 (estimated by the Company
based on the Black-Scholes option pricing model under SFAS 123). The options
vested on the date of grant and are exercisable through June 2002. During fiscal
2000, the Company recognized total marketing expense of $755,000 in the
accompanying statements of operations.

         In May 2000, pursuant to a convertible note agreement with a financial
institution (see Note 6), the Company issued warrants to purchase 15,686 shares
of the Company's common stock, at an exercise price of $6.325, with an estimated
fair market value of $53,333 (estimated by the Company based on the
Black-Scholes option pricing model under SFAS 123). The options vested on the
date of grant and are exercisable through May 2005. During fiscal 2000, the
Company recognized interest expense of $53,333 in the accompanying statements of
operations.

         During fiscal 2000, pursuant to various service agreements with outside
service providers, the Company issued warrants to purchase 58,243 shares of the
Company's common stock at exercise prices ranging from $6.00 to $18.44 per
share, with an estimated fair market value of $775,418 (estimated by the Company
based on the Black-Scholes option pricing model under SFAS 123). The options
vested on the date of grant and are exercisable through June 2005. During fiscal
2000, the Company recognized service expense of $775,418 in the accompanying
statements of operations.

         In August 2000, pursuant to stock purchase agreement with an investor,
the Company issued warrants to purchase 36,923 shares of the Company's common
stock, at exercise price of $1.37 per share. The warrants vested on the date of
grant and are exercisable through August 2003. As these warrants were issued in
connection with fundraising activities, no consulting expense is to be
recognized for these warrants in the statement of operations.

         The following represents a summary of the warrants (including the
warrants discussed in the preferred stock section above) outstanding for the
year ended August 31, 2000:

                                                               Weighted Average
                                               Warrants         Exercise Price
                                              -----------      ----------------

         Outstanding, beginning of year            -           $       -
              Granted                          1,394,804             4.99
              Exercised                            -                   -
              Expired/Forfeited                    -                   -
                                              -----------      ----------------
         Outstanding, end of year              1,394,804       $     4.99
                                              ===========      ================

         Exercisable, end of year              1,394,804       $     4.99
                                              ===========      =================
         Weighted average fair value
          of warrants granted                                  $     4.86
                                                               =================

         526,923 of the warrants outstanding at August 31, 2000 have exercise
prices between $1.00 and $4.00, with a weighted average exercise price of $3.67
and a weighted average remaining contractual life of 4.1 years. 650,523 of the
warrants outstanding at August 31, 2000 have exercise prices between $4.00 and
$6.00, with a weighted average exercise price of $4.50 and a weighted average
contractual life of 4 years. 217,358 of the warrants outstanding at August 31,
2000 have exercise prices between $6.00 and $19.00, with a weighted average
exercise price of $9.67 and a weighted average remaining contractual life of 3.3
years.

                                     F-23


<PAGE>

         The fair value of each warrant granted during 2000 for services is
estimated using the Black-Scholes option pricing model on the date of grant
using the following assumption: (i) no dividend yield, (ii) average volatility
of 390 percent, (iii) weighted average risk free interest rate of approximately
6.25 percent, and (iv) average expected life of 3 years.

NOTE 9.  INVESTMENT AGREEMENT

         In October 1999, the Company entered into an Irrevocable Investment
Agreement for a "private equity line" of up to $35,000,000. Under the Investment
Agreement an investment banking company has made a firm commitment to purchase
the Company's common stock and resell the securities in an offering under
Regulation D of the United States Securities and Exchange Commission.

         Subject to an effective registration statement and ending 36 months
from the initial subscription date, the Company at its discretion may "Put"
common stock to the investment banking company. The purchase price per share
will equal 92% of the lowest closing bid price of the common stock during the 20
business days following each Put, subject to a minimum price specified by the
Company as defined in the Investment Agreement. The amount of each Put sold to
the investment banking company may be up to $2,000,000, but the number of shares
sold may generally not exceed 15% of the aggregate trading volume of the
Company's common stock during the 20 business days following each Put request.

         The investment banking company shall receive warrants to purchase 10%
of the number of shares of the Company it purchases under each Put. The warrants
are exercisable at a price equal to 110% of the market price for each Put.

         In consideration of the Investment Agreement, the Company granted the
investment banking company warrants to purchase 490,000 shares of its common
stock (see Note 8). The warrants are exercisable upon the successful completion
of certain tasks, as defined, and at a price equal to the lowest closing bid
price for the 5 days prior to the execution of the Investment Agreement of the 5
days following its execution, whichever price is lower. The Company has not
valued the warrants as they were issued in connection with fund raising
activities.

         Effective July 17, 2000, the Company advised the investment banking
company that it no longer intends to facilitate the use of this agreement. No
"Puts" were exercised pursuant to this agreement during the fiscal year 2000.
The Company and the Investment Banking Company are negotiating the terms of the
cancellation, which management believes will not have a material adverse effect
on its financial position or statement of operations.

NOTE 10.  RELATED-PARTY TRANSACTIONS

         During fiscal 2000, the former Chairman and CEO of the Company entered
into a verbal contract with SpeeDSL, which is owned and operated by the son of
the former Chairman and CEO, to be a reseller of access services. During fiscal
2000, the Company invoiced SpeeDSL approximately $593,000 for access services
fees, of which, $580,000 is included in accounts receivable in the accompanying
balance sheet at August 31, 2000. Cost incurred by LMKI for such services were
approximately $988,000, including approximately $395,000 of physical routers
that are at customer locations which the Company intends to recover or be
reimbursed for from SpeeDSL. Subsequent to August 31, 2000, the Company
negotiated with the former Chairman and CEO to offset this receivable against
the Company's payable to the former Chairman and CEO (see Note 6).

                                     F-24


<PAGE>

NOTE 11.  EARNINGS PER SHARE

Basic and diluted loss per common share is computed as follows:

<TABLE>
<CAPTION>

Numerator for basic and diluted loss per common share:
     <S>                                                         <C>              <C>
     Net loss                                                    $(20,481,888)    $  (863,361)
     Preferred dividends, including beneficial conversion
     of Preferred A stock                                          (4,227,500)           -
                                                                 -------------    ------------
     Net loss available to common stockholders                   $(24,709,388)    $  (863,361)
                                                                 =============    ============

Denominator for basic and diluted loss per common share:
     Weighted average common shares outstanding                    36,524,870      28,792,000
                                                                 =============    ============

     Net loss per common share available to common
      Stockholders                                               $      (0.68)    $     (0.03)
                                                                 =============    ============
</TABLE>

NOTE 12. SUBSEQUENT EVENT

         Subsequent to August 31, 2000, the Company issued 698,710 shares of
common stock in connection with the conversion of 350 shares of Preferred A,
plus accrued dividends of $18,285, at conversion prices ranging from $0.25 to
$0.917 per share in accordance with the conversion terms of the Preferred A
shares.

         During September 2000, the Company received a written commitment for a
line of credit of up to $5,000,000 from a financial institution for working
capital purposes. The line requires a security interest of 12,000,000 shares of
common stock. In addition, interest on the line is at prime plus 3% (12% as of
the report date) with a maturity date of September 20, 2003 and no prepayments
of the line prior to December 15, 2001. As of the report date, the security
interest provided has been withdrawn, and the Company has decided to postpone
pursuing funds at this time through this commitment.

         Subsequent to August 31, 2000, the Company borrowed approximately
$325,000 for working capital purposes from a related party bearing interest
of 11% per annum, and due upon demand.

         Subsequent to August 31, 2000, the board of directors granted to
various employees, pursuant to the 2000 plan, an aggregate of 1,933,000 options
at exercise prices ranging from $0.14 to $0.562 (based on the closing bid
price of the Company's common stock on the date of each grant). The options vest
through May 2003 and are exercisable through December 2010.

         During November 2000, the Company issued 90,166 shares of common stock
in connection with the conversion of certain related party notes payable of
$33,812 at $0.375 per share (the closing bid price of the Company's common stock
on the date of grant).

         During November 2000, the board of directors authorized the issuance of
10,000 shares of common stock valued at $4,100 (based on the closing bid price
of the Company's common stock on the date of grant) to an employee for wages.

         During November 2000, it was discovered that the former CFO and
beneficial owner (as defined by the Securities Exchange Act of 1934), had
profited from purchases and subsequent sales of the Company's common stock held
for less than six (6) months (a "short-swing" profit). Pursuant to Section 16(b)
of the Securities Exchange Act of 1934, the Company acted to recover these
profits from the former CFO. As a result, the Company received $16,380, which
has been credited to additional paid-in capital as a contribution to
shareholders' deficit.

                                     F-25