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                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

                  [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR
                  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: MARCH 31, 2001      Commission file number: 000-20865

                 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                  For the transition period from _____ to _____

                               ZeroPlus.com, Inc.
                 (Name of small business Issuer in its charter)

<TABLE>
<S>                                                            <C>
                   DELAWARE                                       52-1929282
       (State or other jurisdiction of                         (I.R.S. Employer
       incorporation or organization)                          Identification No.)

         12800 MIDDLEBROOK ROAD, SUITE 400,
                 GERMANTOWN, MD                                       20874
      (Address of principal executive offices)                     (Zip Code)
</TABLE>

                                 (301) 601-8700
                           (Issuer's telephone number)

         Securities registered under Section 12(b) of the Exchange Act:

                    Title of Each Class                   Name of Each Exchange
                                                          on Which Registered
                       NOT APPLICABLE                        NOT APPLICABLE

      Securities registered pursuant to Section 12(g) of the Exchange Act:
                          COMMON STOCK, $.01 PAR VALUE
                                (Title of Class)

     Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for past 90 days. Yes [ X ] No [ ]

     Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]

     State the issuer's revenues for its most recent fiscal year: $1,165,656.

     The aggregate market value of the issuer's voting common stock held by
non-affiliates was approximately $3,943,809 based upon the closing price of the
common stock on June 25, 2001, as quoted by the Nasdaq SmallCap Market.

        State the number of shares outstanding of each of the issuer's classes
of common equity as of the latest practicable date: on June 25, 2001, the number
of issued and outstanding shares of common stock was 10,378,446.

     Transitional Small Business Disclosure Format: Yes [ ] No [ X ]

================================================================================

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                               ZEROPLUS.COM, INC.

                                      INDEX

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<S>         <C>                                                                                                      <C>
                                                       PART I
Item 1.     Description of Business.....................................................................................3
Item 2.     Description of Properties..................................................................................13
Item 3.     Legal Proceedings..........................................................................................14
Item 4.     Submission of Matters to a Vote of Security Holders........................................................14

                                                      PART II
Item 5.     Market for Common Equity and Related Stockholder Matters...................................................14
Item 6.     Management's Discussion and Analysis of Financial Condition and Results of Operations......................15
Item 7.     Financial Statements.......................................................................................23
Item 8.     Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......................42

                                                      PART III
Item 9.     Directors, Executive Officers, Promoters and Control Persons; Compliance with
               Section 16(a) of the Exchange Act.......................................................................42
Item 10.    Executive Compensation.....................................................................................45
Item 11.    Security Ownership of Certain Beneficial Owners and Management.............................................48
Item 12.    Certain Relationships and Related Transactions.............................................................49
Item 13.    Exhibits, List and Reports on Form 8-K.....................................................................50
</TABLE>


                                       2

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                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS.

RECENT DEVELOPMENTS AND OVERVIEW

              On June 5, 2001, ZeroPlus.com announced a phased shutdown of
operations and the immediate termination of all services and the majority of
employees. This was done in an effort to conserve cash while seeking to pursue
and consider any possible alternatives to recapitalize our business, or to seek
value for our technology and/or relationships through an asset sale, merger, or
other business arrangement. We made the decision to suspend operations after we
determined that the Company no longer had the resources to continue to support
the operating losses we have experienced. On June 27, 2001 ZeroPlus.com
voluntarily consented to having its stock delisted by NASDAQ. Prior to June 27,
NASDAQ had placed an indefinite halt to trading pending further information
concerning our June 5, 2001 announcement. On June 12, 2001, the Company entered
into a forbearance agreement with its principal secured lender, pursuant to
which the secured creditor agreed to forbear from pursuing its remedies against
the Company until September 10, 2001.

            Prior to suspending operations, ZeroPlus.com, Inc. engaged in the
business of providing Internet telephony services to consumers worldwide,
including free PC-to-PC phone services, and fee-based PC-to-phone, phone-to-PC
and phone-to-phone services. We also have developed an e-commerce solution,
ZPCommerce, which enables companies to voice-enable their websites. ZeroPlus.com
can route calls from customers' PCs to existing call centers entirely over the
Internet, thereby drastically reducing e-commerce companies' inbound 800-number
service costs.

            During fiscal 2000, we refocused the main thrust of our business
onto our consumer and e-commerce Internet telephony solutions, as reflected by
our merger with our wholly-owned subsidiary, ZeroPlus.com Incorporated and our
name changed from e-Net, Inc. to ZeroPlus.com, Inc., in February 2000. During
the transition, we reduced our emphasis on selling certain of our Telecom
2000(TM) products ("Telecom 2000 Products"). These products generally provided
high fidelity duplex voice and fax through the Internet, private Internet
Protocol networks and "intranets," and other types of digital data networks
(collectively, "Digital Data Networks"). They also generally offered traditional
telephony features like call waiting, call holding, call transfer, conference
calling, billing, voice-mail and the like. These features, functions and
capabilities became the basis for building the service-based product set offered
through ZeroPlus.com.

            ZeroPlus.com differs from its competitors in the Internet telephony
industry by being built around Internet telephone numbers. This concept, for
which we have a patent application pending (the "Pending Patent"), provides
Internet consumers with a unique phone number that can be identical to their
home phone numbers, except that "0" is the first digit. We believe that, if
granted, the Pending Patent may provide certain strategic and technological
advantages in the emerging market for Internet telephony. We can make no
assurances that our application for the Pending Patent will be granted, or if
granted, as to the advantages or protection that may result. Our current and
anticipated product line is not wholly dependent on the validity or
applicability of the Pending Patent. The Pending Patent would not cover all of
our products.


COMPANY BACKGROUND

            Since our founding in 1995, we have focused on the development of
software-based telecommunications products that enable, enhance or manage
telephone communications. We announced our first Telecom 2000 Products in April
1996, then we established "beta" test sites for the Telecom 2000 system. After
completing "beta" testing, in May 1997 we announced the Internet Protocol
version of Telecom 2000.

            We began to sell Telecom 2000 Products in July 1997 with the
introduction of the Telecom 2000 Desktop System. We announced the Telecom 2000
Customer Premise Equipment Gateway Systems, also known as the Telecom 2000 T1/E1
Digital Trunk Interface, in October 1997; that product became generally
available in February 1998. We announced the general availability of our Telecom
2000 retail system called "NetConnect" in May 1998. In 1998, we also delivered
our 24 port and 30 port T1/E1 Digital Trunk Interface product in the medium
system range, and we developed customer relationships with emerging
communications services companies in the domestic U.S., Latin America, and
Europe. In 1997-1998, we also began planning for large-systems development in
1998 and began to develop voice-over-cable-television products in conjunction
with various strategic partners.

            In 1998, we recognized that the delay in growth of generally
forecast demand for Digital Data Network telephony meant that we needed to focus
our immediate sales activities in niche areas. By early 1999, we had identified
three such niche markets: voice-over-cable-television, small-to-mid-sized newer
telecommunications services companies ("Next-Generation

                                       3

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Telcos"), and World Wide Web-based Internet telephony for Internet commerce and
otherwise. To further the voice-over-cable-television niche, we expanded our
cable television modem project to include more telephone features and to address
Internet Protocol. To further the Next-Generation Telco niche, we completed
development of an intelligent module for the medium-sized Digital Trunk
Interface product called the T2000 Gatekeeper, and we developed the capability
to use our products on wireless Digital Data Networks, offering this customer
base a low infrastructure cost system alternative. To further the World Wide
Web-based Internet telephony niche, we developed and enhanced our software-only
T2000 product, T2000 TS Express. As a distribution strategy for this niche, we
created a wholly owned subsidiary, ZeroPlus.com Incorporated.

            The third niche quickly became our primary focus. In keeping with
that focus, we introduced our PC-to-PC consumer solution, available at our
Internet website, ZeroPlus.com, in June 1999. In October 1999 we began
connecting PC-to Phone calls to 800-type toll free telephone numbers and began
providing a free instant messaging service. In November 1999, we provided free
unlimited PC-to-Phone calling for the Thanksgiving holiday for members who added
at least $25 to their prepaid accounts. In December 1999, we first provided
Phone-to-PC and Phone-to-Phone calls, as well as sponsored free calling on the
Christmas and New Years holidays for members with a minimum deposit of $15 in
their account. International calling to Western Europe was made available in
February 2000 and world-wide calling was made available in May 2000. We also
developed our e-commerce solution, which was announced in January 2000 and
became available for testing in June 2000. In keeping with this change in focus,
we merged with our wholly owned subsidiary, ZeroPlus.com Incorporated and
changed our name from e-Net, Inc. to ZeroPlus.com, Inc. in February 2000.

            During fiscal 2001, our efforts were focused on pursuing strategic
relationships with network and marketing partners. In May 2000, we announced our
Internet Protocol Telephone Service Participation agreement with Priceline Long
Distance, LLC. By this agreement, ZeroPlus was to be one of three VoIP carriers
for Priceline's customers. In February 2001, we signed a formal contract with
Worldwide Consumer Direct to operate as their primary telephony service
provider. This agreement was enacted after approximately six months trial
period, of which four months were paid trials. The Worldwide Consumer Direct
(WCD) contract accounted for the majority of our VoIP revenues during fiscal
2001. To support the WCD contract, ZeroPlus negotiated a carrier services
contract with Qwest Communications, Inc. in October 2000. In January 2001, we
announced a strategic relationship with Uniden America Corporation. Uniden is
the world's largest manufacturer of cordless phones. Our agreement with Uniden
provides for a cordless phone design incorporating one button access to the
ZeroPlus VoIP network. However, we have not been able to raise sufficient
capital to take advantage of our agreement with Uniden. Furthermore, with the
suspension of operations on June 5, 2001, all Internet telephony services have
been terminated.


INDUSTRY BACKGROUND

            In the mid-1990's, companies began to develop and market products
that delivered audio, including voice, over the Internet. Such products were the
first to use "Voice-over-Internet Protocol," or the transmission of voice as
digital data on Internet Protocol-compatible networks, including the Internet as
well as Internet-compatible, private Digital Data Networks such as "Intranets."
However, early Internet telephone calls required cumbersome components to make
Internet-based telephone calls, such as personal computer speakers and
microphones. In addition, participants in the telephone call had to use
identical software, running at the same time. Voice quality was often poor. Many
products had a half-duplex nature and experienced long delays. However, the
promise of this technology was established because of the low cost of the
Internet telephone call, which could seemingly be made "free," even over long
international distances.

            Internet telephone calls are less expensive than traditional
international long distance calls primarily because these calls are carried over
the Internet or private Internet Protocol Digital Data Networks and therefore
bypass a significant portion of international long distance costs. Currently,
Internet telephone companies use a technology called "packet-switching" to break
calls into discrete data packets, route them over the Internet or a private,
Internet Protocol Digital Data Network and reassemble them into their original
form for delivery to the recipient. Traditional international long distance
calls, in contrast, are made using a technology called "circuit switching",
which carries these calls over international voice telephone networks. Circuit
switching requires a dedicated connection between the caller and the recipient
that remains open for the duration of the call. As a result, circuit-switching
technology is inherently less efficient than packet-switching technology, which
allows data packets representing multiple conversations to be carried over the
same line. This greater efficiency creates network cost savings that can be
passed on to the consumer in the form of lower long distance call costs, even
"free" calls in some circumstances and under some business models.


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            Therefore, despite earlier quality problems, many technology
analysts forecast a large target market for Internet telephone calls and other
Internet telephony products, such as voice coupled with full-duplex, call
waiting, call holding, call transfer, conference calling, billing, voice-mail
and the like. Reports issued by technology industry analysts forecast the annual
Internet telephony market to grow to almost a billion minutes by 2002, and that
more than 10% of all telecommunications traffic will travel over Internet
Protocol Digital Data Networks 2002.

OUR PRODUCTS

            ZeroPlus.com, introduced in June 1999, is an Internet telephony
service that currently provides PC-to-PC, PC-to-phone, phone-to-PC and
phone-to-phone service. We built ZeroPlus.com around a unique concept, Internet
telephone numbers, for which we have applied for the Pending Patent. See
"--Patent, Trademark, Copyright and Proprietary Rights". This concept is unique
to the Internet telephony industry because it provides customers with a unique
phone number identical to their home phone number, except that a "0" is inserted
as the first digit. For example, if a person's home phone number is
1-212-555-1212, the Internet phone number becomes 0-212-555-1212.

            There are three key reasons why we believe the Internet phone number
scheme is an important advance in Internet telephony. First, most Internet
telephony services offering PC-to-PC capability route calls using an
alphanumeric nickname. However, because most people have multiple Internet
nicknames associated with various email accounts, users are often confused over
which nickname to use when calling another person. Second, consumers have been
using phone numbers for over 100 years, making it an easily understood concept.
We believe that this will allow us to target mainstream consumers more easily,
in addition to those who are technologically proficient. Third, our Internet
telephone-dialing plan is based on the traditional phone network's standard
dialing plan. This enables existing telecommunications equipment to route
ZeroPlus.com calls, thus providing more complete integration of our Internet
telephony service with the existing phone network.

            CONSUMER SOLUTION

            ZeroPlus.com offered four types of Internet telephony services.
First, our PC-to-PC service allows users to call each other over the Internet
for free using Internet-connected, Windows-based PCs. Consumers signed up for
the service at no charge by visiting our website, providing their name, city,
state, country, and the number they wish to reserve as their Internet phone
number. After downloading the software to install the program, they began making
free calls to other ZeroPlus.com members.

            We also offered PC-to-phone, phone-to-PC and phone-to-phone
services. Once members have signed up for PC-to-PC service, they were able to
visit a secure portion of the website to fund a ZeroPlus.com debit account. Our
PC-to-phone service allowed our customers to call any phone on the public
telephone network, anywhere in the world, from their PC. Our phone-to-PC service
allowed our customers to call from any phone on the U.S. public telephone
network to any ZeroPlus.com customer, anywhere in the world, who was logged on
to his or her PC. Finally, our phone-to-phone service allowed our customers to
call from any phone on the U.S. public telephone network to any other phone on
the public telephone network, anywhere in the world. The cost savings of these
services can be significant over traditional full-rate long distance telephone
service.

            In addition to offering these basic Internet telephony services,
ZeroPlus.com was working toward duplicating the other enhanced service provided
by traditional telephony vendors. Our goal was to provide a service functionally
identical to the phone service that consumers use every day. For no charge, we
provided consumers with call hold, caller ID, speed dialing, call waiting, call
forwarding and call transfer functions in the software.

            Assuming that we are able to recapitalize our business and restore
operations, ZeroPlus.com's long-term goal is to develop a single, integrated
communications portal for all Internet users. To accomplish this, we hope to
provide instant messaging and text chat free to all our members. In the future,
we hope to add unified messaging and voice mail, and may also add additional
communication services such as shadow services and fax, some of which we
currently expect will be fee-based services.

            e-COMMERCE SOLUTION

            While there is a consensus that selling products via the Internet is
quite cost-effective, e-commerce is still hampered by its inability to provide
sufficient customer service over the Internet, in both business-to-consumer and
business-to-business scenarios. Customers with questions often feel more
comfortable talking to a customer service representative. In order to take full
advantage of both the capabilities of the Internet and the personalized service
that can be offered by a live representative, such simultaneous support has
required the customer simultaneously to be connected to a website and to call a
customer service number. Unfortunately, many consumers access the Internet by
their sole telephone line, making it impossible for them to do

                                       5

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both at the same time. Moreover, because vendors typically pay for inbound calls
to their customer service centers, adding voice interaction with a customer
service representative drives up the cost of an e-commerce transaction.

            ZeroPlus.com has developed a solution to these impediments: our
e-commerce solution, ZPCommerce. ZPCommerce enables companies to "voice-enable"
their websites using coded icons that can be placed on the customer service
portion of the website, or even next to individual products. By clicking on a
ZPCommerce icon, customers will launch a ZeroPlus.com call over the Internet to
the vendor's existing call center. Only one phone line will be required to
simultaneously browse a website and talk over the Internet.

            There are two key components to ZPCommerce. The first is software.
Our suite of software products is comprised of several units that can be used
independently or as an integrated solution. ZPDial icon and ZPLite are software
products that initiate the Voice Over Internet Protocol call from a website
customer's personal computer to the website's call center or customer support
site. This software must be sufficiently small so that download time does not
too unduly delay first-time users when they click on a ZPCommerce icon. We
currently are redesigning this software to require the minimal download, while
we work on a Java applet version of our software to improve the e-commerce
users' experience. ZPSoft Agent is a software solution that allows the website's
call center or customer support site to receive Voice Over Internet Protocol
calls directly at their personal computer and allows the website to determine
how an incoming call should be routed.

            The other key component to our e-commerce solution is the call
center hardware. We have been designing voice over Internet Protocol hardware
for more than five years. We already have developed the equipment necessary for
"brick-and-mortar" call centers to accept Internet phone calls. This equipment
eliminates the need for the call to ever touch the traditional public telephone
network. Therefore, inbound calls can be delivered at very little cost. The fees
and per-minute charges to vendors for ZPCommerce may yield cost reductions of
50-90% over traditional inbound toll-free charges.

            ZPCommerce can be completely integrated with existing call centers,
which can take advantage of existing legacy systems. Our equipment can be
integrated into existing Interactive Voice Response ("IVR") systems, and
customer service representatives can answer both traditional and Internet calls
on their existing equipment.

            Our e-commerce solution offers the following advantages to our
customers:

            O           No Routing Required Over Public Telephone Network: A
                        call launched from a customer's PC may travel to the
                        vendor's call center entirely over the Internet; the
                        call does not need to be routed to the standard public
                        telephone network. Our competitors, however, currently
                        route calls to the public telephone network. Therefore,
                        unlike our competitors' current products, ZPCommerce
                        provides significant savings on inbound toll-free
                        service charges.

            O           Automatic Placement in Proper IVR Queue: ZPCommerce
                        recognizes the location of the icon clicked by the
                        customer, so call center equipment can intelligently
                        connect a caller to the customer service representative
                        most familiar with the product in which he or she is
                        interested. Competitors' products currently place
                        customers at the highest level of the IVR system,
                        requiring them to answer multiple prompts to get to the
                        proper queue. Therefore, we believe our e-commerce
                        solution enables vendors to provide better customer
                        service and a faster response time.

            O           Automatic Access to Customer Information: Because
                        ZeroPlus.com and ZPCommerce use Internet phone numbers
                        and have caller ID capabilities, ZPCommerce can route a
                        caller's Internet phone number and personal registration
                        information for previous ZeroPlus.com users to the
                        vendor's customer service representative. In many cases,
                        the customer's Internet phone number can be identical to
                        his or her phone number. The customer service
                        representatives will have access to this information
                        without having to ask the customer.

            O           Integrated Toll-Free Phone Numbers: Companies spend a
                        great deal of marketing funds to ensure that consumers
                        remember their toll-free phone numbers. Because it is
                        built around Internet telephone numbers, our e-commerce
                        solution can preserve the recognition built into
                        e-commerce companies' traditional toll-free numbers, an
                        advantage not currently shared by our competitors.

            O           Access to Consumer Base: We hope to grow our consumer
                        membership base, so that access to those customers will
                        become an additional inducement to e-commerce companies'
                        adoption of our e-commerce solution. We also intend to
                        offer a ZeroPlus.com Yellow Pages in which our
                        e-commerce customers can participate, allowing our
                        consumers to easily make purchases from our e-commerce
                        clients.


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GOVERNMENT REGULATION

            INTERNET PROTOCOL TELEPHONY

            The use of the Internet and private Internet Protocol networks to
provide telephone service remains a relatively recent market development. While
we believe that the provision of voice communications services over the Internet
and private Internet Protocol networks is currently permitted under United
States law, some foreign countries have laws or regulations that may prohibit
voice communications over the Internet.

            UNITED STATES. We believe that, under United States law, based on
specific regulatory classifications and recent regulatory decisions, the
Internet Protocol communications services that we provide constitute information
services (as opposed to regulated telecommunications services). As such, our
services are not currently regulated by the Federal Communications Commission
(the "FCC") or any state agencies charged with regulating telecommunications
carriers. Nevertheless, aspects of our operations may be subject to state or
federal regulation, including regulation governing universal service funding,
disclosure of confidential communications, copyright and excise tax issues.
However, we cannot assure you that our services will not be regulated in the
future. Several efforts have been made in the United States to enact federal
legislation that would either regulate or exempt from regulation communications
services provided over the Internet. Increased regulation of the Internet may
slow its growth, particularly if other countries also impose regulations. Such
regulation may negatively impact the cost of doing business over the Internet
and materially adversely affect our business, operating results, financial
condition and future prospects.

            In addition, the FCC is currently considering whether to impose
surcharges or other common carrier regulations upon some providers of Internet
and Internet Protocol telephony, primarily those which provide Internet and
Internet Protocol telephony services to end users located within the United
States. Although the FCC decided that information service providers, including
Internet and Internet Protocol telephony providers, are not telecommunications
carriers, various companies have challenged that decision. Congressional
dissatisfaction with the FCC's conclusions could result in requirements that the
FCC impose greater or lesser regulation, which in turn could materially
adversely affect our business, financial condition, operating results and future
prospects. On April 10, 1998, the FCC issued a report to Congress discussing its
implementation of universal service provisions contained in the 1996 amendments
to the Communications Act of 1934. In the report, the FCC indicated that it
would examine the question of whether certain forms of phone-to-phone Internet
Protocol telephony are information services or telecommunications services. The
two are treated differently in several respects, with certain information
services being more lightly regulated and not subject to universal service
contribution obligations. The FCC noted that it did not have, as of the date of
the report, an adequate record on which to make a definitive ruling. However,
the record suggested that certain forms of phone-to-phone Internet Protocol
telephony appear to have the same functionality as non-Internet Protocol
telecommunications services and lack the characteristics that would render them
information services. In September 1998, two regional Bell operating companies
advised Internet and Internet Protocol telephony providers that they would
impose access charges on Internet and Internet Protocol telephony traffic. It is
uncertain at this time whether these companies will actually impose access
charges or when such charges will become effective. In addition, one of these
regional Bell operating companies has recently filed a petition with the FCC
seeking the imposition of access charges on phone-to-phone Internet and Internet
Protocol telephony services. On September 29, 1999, the FCC released a notice of
inquiry seeking information on the extent to which phone-to-phone Internet
Protocol telephony services might impact the accessibility of telecommunications
services to people with disabilities. This inquiry focused on, among other
things, opportunities for achieving greater accessibility for Internet Protocol
telephony and the extent to which Internet Protocol telephony is now, or soon
will be, an effective substitute for conventional circuit-switched telephony. On
October 22, 1999, the FCC released a notice of proposed rulemaking on collecting
information on the status of local telephone service competition and the
deployment of advanced telecommunications capability. The FCC recognized that,
while it does not regulate Internet services, Internet Protocol telephony may
become an important substitute for circuit-switched telephony and should be
included in evaluating local competition. Also, the FCC asked whether it should
undertake a more specific determination of the extent to which the Internet is
being used to provide telephony services.

            If the FCC were to determine that certain services are subject to
FCC regulations as telecommunications services, the FCC may require providers of
Internet and Internet Protocol telephony services to be subject to traditional
common carrier regulation, make universal service contributions, and/or pay
access charges. It is also possible that the FCC may adopt a regulatory
framework other than traditional common carrier regulation for Internet and
Internet Protocol telephony providers. Any such determinations could materially
adversely affect our business, financial condition, operating results and future
prospects to the extent that they negatively affect our cost of doing business
or otherwise slow the growth of our business.

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            State regulatory authorities may also retain jurisdiction to
regulate the provision of intrastate Internet and Internet Protocol telephony
services. Several state regulatory authorities have initiated proceedings to
examine the regulation of such services. Others could initiate proceedings to do
so. If such regulations are adopted, they could materially adversely affect our
business, financial condition, operating results and future prospects.

            INTERNATIONAL. The regulatory treatment of Internet and Internet
Protocol telephony outside of the United States varies widely from country to
country. A number of countries that currently prohibit competition in the
provision of voice telephony may also prohibit Internet and Internet Protocol
telephony. Other countries permit but regulate Internet and Internet Protocol
telephony. Some countries will evaluate proposed Internet and Internet Protocol
telephony service on a case-by-case basis and determine whether it should be
regulated as a voice service or as another telecommunications service. Finally,
in many countries, Internet and Internet Protocol telephony have not yet been
addressed by legislation or regulatory action. Increased regulation of the
Internet and/or Internet and Internet Protocol telephony providers or the
prohibition of Internet and Internet Protocol telephony in one or more
countries, or more aggressive enforcement of existing regulations in such
countries, could materially adversely affect our business, financial condition,
operating results and future prospects.

            For example, we believe that our services fall outside the
classification of regulated voice telephony services in the European Union. The
European Union regulatory regime distinguishes between voice telephony services
and other telecommunications services. In Services Directive 90/388/EEC, issued
in 1990, the European Commission required Member States to allow competition for
all telecommunications services except voice telephony and certain other
services. The Services Directive was amended in 1996 by Commission Directive
96/19/EC, which required the liberalization of all telecommunications services,
including voice telephony, by January 1, 1998, except in certain member states
that were granted extended compliance periods. In addition, Directive 96/19/EC
requires that services other than voice telephony be subjected to no more than a
general authorization or declaration procedure. For purposes of these
Directives, "voice telephony" is defined as the commercial provision for the
public of the direct transport and switching of speech in real time between
public switch network termination points.

            On January 10, 1998, the Commission issued a Notice addressing
whether Internet Protocol telephony was voice telephony and thus subject to
regulation as voice telephony by the Member States. As noted by the Commission,
a determination that Internet Protocol telephony constitutes "voice telephony"
may trigger significant regulatory consequences with respect to, among other
things, licensing requirements and contributions to universal service funding.
Consistent with its earlier directives, the Commission stated that Internet
telephony could properly be considered voice telephony only if all elements of
its "voice telephony" definition were met. In this January 1998 Notice, the
Commission concluded that no form of Internet Protocol telephony currently meets
the definition of "voice telephony" subject to Member States' regulation. The
Commission noted, however, that its conclusion that Internet Protocol telephony
cannot be considered voice telephony may not apply to particular forms of
service provisions. For example, this conclusion may not apply where an Internet
Protocol telephony service is marketed as an alternative form of voice telephony
service, users can dial out to any telephone number, and the provider guarantees
the quality of the Internet Protocol voice service by bandwidth reservation and
claims that the quality of the Internet Protocol voice service is the same as
traditional voice telephony service. Accordingly, the Commission concluded that
while voice over the Internet services cannot "for the time being" be generally
classified as "voice telephony," the situation must be kept under review in
light of technological and market developments. The Commission intends to review
its Notice periodically.

            On November 10, 1999, the Commission released a communication
stating: "Assuming that over time the voice over the Internet service meets the
key criteria for classification as voice telephony under the regulatory
framework," this service would be regulated like other voice telephony services
and covered by general authorizations. The Commission has announced that it is
drafting a report on regulating the quality of voice telephony services and
related consumer protection issues and another report discussing the new
Internet telecommunications services and their impact on the European Union's
regulatory and policy framework. We cannot predict what the content of such
reports will be, or what impact, if any, they may have on our business. Based on
the Commission's current position, providers of Internet Protocol telephony
should be subjected to no more than a general authorization or declaration
requirement by the European Union Member States. The Member States of the
European Union are Austria, Belgium, Denmark, Finland, France, Germany, Greece,
Ireland, Italy, Luxembourg, The Netherlands, Portugal, Spain, Sweden and the
United Kingdom. However, we cannot assure you that individual Member States will
not impose more stringent regulatory requirements, since the Commission's Notice
is not binding on the Member States. The Member States therefore are not
obligated to reach the same conclusions as the Commission on this subject so
long as they adhere to the definition of "voice telephony" in the Services
Directive. In fact, France is currently conducting an investigation into how
Internet Protocol telephony should be regulated. We cannot assure you that the
services provided over our network will not be deemed voice telephony subject to
heightened regulation by one or more EU Member States. Moreover, we cannot

                                       8

<PAGE>

assure you that our failure or the failure of any of our partners to obtain any
necessary authorizations will not have a material adverse effect on our
business, financial condition, operating results and future prospects.

            As we make our services available in foreign countries, and as we
facilitate sales by our partners to end users located in foreign countries, such
countries may claim that we are required to qualify to do business in the
particular foreign country. Such countries may also claim that we are subject to
regulation, including requirements to obtain authorization for the provision of
voice telephony or other telecommunications services, or for the operation of
telecommunications networks. It is also possible that such countries may claim
that we are prohibited in all cases from providing our services or conducting
our business as conducted in those countries. Our failure to qualify as a
foreign corporation in a jurisdiction in which we are required to do so or to
comply with foreign laws and regulations could materially adversely affect our
business, financial condition, operating results and future prospects. In
particular, this may subject us to taxes and penalties or preclude us from, or
limit us in, enforcing contracts in such jurisdictions.

            We or our partners may also currently be, or in the future may
become, subject to requirements to qualify to do business in a particular
foreign country, comply with regulations (including requirements to obtain
authorizations for the provision of voice telephony or other telecommunications
services or for the operation of telecommunications networks), or to cease
providing services or conducting business as conducted in that country. We
cannot be certain that either we or our partners are currently in compliance
with any such requirements, will be able to comply with any such requirements,
or will continue in compliance with any such requirements. The failure of us or
our partners to comply with such requirements could materially adversely affect
our business.

            One of our competitors recently disclosed that access to its
PC-to-phone service was blocked in certain countries in Asia and the Middle East
by government-controlled telecommunications companies, and that it intended to
negotiate agreements to continue to provide its services in those countries but
could not give assurances that such negotiations would be successful. Another of
our competitors recently disclosed that it has received a letter from the Israel
Minister of Communications requesting that it cease and desist terminating calls
over the Internet in Israel. We have not received any similar notices from these
regulators and we do not know specifically how these competitors operate in such
countries or why they received such notices. However, we cannot assure you that
such regulators or any other regulator may not block our service or send us
similar cease and desist orders in the future.

            OTHER REGULATION AFFECTING THE INTERNET

            UNITED STATES. Congress has recently adopted legislation that
regulates certain aspects of the Internet, including on-line content, user
privacy and taxation. For example, the Internet Tax Freedom Act prohibits
certain taxes on Internet uses through October 21, 2001. We cannot predict
whether substantial new taxes will be imposed on our services after that date.
In addition, Congress and other federal entities are considering other
legislative and regulatory proposals that would further regulate the Internet.
Congress is, for example, currently considering legislation on a wide range of
issues including Internet spamming, database privacy, gambling, pornography and
child protection, Internet fraud, privacy and digital signatures. Various states
have adopted and are considering Internet-related legislation. Increased United
States regulation of the Internet may slow its growth, particularly if other
governments follow suit, which may negatively impact the cost of doing business
over the Internet and materially adversely affect our business, financial
condition, results of operations and future prospects.

            The Federal Trade Commission has proposed regulations regarding the
collection and use of personal identifying information obtained from individuals
when accessing Web sites, with particular emphasis on access by minors. These
regulations may include requirements that companies establish certain procedures
to disclose and notify users of privacy and security policies, obtain consent
from users for certain collection and use of information and to provide users
with the ability to access, correct and delete personal information stored by
the company. These regulations may also include enforcement and redress
provisions. There can be no assurance that the policies we adopt will conform
with future regulations adopted by the FTC.

            Moreover, even in the absence of those regulations, the FTC has
begun investigations into the privacy practices of companies that collect
information on the Internet. One investigation resulted in a consent decree
pursuant to which an Internet company agreed to establish programs to implement
the principles noted above. We may become subject to a similar investigation, or
the FTC's regulatory and enforcement efforts may adversely affect the ability to
collect demographic and personal information from users, which could have an
adverse effect on our ability to provide highly targeted opportunities for
advertisers and electronic commerce marketers. Any of these developments would
materially adversely affect our business, results of operations and financial
condition.

                                       9

<PAGE>

            INTERNATIONAL. The European Union has also enacted several
directives relating to the Internet. The European Union has, for example,
adopted a directive on data protection that imposes restrictions on the
processing of personal data, which are more restrictive than current United
States privacy standards. Under the directive, personal data may not be
collected, processed or transferred outside the European Union unless certain
specified conditions are met. In addition, persons whose personal data is
processed within the European Union are guaranteed a number of rights. These
include the right to access and obtain information about their data, the right
to have inaccurate data rectified, the right to object to the processing of
their data for direct marketing purposes and in certain other circumstances, and
rights of legal recourse in the event of unlawful processing. The Directive will
affect all companies that process personal data in, or receive personal data
processed in, the European Union, and may affect companies that collect or
transmit information over the Internet from individuals in the European Union
Member States. In particular, companies with establishments in the European
Union may not be permitted to transfer personal data to countries that do not
maintain adequate levels of data protection. The directive does not, however,
define what standards of privacy are adequate. As a result, the directive may
adversely affect the activities of entities such as us that engage in data
collection from users in European Union member countries. In addition, the
European Union has adopted a separate, complementary directive that pertains to
privacy and the processing of personal data in the telecommunications sector.
This directive establishes certain requirements with respect to, among other
things, the processing and retention of subscriber traffic and billing data,
subscriber rights to non-itemized bills, and the presentation and restriction of
calling and connected line identification. In addition, a number of European
countries outside the European Union have adopted, or are in the process of
adopting, rules similar to those set forth in the European Union directives.
Although we do not engage in the collection of data for purposes other than
routing calls and billing for our services, the data protection directives are
quite broad and the European Union privacy standards are stringent. Accordingly,
the potential effect of these data protection rules on the development of our
business is uncertain.

PATENT, TRADEMARK, COPYRIGHT AND PROPRIETARY RIGHTS

            The value of our assets is dependent to a significant degree on our
proprietary and licensed technology. We rely on a combination of patent,
copyright, trademark and trade secret laws and contractual restrictions to
establish and protect our technology. All key employees have signed
confidentiality agreements. These agreements provide that confidential
information developed by or with an employee or consultant, or disclosed to such
person during his or her relationship with us, may not be disclosed to any third
party except in certain specified circumstances. These agreements also require
our employees to assign their rights to any inventions to us. The steps taken by
us may not, however, be adequate to prevent the misappropriation of our
proprietary rights or technology. In addition, our competitors may independently
develop technologies that are substantially equivalent or superior to our
technology.

              ZeroPlus.com differs from its competitors in the Internet
telephony industry in being built around Internet telephone numbers. This
concept, which is the subject of our Pending Patent application, provides
Internet consumers with a unique phone number that can be identical to their
home phone numbers, except that "0" is the first digit.

            In March 1996, we acquired all rights, title and interest in and to
the U.S. Patent No. 5,526,353, "System and Method for Communicating Audio Data
over Packet-Based Networks" ("the 353 Patent"). We believe that the 353 Patent
is one of the first patents that specifically involves telephony through Digital
Data Networks. With the re-focus of our revised business model in 1999, we are
less reliant on the 353 Patent, and therefore, the relative value of the patent
has been diminished. Our current and anticipated service offering is not wholly
dependent on the validity or applicability of the 353 Patent.

            In July 1999, we were issued U.S. Patent No. 5,923,655 titled
"Interactive video communication over a packet data network". This patent adds
video communications to the previously issued 353 Patent. In addition to the
Pending Patent described above, we have filed several other patent applications
in conjunction with our voice over Internet protocol business strategy.

            There can be no assurance that our patent applications will result
in the issuance of a patent. There can be no assurance that the current patents
or future patents (if issued) would adequately protect us against competitive
technology or that either would be held valid and enforceable against a
challenge. In addition, it is possible that our competitors may be able to
design around any such patents. Also, our competitors may obtain patents that we
would need to license or circumvent in order to make, use, sell or offer for
sale our technology.

            We were one of eight defendants in a patent infringement suit
brought by Multi-Tech Systems, Inc., which alleged that all defendants have
infringed on one or more patents relating to concurrent transmission of voice
and data information. For further information regarding this suit, see Part I.
Item 3. "Legal Proceedings".

                                       10

<PAGE>


             We believe that we do not infringe upon the patent rights of any
third party, with the possible exception of the matters covered by the MultiTech
litigation. It is possible, however, that other patent infringement claims might
be asserted successfully against us in the future. Our ability to make, use,
sell or offer for sale our products and services depends on our freedom to
operate. That is, we must ensure that we do not infringe upon the patents of
others or have licensed all such rights. Except in connection with the MultiTech
litigation, we have not requested or obtained an opinion from our outside
counsel as to whether our products and services infringe upon the patent rights
of any third parties. We are aware that patents have recently been granted to
others based on fundamental technologies in the Internet telephony area. Because
patent applications in the United States are not publicly disclosed until
issued, other applications may have been filed which, if issued as patents,
could relate to our services and products. However, foreign patent applications
do publish before issuance. Issuance of such a patent or patents could
materially adversely affect our ability to operate. A party making an
infringement claim could secure a substantial monetary award or obtain
injunctive relief. If any of these risks materialize, we could be forced to pay
significant amounts to defend our rights.

            TRADEMARK APPLICATIONS - UNITED STATES

<TABLE>
<CAPTION>
               TRADEMARK                 CLASS      STATUS                        FILED ON
               ---------                 -----      ------                        --------
               <S>                       <C>        <C>                           <C>
               DATA TELEPHONY             09        Pending                       05/08/98
               NETCONNECT                 09        Suspended                     05/08/98
</TABLE>

            We do not currently have any other issued trademark registrations or
registered copyrights in the United States, nor have we applied for any. There
can be no assurance that we will be able to secure significant protection for
all of our trademarks. Competitors of ours or others could adopt trademarks
similar to ours, or try to prevent us from using our trademarks, thereby
impeding our ability to build brand identity and possibly leading to customer
confusion.

            To date, we have not taken any steps to file applications in foreign
countries to obtain protection of our trademarks. To the extent trademark rights
are acquired through registration in countries outside the United States, we may
not be able to protect our marks or assure that we are not infringing other
parties' marks in those countries. Moreover, although we have taken some steps
to commence the registration of "ZeroPlus.com" as a domain name with the various
international registries, we cannot assure you that this will be accomplished.

            We are also aware of other companies that use marks similar to marks
that we use. There can be no assurance that companies with marks similar to our
marks will not bring suit to prevent us from using the "ZeroPlus.com" mark or
other marks. Defending or losing any litigation relating to intellectual
property rights could materially adversely affect our business, results of
operations and financial condition.

            We rely on a variety of technology, primarily software, that we
license from third parties, including software that is integrated with
internally developed software and used in our products to perform key functions.
Of particular note is standards-based compression software that we currently
license from elemedia, an affiliate of Lucent Technologies, Inc. We can make no
assurances that these technology licenses will continue to be available to us on
commercially reasonable terms or at all. We believe that we are not unduly
reliant on any of these third parties or their products. We are aware of
alternate sources of supply; however, the loss of or inability to maintain any
of these technology licenses may result in delays or breakdowns in our ability
to continue developing and providing our products and services or to enhance and
upgrade our products and services. Any of these results could materially and
adversely affect our business, operating results and financial condition.

COMPETITION

            LONG DISTANCE MARKET

            The long distance telephony market and, in particular, the Internet
telephony market, is highly competitive. There are several large and numerous
small competitors. The principal competitive factors in the market include
price, quality of service, breadth of geographic presence, customer service,
reliability, network capacity and the availability of enhanced communications
services. Our competitors include AT&T, MCI WorldCom and Sprint in the United
States and foreign telecommunications carriers.

            Many of our competitors have substantially greater financial,
technical and marketing resources, larger customer bases, longer operating
histories, greater name recognition and more established relationships in the
industry than we have. As a result, certain of these competitors may be able to
adopt more aggressive pricing policies, which could hinder our ability to market
our Internet telephony services. One of our key competitive advantages is the
ability to route calls through the Internet and private

                                       11

<PAGE>

Internet Protocol Digital Data Networks, which allows us to bypass the
international settlement process and realize substantial savings compared to
traditional telephone service. Any change in our regulatory status as a provider
could force us to increase prices and offer rates that are more comparable to
traditional telephone call providers. For further details in this regard, see
"--Government Regulation".

            INTERNET TELEPHONY MARKET

            As consumers and telecommunications companies have grown to
understand the benefits that may be obtained from transmitting voice over the
Internet, a substantial number of companies have emerged to provide voice over
the Internet. In addition, companies currently in related markets have begun to
provide voice over the Internet services or adapt their products to enable voice
over the Internet services. These related companies may potentially migrate into
the Internet telephony market as direct competitors.

            INTERNET TELEPHONY SERVICE PROVIDERS. During the past several years,
a number of companies have introduced services that make Internet telephony
services available to businesses and consumers. In addition to ZeroPlus.com,
AT&T Jens (a Japanese affiliate of AT&T), net2phone (an affiliate of IDT
Corporation), deltathree.com (an affiliate of RSL Communications), I-Link,
iBasis (formerly known as VIP Calling), ICG Communications, IPVoice.com, ITXC
and OzEmail (which was acquired by MCI WorldCom) provide a range of voice over
the Internet services. These companies offer PC-to-phone, phone-to-PC or
phone-to-phone services that are similar to the services we offer, although none
uses our key concept of the Internet phone number. Some, such as AT&T Jens and
OzEmail, offer these services within limited geographic areas.

            SOFTWARE/HARDWARE PROVIDERS. Many companies produce software and
other computer equipment that may be installed on a user's computer to permit
voice communications over the Internet, similar to our former Telecom 2000
Desktop - Small Systems offering, NetConnect. Some of these competing products
use the telephone handset, while some rely on PC-based speakers and microphones.
Many of these products deliver voice sound that is delayed or which contains
echo and "jitter," producing overall low quality. These products generally
require each user to have compatible software and hardware equipment and rely on
the public Internet for the transmission of traffic, which often results in a
further reduction in the quality of communications.

            TELECOMMUNICATIONS COMPANIES. A number of telecommunications
companies, including AT&T, Deutsche Telekom, MCI WorldCom and Qwest, currently
maintain, or plan to maintain, packet-switched networks to route the voice
traffic of other telecommunications companies. These companies, which tend to be
large entities with substantial resources, generally have large budgets
available for research and development and therefore may enhance the quality and
acceptance of the transmission of voice over the Internet. However, many of
these companies are relatively new to the Internet telephony market, and
therefore it is not clear whether they will build brand recognition among
consumers for these services. These companies also may not have the range of
product and service offerings that are necessary to independently provide a
broad set of voice-enabled Web services. AT&T, for example, has attempted to
enter the market but has focused its effort on the cable market and it is
unclear if it will continue to pursue voice over the Internet. Qwest has taken
steps to enter the market by building a high capacity network in the United
States. In addition, Qwest has also entered into a three-year strategic alliance
with Netscape to provide one-stop access to Internet services including long
distance calling, e-mail, voice mail, faxes, Internet access and conference
calls.

            NETWORK HARDWARE MANUFACTURERS. Several of the world's major
providers of telecommunications equipment, such as Alcatel, Cisco, Lucent,
Northern Telecom and Dialogic (which was acquired by Intel) have developed or
plan to develop network equipment that may be used in connection with the
provision of voice over the Web services. This equipment includes routers,
servers and related hardware and software. By developing this equipment, these
manufacturers may exert substantial influence over the technology that is used
in connection with transmission of voice over the Web and may develop products
that facilitate the quality and timely roll-out of these networks. However,
these companies are dependent upon the operators of Internet telephony networks
to purchase and install their equipment into their networks. They are also
dependent upon the developers of hardware and software to market their systems
to end-users. Cisco currently manufactures Internet telephony equipment for low
to medium scale networking, but does not manufacture high-end Internet telephony
equipment for large networks. However, Cisco recently acquired two companies
that produce devices to help Internet service providers transition voice and
data traffic to packet networks while maintaining traditional phone usage and
network equipment. Lucent has recently co-developed with VocalTec a set of
industry standards that have been adopted by major competitors and is currently
marketing Internet telephony hardware, including servers that allow the
transmission of calls and faxes over the Internet. Lucent also offers related
support products, such as billing centers and "Internet call centers", which
allow Internet access and conversation with a customer support agent on a single
line, similar to our ZPCommerce e-commerce solution.

            VOICE-ENABLED ONLINE COMMERCE PROVIDERS. Several providers have
begun to apply Internet telephony technologies in connection with e-commerce
transactions. These providers compete with our e-commerce solution, ZPCommerce,
by integrating

                                       12

<PAGE>

voice communications into commercial Web sites. These competitors include
Net2Phone, which introduced its Click2Talk service in 1999, and USA Global Link,
which introduced its Instant Call service in 1998. These systems permit voice
communications between a customer on the Web and customer service
representatives, although we believe they do not provide some of the other
advantages of ZPCommerce, such the cost advantage from routing the customer's
entire call over the Internet. In addition, AT&T's Inter@active Communications
is a group of services that integrates voice into the Web, including AT&T Chat'N
Talk, a voice-enabled chat service, and Click2Dial Conferencing Services, which
initiates and manages conference calls. If we are able to recapitalize our
business and restore operations, these services may emerge as significant
competitors to our current and planned offerings.

RESEARCH AND DEVELOPMENT

            At our primary research and development center in Austin, Texas, and
as of March 31, 2001, we employed 5 full time developers, whose specialties
include software, hardware, switching, Internet security, voice compression,
engineering real-time online transactions, billing, and network and call
management. Currently, we employ 2 full time developers.

            We incurred approximately $1,273,000 and $1,768,000 in product
development expenses during fiscal 2001 and fiscal 2000, respectively.


EMPLOYEES

            As of March 31, 2001, we had approximately 36 full-time employees,
including approximately 14 in technical support and customer service, 6 in sales
and marketing, 9 in management and finance, and 7 in research and development.
Our employees are not represented by any union, and we consider our employee
relations to be good. We have never experienced a work stoppage.

            On June 5, 2001, the Company announced the suspension of operations.
In conjunction with this announcement, the Company also terminated the majority
of its employees. Currently we employ 7 full time employees.

FORWARD-LOOKING AND CAUTIONARY STATEMENTS

            Certain statements that we have made herein that are not historical
are forward-looking within the meaning of the Private Securities Litigation
Reform Act of 1995. We and our representatives may from time to time make other
written or oral forward-looking statements, including statements contained in
our filings with the Securities and Exchange Commission and in our reports to
stockholders. The words "estimate," "project," "intend," "expect," "believe" and
similar expressions are intended to identify forward-looking statements. Other
forward-looking statements are those regarding matters that are not historical
facts. Forward-looking statements involve known and unknown risks and
uncertainties. Many factors could cause the actual results, performance or
achievements for us to be materially different from those contemplated by
forward-looking statements, including the factors described below in Part II,
Item 6, "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Risk Factors". We caution that this list of cautionary statements
is not exclusive. We do not undertake to update any forward-looking statements
that may be made from time to time by or on behalf of us.


ITEM 2. DESCRIPTION OF PROPERTIES.

            We lease approximately 19,100 square feet for our principal
executive offices, which are located at 12800 Middlebrook Road, Suite 400,
Germantown, Maryland 20874. Our Austin, Texas product development facilities are
approximately 4,000 square feet and are located at 12710 Research Blvd., Austin,
Texas 78759. Base rental for the current premises is approximately $30,400 and
$6,800 per month, respectively. The leases require us to pay certain property
taxes and certain operating expenses. With our suspension of operations on June
5, 2001, our total leased facility space exceeds our current needs. Currently,
we are exploring various alternatives to reduce total leased space. There can be
no assurance that we will be successful in reducing our lease commitments.


ITEM 3. LEGAL PROCEEDINGS.

            We are a co-defendant in civil litigation brought by Prudential
Securities, Inc., which seeks to recover in excess of $3 million in alleged
losses associated with a margin loan made to a non-affiliated shareholder of
ZeroPlus.com. The action alleges that either we or American Stock Transfer &
Trust Co., the transfer agent for our common stock, improperly removed a


                                       13

<PAGE>

restrictive legend from the stock certificate underlying the shares used to
collateralize the margin loan. We have filed a cross-claim against American
Stock Transfer seeking indemnity. American Stock Transfer has filed a
cross-claim against us for, among other things, indemnity, to recover any
amounts it pays Prudential or expends in defending the suit. American Stock
Transfer has cross-claimed against the non-affiliate shareholder, and also
against Dean Witter Reynolds, Inc. On May 19, 2000, Prudential amended its
complaint to add six additional counts. These new claims include allegations of
negligence, intentional concealment, deceit, constructive fraud, and injurious
falsehood. After withdrawing our counterclaim against Prudential, we moved for
summary judgment as to the original complaint and moved to strike to amended
complaint. On June 30, 2000, the Court entered a Final Judgment dismissing all
of Prudential's claims. On July 28, 2000, Prudential filed a Notice of Appeal in
the Maryland Court of Special Appeals. Briefing has been completed and the
appellate argument took place on May 9, 2001. Although we cannot assure you of
this result, we believe the claims against us are without merit and that our
actions will cause the matter to be either entirely dismissed or will otherwise
eliminate us from any liability.

            We were one of eight defendants in a patent infringement suit filed
on February 15, 2000, in the United States District Court for the District of
Minnesota. The plaintiff, Multi-Tech Systems, Inc., alleged that all defendants
have infringed one or more patents relating to concurrent transmission of voice
and data information. As a result of our June 5, 2001 announced suspension of
operations, Multi-Tech Systems, Inc. filed on June 13, 2001 a request to dismiss
the Company from the defined action without prejudice. The request was granted
on June 19, 2001. Although the dismissal without prejudice temporarily minimizes
future legal expenses associated with the Company's defense, the nature of the
dismissal permits the plaintiff to re-assert its claim(s) at any point in the
future. An adverse outcome of this matter could have a material adverse effect
on our financial position and results of operations.

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

None.


PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

            On April 4, 2001, ZeroPlus was informed by Nasdaq that the Company's
common stock had failed to maintain a minimum bid price of $1.00 for 30
consecutive days as required under The Nasdaq SmallCap Market rules. The Company
had until July 3, 2001 to regain compliance with this Rule. On June 6, 2001,
Nasdaq indefinitely halted trading on the stock pending the receipt of
additional information subsequent to a June 5, 2001 announcement from the
Company that it had laid off most of its employees and begun a phased shutdown
of the Company's operations while it seeks any opportunities that may exist to
realize value from its technology assets and its strategic partnerships. On June
27, 2001, the Company voluntarily consented to the delisting of its common stock
on Nasdaq.

            Our common stock, par value $.01 per share, had traded on the Nasdaq
SmallCap Market since April 8, 1997, formerly under the symbol "ETEL" and now
under the symbol "ZPLS." On June 27, 2001, the closing price of the Common Stock
was $0.38 per share. There are approximately 130 record holders of our common
stock. The following table sets forth the range of high and low bid prices for
our common stock, as quoted on Nasdaq, for the period from April 1, 2000 through
March 31, 2001.

<TABLE>
<CAPTION>
                            PERIOD                                                             COMMON STOCK
                            ------                                                             ------------
                                                                                HIGH                                   LOW
                                                                                ----                                   ---
<S>                                                                           <C>                                    <C>
April 1 - June 30, 2000                                                       $10.3125                               $2.8750
July 1 - September 30, 2000                                                   $3.7190                                $1.3750
October 1 - December 31, 2000                                                 $2.4375                                $0.2812
January 1 - March 31, 2001                                                    $1.6250                                $0.1875
</TABLE>

          Holders of our Common Stock are entitled to dividends when, as and if
declared by the Board of Directors out of funds legally available therefor. We
do not anticipate the declaration or payment of any dividends in the foreseeable
future. We intend to retain earnings, if any, to finance the development and
expansion of our business. Future dividend policy will be subject to the
discretion of the Board of Directors and will be contingent upon future
earnings, if any, our financial condition, capital requirements, general
business conditions and other factors. Therefore, there can be no assurance that
we will ever pay any dividends of any kind.

                                       14


<PAGE>

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


RESULTS OF OPERATIONS

YEARS ENDED MARCH 31, 2001 AND MARCH 31, 2000

On June 5, 2001, ZeroPlus.com announced a phased shutdown of operations and the
immediate termination of all services. In addition, the majority of our
employees were terminated on June 5, 2001. This was done in an effort to
conserve cash while seeking to pursue and consider any possible alternatives to
recapitalize our business or to attain value for our technology and/or
relationships. As a result of these developments, the Company does not believe
that the historical financial information in this Form 10-KSB provides a
meaningful indication of the Company's future financial condition. Despite
extensive efforts by the Company and its management to rebuild stockholder value
and ensure a viable future for the business, the Company has not been able to
identify and secure a suitable source of immediate funds, a strategic alliance
partner or other arrangement pursuant to which the Company could continue to
operate as a going concern or realize going concern value for its assets.
Accordingly, there cannot be any assurance that the Company will be able to
secure sources of capital, or enter into strategic alliances or other
arrangements pursuant to which the Company will be able to operate as a going
concern in the future or realize going concern value for its assets.


SALES

            Sales for the year ended March 31, 2001 were approximately
$1,165,700, an increase of 141% from the approximately $483,200 recorded for
fiscal year 2000. The increase in revenues was the result of increased product
acceptance and strategic marketing. The majority of the revenue increase was
earned in the last two quarters of fiscal 2001 and was primarily the result of
our contract with Worldwide Consumer Direct, Inc. (see Exhibit 10.10).

            Approximately 85% of our sales in fiscal 2001 were derived from two
customers.

GROSS PROFIT

            Gross profits for the year ended March 31, 2001 were approximately
($807,300), compared to the approximately ($447,000) for fiscal year 2000. The
negative gross profit in fiscal 2001 is the result of higher than planned
network costs. Due to under utilization of our network, the fixed costs
allocated over network minutes resulted in total network costs above the
break-even point. In addition, our lack of local points of presence on our
network attributed to higher than anticipated transmission costs. As the network
expands and traffic increases, overall transmission costs are expected to
decrease. Finally, increased staffing costs to maintain a 24x7 customer support
center also contributed to the negative gross margin. Customer support costs, as
a percentage of total costs of revenue, will decrease as network traffic
(minutes) increases.

            The negative gross profit for fiscal 2000 is attributable to the
inventory writedown as part of our restructuring efforts and the decrease in
sales as compared to fiscal 1999. Without the inventory writedown, our gross
profit would have been approximately $128,000, or 26% of sales.

OPERATING EXPENSES

            Selling and marketing expenses for the year ended March 31, 2001
were approximately $4,158,900, an increase of 113% over the approximately
$1,954,700 recorded for fiscal year 2000. Increased expenditures for purchased
advertising and contractual payments to market affiliates (web portals) and
distributors accounted for approximately $2,088,000 of the increase. Also, we
expanded our in-house marketing department during fiscal 2001 resulting in
increased employment costs.

            General and administrative expenses for the year ended March 31,
2001 were approximately $4,448,500, a decrease of 3% over the approximately $
4,573,300 recorded for fiscal year 2000. The decrease in these expenses over the
prior year is primarily attributed to reduced legal expenses and decreased
employment costs.

                                       15


<PAGE>


            Research & development expenses for the year ended March 31, 2001,
were approximately $1,273,400, a 28% decrease over the approximately $1,768,100
recorded for fiscal year 2000. The decreased expenditures for research and
development are due to the decrease in number of employees and related
expenditures required to support the ZeroPlus.com suite of products.

OTHER INCOME (EXPENSE)

            In fiscal 2001, Other income (expense) includes a non-cash charge of
$977,100 recorded for the impairment of assets as of March 31, 2001. This charge
was recorded based on the subsequent event of the Company's June 5, 2001
announcement of suspension of operations. The impairment charge is used to
write-down the value of assets to their current realizable value. However,
management cannot assure that the assets will generate any meaningful value.

            In fiscal 2000, Other income (expense) includes a non-cash charge of
$405,900 associated with the settlement of a lawsuit brought by the holders of
warrants issued in connection with the underwriting of our initial public
offering. Under the terms of the settlement, the Company agreed to lower the
exercise price of certain warrants held by the plaintiffs.

OTHER

            To date, inflation and seasonality have not had a material impact on
our results of operations.

LIQUIDITY AND CAPITAL RESOURCES

            In the year ended March 31, 2001, we used approximately $8,900,000
in cash flows from operating activities, compared to approximately $7,100,000
for fiscal year 2000. The increase in cash flows used in operating activities
excluding changes in assets and liabilities was mainly due to the increased cost
of services provided and increased advertising expenditures.

            Cash provided by investing activities totaled approximately
$5,458,000 for the year ended March 31, 2001 as compared to approximately
($3,026,000) for fiscal year 2000. The main component of these funds was the
conversion of short-term securities into cash and cash equivalents during the
period. Capital expenditures were approximately $1,044,000 in fiscal 2001 and
$354,000 in fiscal 2000.

            Cash provided by financing activities totaled approximately
$1,725,000,for the year ended March 31, 2001, compared to approximately
$11,913,000 for the corresponding fiscal year 2000. In March 2001, we secured a
short-term loan for $2,000,000, which was due in June 2001 and convertible to
equity. In June 2001, we negotiated a 90-day Forbearance Agreement with the
lender. In December 1999, Broadwing Inc. exercised a call right to purchase
1,888,653 shares of our common stock for an aggregate price of $10,826,800.

            On June 5, 2001, ZeroPlus.com announced a phased shutdown of
operations and the immediate termination of all services. In addition, the
majority of our employees were terminated on June 5, 2001. This was done in an
effort to conserve cash while seeking to pursue and consider any possible
alternatives for attaining value for our technology and/or relationships. Our
available cash, cash equivalents and short-term investments balance at June 5,
2001 was approximately $1,573,900. Despite extensive efforts by the Company and
its management to rebuild stockholder value and ensure a viable future for the
business, the Company has not been able to identify and secure a suitable source
of immediate funds, a strategic alliance partner or other arrangement pursuant
to which the Company could continue to operate as a going concern or realize
going concern value for its assets. Accordingly, there cannot be any assurance
that the Company will be able to secure sources of capital, or enter into
strategic alliances or other arrangements pursuant to which the Company will be
able to continue to operate as a going concern or realize going concern value
for its assets.


SEASONALITY

            Based on our experience to date, seasonal changes in weather do not
affect our results.

                                       16

<PAGE>

RISK FACTORS

            In addition to the other information in this report, the following
factors should be carefully considered in evaluating our business and prospects.

            RISKS RELATED TO OUR COMPANY AND INDUSTRY

            WE HAVE SUSPENDED OPERATIONS EFFECTIVE JUNE 5, 2001. We announced a
suspension of operations on June 5, 2001. All services were immediately
terminated and the majority of our employees were terminated. This was done in
an effort to conserve cash while seeking to pursue and consider any possible
alternatives for attaining value for our technology and/or relationships.
Despite extensive efforts by the Company and its management to rebuild
stockholder value and ensure a viable future for the business, the Company has
not been able to identify and secure a suitable source of immediate funds, a
strategic alliance partner or other arrangement pursuant to which the Company
could continue to operate as a going concern or realize going concern value for
its assets. Accordingly, there cannot be any assurance that the Company will be
able to secure sources of capital, or enter into strategic alliances or other
arrangements pursuant to which the Company will be able to continue to operate
as a going concern or realize going concern value for its assets.

            OUR STOCK WAS DELISTED FROM THE NASDAQ SMALL-CAP MARKET ON JUNE 27,
2001 AND IS SIGNIFICANTLY LESS LIQUID THAN BEFORE. We consented to the delisting
of our stock from trading on the Nasdaq Stock Market on June 27, 2001. After
this delisting, the ability of stockholders to buy and sell our shares has been
materially impaired, and is limited primarily to over-the-counter quotation
services, such as Pink Sheets, that handle high-risk ventures and are not
regulated by the Securities and Exchange Commission.

            WE HAVE A HISTORY OF LOSSES AND WE ANTICIPATE OUR LOSSES WILL
CONTINUE. We have incurred significant losses since inception, and we expect to
continue to incur significant losses for the foreseeable future. As of March 31,
2001, our accumulated deficit was approximately $ 42.3 million. Our operating
expenses and marketing expenses have increased continuously since inception. As
a result, even if we are able to recapitalize our business and restore
operations, we will need to increase our revenues significantly to become
profitable. In order to increase our revenues, we need to attract users to
increase the fees we collect for our services. If our revenues do not increase
as much as we expect or if our expenses increase at a greater pace than
revenues, we may never be profitable or, if we become profitable, we may not be
able to sustain or increase profitability on a quarterly or annual basis.

            WE HAVE A LIMITED OPERATING HISTORY UPON WHICH YOU CAN EVALUATE US.
We have only a limited operating history upon which you can evaluate our
business and prospects. We commenced operations in 1995, and began focusing on
our current ZeroPlus.com telephony business model in 1999. Even if we are able
to recapitalize our business and restore operations, you should consider our
prospects in light of the risks, expenses and difficulties we may encounter as
an early stage company in the new and rapidly evolving market for Internet
Protocol communications services. These risks include our ability:

            o           To increase awareness of our brand, increase the number
                        of users of our IP telephony services and build user
                        loyalty;

            o           To increase revenues to cover the increased marketing
                        expenditures we have planned;

            o           To compete effectively; and

            o           To develop new products and keep pace with developing
                        technology.

            WE MAY NOT BE ABLE TO EXPAND OUR REVENUE AND ACHIEVE PROFITABILITY.
If we are able to recapitalize our business and restore operations, our business
strategy will be to expand our revenues to include significant fees from selling
fee-based ZeroPlus.com consumer services (including fees for PC-to-phone,
phone-to-PC and phone-to-phone calls, as well as fees for enhanced services) and
e-commerce services and the sale of Internet advertising. We can neither assure
you that we will be able to do this or that this strategy will be profitable.

            A SIGNIFICANT MARKET FOR OUR SERVICES MAY NOT DEVELOP. We are
uncertain whether a significant market will develop for the services we provide.
Our market is new and rapidly evolving. Even if we are able to recapitalize our
business and restore operations, our ability to sell our services to end users
may be inhibited by, among other factors, the reluctance of some end users to
switch from traditional communications carriers to Internet Protocol
communications carriers, and by concerns with the quality of Internet and
Internet Protocol telephony and adequacy of security in the exchange of
information over the Internet.

                                       17

<PAGE>

End users in markets serviced by recently deregulated telecommunications
providers are not familiar with obtaining services from competitors of these
providers and may be reluctant to use new providers, such as our company. Our
ability to generate significant revenues from sales of fee-based ZeroPlus.com
services depends on the migration of traditional telephone network traffic to
our Internet network. If end users do not accept our ZeroPlus.com services as a
means of sending and receiving communications, we will not be able to increase
our number of paid users or successfully generate revenues in the future.

            OUR FUTURE SUCCESS DEPENDS ON GROWTH IN THE USE OF THE INTERNET AS A
MEANS OF COMMUNICATIONS. Even if we are able to recapitalize our business and
restore operations, if the market for Internet Protocol communications, in
general, and our services in particular, does not grow at the rate we
anticipate, we will not be able to increase our number of users or generate
revenues from our fee-based ZeroPlus.com services or from advertising on the
Internet at the rate we anticipate. To be successful, Internet Protocol
communications requires validation as an effective, quality means of
communication and as a viable alternative to traditional telephone service. As
is typical in the case of a new and rapidly evolving industry, demand and market
acceptance for recently introduced services are subject to a high level of
uncertainty. The Internet may not prove to be a viable alternative to
traditional telephone service for reasons including:

            o           Inconsistent quality or speed of service;

            o           Traffic congestion on the Internet;

            o           Potentially inadequate development of the necessary
                        infrastructure;

            o           Lack of acceptable security technologies;

            o           Lack of timely development and commercialization of
                        performance improvements; and

            o           Unavailability of cost-effective, high-speed access to
                        the Internet.

            If Internet usage grows, the Internet infrastructure may not be able
to support the demands placed on it by such growth, or its performance or
reliability may decline. In addition, Web sites may from time to time experience
interruptions in their service as a result of outages and other delays occurring
throughout the Internet network infrastructure. If these outages or delays
frequently occur in the future, Internet usage, as well as usage of our
communications portal and our services, could be adversely affected.

            IF WE DO NOT DEVELOP THE ZEROPLUS.COM BRAND, WE MAY NOT BE ABLE TO
DEVELOP A LEADING POSITION IN OUR INDUSTRY. Even if we are able to recapitalize
our business and restore operations, we may not be able to become the leader in
our industry. To become a leader, we must strengthen the brand awareness of the
ZeroPlus.com brand. If we fail to create and maintain brand awareness, it could
adversely affect our ability to attract sufficient Web traffic and reduce our
attractiveness to advertisers. Brand recognition may become more important in
the future with the growing number of Internet sites and Internet communications
providers. Promotion and enhancement of our brand will depend on the
effectiveness of our marketing and advertising efforts and on our success in
providing high-quality products and services, neither of which can be assured.

            IF WE FAIL TO ESTABLISH MARKETING RELATIONSHIPS THAT PROVIDE US
VISIBILITY, WE MAY NOT BE ABLE TO SUFFICIENTLY INCREASE OUR SALES. Even if we
are able to recapitalize our business and restore operations, we depend, and
expect to continue to depend, on strategic relationships to, among other things,
distribute our products, increase usage of our services, build brand awareness
and cooperatively market our services. We believe that our success depends, in
part, on our ability to develop and maintain marketing and promotional
relationships with Internet companies, communications equipment and software
companies and other marketing and distribution partners that themselves have
strong brand names or high traffic volumes. If we are unable to establish and
maintain these relationships, we may not be able to increase sales of our
services, and we may lose users. In cases where our products and services are
integrated into our strategic partners' product and service offerings, our
ability to meet sales goals and expectations will depend upon a timely release
of these offerings. If any of our strategic relationships are discontinued or if
the release of these partners' offerings that integrate our products and
services are delayed, sales of our products and services and our ability to
maintain or increase our customer base may be substantially diminished.

            WE NEED ADDITIONAL CAPITAL TO RESTORE OUR OPERATIONS IN THE FUTURE
AND WE MAY NOT BE ABLE TO OBTAIN THAT CAPITAL. Our cash flow from operations has
not been sufficient to meet our capital expenditure and working capital
requirements; we need to raise additional capital from other sources. Obtaining
additional financing will be subject to a number of factors, including market
conditions, our operating performance and investor sentiment. These factors may
make the timing, amount, terms and conditions of additional financings
unattractive to us. If we are unable to raise additional capital as and when

                                       18

<PAGE>

needed, we may be required to sell some of our assets, seek a merger partner or
other business combination, or otherwise seek to obtain any remaining value for
our assets.

            WE MAY BE UNABLE TO EFFECTIVELY MANAGE GROWTH. Even if we are able
to recapitalize our business and restore operations, our future performance will
depend, in part, on our ability to manage growth effectively. If we are
successful in achieving growth, this is likely to place a significant strain on
our managerial, operational and financial resources. To manage our growth, we
must implement and improve our operational and financial systems, as well as our
managerial controls and procedures. We cannot assure you that we have made
adequate allowances for the costs and risks associated with this expansion, that
our systems, procedures or controls will be adequate to support our operations
or that our management will be able to successfully offer and expand our
services.

            BECAUSE WE CANNOT PREDICT OUR NETWORK CAPACITY NEEDS, WE MAY BE
FORCED TO ENTER INTO CONTRACTS THAT REDUCE OUR PROFITABILITY. Even if we are
able to recapitalize our business and restore operations, to the extent that we
overestimate our call volume, we may be obligated to pay for more transmission
capacity than we actually use, resulting in costs without corresponding revenue.
Conversely, if we underestimate our capacity needs, we may be required to obtain
additional transmission capacity through more expensive means that may not be
available. If we are unable to maintain sufficient capacity to meet the needs of
our users, our reputation could be damaged and we could lose users.

            OUR COMPUTER AND COMMUNICATIONS SYSTEMS MAY FAIL. Even if we are
able to recapitalize our business and restore operations, our business depends
on the efficient and uninterrupted operation of our computer and communications
systems as well as those that connect to our network. Any system interruptions
that would cause our services to be unavailable, including significant or
lengthy telephone network failures or difficulties for users in communicating
through our network or portal, could damage our reputation and result in a loss
of users.

            OUR COMPUTER SYSTEMS AND OPERATIONS MAY BE VULNERABLE TO SECURITY
BREACHES. Even if we are able to recapitalize our business and restore
operations, our computer infrastructure is potentially vulnerable to physical or
electronic computer viruses, break-ins and similar disruptive problems and
security breaches, which could cause interruptions, delays or loss of services
to our users. We believe that the secure transmission of confidential
information over the Internet, such as credit card numbers, is essential in
maintaining user confidence in our services. We rely on third party web hosting
providers for encryption and authentication technology to effect secure
transmission of confidential information, including credit card numbers. It is
possible that advances in computer capabilities, new technologies or other
developments could result in a compromise or breach of the technology we use to
protect user transaction data. A party that is able to circumvent our security
systems could misappropriate proprietary information or cause interruptions in
our operations. Security breaches also could damage our reputation and expose us
to a risk of loss or litigation and possible liability. Although we have
experienced no security breaches to date of which we are aware, we cannot
guarantee you that our security measures will prevent security breaches.

            THIRD PARTIES MIGHT INFRINGE UPON OUR PROPRIETARY TECHNOLOGY. We
cannot assure you that the steps we have taken to protect our intellectual
property rights will prevent misappropriation of our proprietary technology. To
protect our rights to our intellectual property, we rely on a combination of
trademark and patent law, trade secret protection, confidentiality agreements
and other contractual arrangements with our employees, affiliates, strategic
partners and others. We own the 353 Patent and have a pending application for
the ZeroPlus dialing plan patent in the United States. We may be unable to
detect the unauthorized use of, or take appropriate steps to enforce, our
intellectual property rights. Effective copyright and trade secret protection
may not be available in every country in which we offer or intend to offer our
services. Failure to adequately protect our intellectual property could harm our
brand and devalue our proprietary content. Further, defending our intellectual
property rights could result in the expenditure of significant financial and
managerial resources. For further information concerning these matters and
related risks, see Part I, Item 1., "Description of Business--Patent, Trademark,
Copyright and Proprietary Rights".

            OUR SERVICES MAY INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF
OTHERS. Third parties may assert claims that we have infringed a patent
copyright, trademark or other proprietary right belonging to them. We
incorporate licensed third-party technology in some of our services. In these
license agreements, the licensors generally have agreed to indemnify us with
respect to any claim by a third party that the licensed software infringes any
patent or other proprietary right so long as we have not made changes to the
licensed software. We cannot assure you that these provisions will be adequate
to protect us from infringement claims. Any infringement claims, even if not
meritorious, could result in the expenditure of significant financial and
managerial resources.

            We were one of eight defendants in a patent infringement suit
brought by Multi-Tech Systems, Inc., which alleged that all defendants have
infringed one or more patents relating to concurrent transmission of voice and
data information. For further information regarding this suit, see Part I, Item
3, "Legal Proceedings".

                                       19

<PAGE>

            OPERATING INTERNATIONALLY EXPOSES US TO ADDITIONAL AND UNPREDICTABLE
RISKS. If we are able to recapitalize our business and restore operations, we
intend to continue to expand our operations outside the United States, although
we cannot assure you that we will be successful in doing so. International
operations are subject to inherent risks, including, among others:

            o           Potentially weaker protection of intellectual property
                        rights;

            o           Political instability;

            o           Unexpected changes in regulations and tariffs;

            o           Fluctuations in exchange rates;

            o           Increased bad debt and subscription fraud;

            o           Action by foreign governments or foreign
                        telecommunications companies to limit access to our
                        services;

            o           Varying tax consequences; and

            o           Uncertain market acceptance and difficulties in
                        marketing efforts due to language and cultural
                        differences.

We cannot assure you that one or more of these factors, or other factors, will
not materially and adversely affect our business.

            WE MAY EXPERIENCE LOSSES AS A RESULT OF FRAUD. If we are able to
recapitalize our business and restore operations, we may experience losses due
to fraud. Callers may obtain our services without rendering payment by
unlawfully using our access numbers and personal identification numbers.
Although we have implemented anti-fraud measures in order to control losses
relating to these practices, these measures may not be sufficient to effectively
limit all of our exposure in the future from fraud and we may continue to
experience losses from fraud. While we have established reserves for bad debts
in accordance with historical levels of uncollectible receivables, our losses
may exceed our reserves and could rise significantly above anticipated levels.

            INTENSE COMPETITION COULD REDUCE OUR MARKET SHARE AND HARM OUR
FINANCIAL PERFORMANCE. Even if we are able to recapitalize our business and
restore operations, the market for our services has been extremely competitive.
Many companies offer products and services like ours, and many of these
companies have a substantial presence in this market. In addition, many of these
companies are larger than we are and have substantially greater financial,
distribution and marketing resources than we do. We therefore may not be able to
compete successfully in this market. If we do not succeed in competing with
these companies, we will lose customers and our revenue will be substantially
reduced. For further information regarding our competitors, see Part I, Item 1,
"Description of Business--Competition".

            DECREASING TELECOMMUNICATIONS RATES MAY DIMINISH OR ELIMINATE OUR
COMPETITIVE PRICING ADVANTAGE. Decreasing telecommunications rates may diminish
or eliminate the competitive pricing advantage of our products. International
and domestic telecommunications rates have decreased significantly over the last
few years in most of the markets in which we operate, and we anticipate that
rates will continue to be reduced in all of the markets in which we do business
or expect to do business. Users who select our services to take advantage of the
current pricing difference between traditional telecommunications rates and our
rates may switch to traditional telecommunications carriers as those pricing
differences diminish or disappear, and we will be unable to use those pricing
differences to attract new customers in the future. If telecommunications rates
continue to decline, we may lose users for our services. We would then have to
rely on factors other than price to differentiate our product, which we may not
be able to do.

            GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES RELATING TO INTERNET
PROTOCOL TELEPHONY COULD HARM OUR BUSINESS. Traditionally, voice communications
services have been provided by regulated telecommunications common carriers.
Based on specific regulatory classifications and recent regulatory decisions, we
believe we qualify for certain exemptions from telecommunications common carrier
regulation in many of our markets. However, the growth of Internet Protocol
telephony has led to close examination of its regulatory treatment in many
jurisdictions. Therefore, the legal status of our services is uncertain and
subject to change as a result of future regulatory action, judicial decisions or
legislation in any of the jurisdictions in which we operate. Established
regulated telecommunications carriers have sought and may continue to seek
regulatory actions to restrict the ability of companies such as ours to provide
services or to increase the cost of providing such services. In addition, our
services may be subject to regulation if regulators distinguish phone-to-phone
and PC-to-phone telephony service using Internet Protocol technologies over
privately managed networks, from PC-to-PC and PC-to-phone voice services over
the

                                       20

<PAGE>

Internet. Some regulators may decide to treat the former as regulated common
carrier services and the latter as unregulated enhanced or information services.
For a more detailed discussion of the regulation of Internet Protocol telephony,
see Part I, Item 1, "Description of Business--Regulation of Internet Protocol
Telephony."

            WE MAY NOT BE ABLE TO KEEP PACE WITH RAPID TECHNOLOGICAL CHANGES IN
THE COMMUNICATIONS INDUSTRY. Even if we are able to recapitalize our business
and restore operations, our industry is subject to rapid technological change.
We cannot predict the effect of technological changes on our business. In
addition, widely accepted standards have not yet developed for the technologies
we use. We expect that new services and technologies will emerge in the market
in which we compete. These new services and technologies may be superior to the
services and technologies that we use, or these new services may render our
services and technologies obsolete.

            WE MAY NOT BE ABLE TO COMPETE WITH PROVIDERS THAT CAN BUNDLE LONG
DISTANCE SERVICES WITH OTHER OFFERINGS. Our competitors may be able to bundle
services and products that we do not offer together with long distance or
Internet telephony services. These services could include wireless
communications, voice and data services, Internet access and cable television.
This form of bundling would put us at a competitive disadvantage if these
providers can combine a variety of service offerings at a single attractive
price. In addition, some of the telecommunications and other companies that
compete with us may be able to provide customers with lower communications costs
or other incentives with their services, reducing the overall cost of their
communications packages, and significantly increasing pricing pressures on our
services. This form of competition could significantly reduce the value of our
assets.

            MANY OF THE TELEPHONE CALLS MADE BY OUR CUSTOMERS ARE CONNECTED
THROUGH LOCAL TELEPHONE COMPANIES AND THROUGH LEASED NETWORKS THAT MAY BECOME
UNAVAILABLE. We are not a local telephone company or a registered local exchange
carrier. We do not have our own network. Accordingly, if we are able to
recapitalize our business and restore operations, we must route all calls made
by our customers over leased transmission facilities. In addition, because our
network does not extend to homes or businesses, we must route PC-to-phone,
phone-to-PC and phone-to-phone calls through a local telephone company to reach
our network.

            In many of the foreign jurisdictions in which we conduct or plan to
conduct business, the primary provider of significant intra-national
transmission facilities is the national telephone company. Accordingly, we may
have to lease transmission capacity at artificially high rates from a
monopolistic provider and, consequently, we may not be able to generate a profit
on those calls. In addition, national telephone companies may not be required by
law to lease necessary transmission lines to us or, if applicable law requires
national telephone companies to lease transmission facilities to us, we may
encounter delays in negotiating leases and interconnection agreements and
commencing operations. Additionally, disputes may result with respect to pricing
terms and billing.

            In the United States, the providers of local telephone service are
generally the incumbent local telephone companies, including the regional Bell
operating companies. The permitted pricing of local transmission facilities that
we lease in the United States is subject to uncertainties. The Federal
Communications Commission has issued an order requiring incumbent local
telephone companies to price those facilities at total element long-run
incremental cost, and the United States Supreme Court recently upheld the FCC's
jurisdiction to set a pricing standard for local transmission facilities
provided to competitors. However, the incumbent local telephone companies can be
expected to bring additional legal challenges to the FCC's total element
long-run incremental cost standard and, if they succeed, the result may be to
increase the cost of incumbent local transmission facilities obtained by us.

            OUR SUCCESS DEPENDS ON OUR ABILITY TO HANDLE A LARGE NUMBER OF
SIMULTANEOUS CALLS, WHICH OUR SYSTEMS MAY NOT BE ABLE TO ACCOMMODATE. If we are
able to recapitalize our business and restore operations, we expect the volume
of simultaneous calls to increase significantly as we expand our operations. Our
network hardware and software may not be able to accommodate this additional
volume. If we fail to maintain an appropriate level of operating performance, or
if our service is disrupted, our reputation could be hurt and we could lose
customers.

            RISKS RELATED TO OUR STOCK

            On April 4, 2001, ZeroPlus was informed by Nasdaq that the Company's
common stock had failed to maintain a minimum bid price of $1.00 for 30
consecutive days as required under The Nasdaq SmallCap Market rules. The Company
had until July 3, 2001 to regain compliance with this Rule. On June 6, 2001,
Nasdaq indefinitely halted trading on the stock pending the receipt of
additional information subsequent to a June 5, 2001, announcement from the
Company that it had laid off most of its employees and begun a phased shutdown
of the Company's operations while it seeks any opportunities that may exist to
realize value from its technology assets and its strategic partnerships. On June
27, 2001, the Company voluntarily consented to the delisting of its common stock
on Nasdaq.

                                       21

<PAGE>

            IF OUR STOCK PRICE REMAINS LOW, WE MAY BECOME SUBJECT TO SECURITIES
LITIGATION, WHICH IS EXPENSIVE AND COULD DIVERT OUR RESOURCES. In the past,
following periods of market volatility in the price of a company's securities,
security holders have instituted class action litigation. Many companies in our
industry have been subject to this type of litigation. If the market value of
our stock remains at historically low levels, and we become involved in this
type of litigation, regardless of the outcome, we could incur substantial legal
costs and our management's attention could be diverted, causing our business to
suffer.

            WE DO NOT INTEND TO PAY DIVIDENDS. We have never declared or paid
any cash dividends on our common stock. We intend to retain any future earnings
to finance our operations and to expand our business and, therefore, do not
expect to pay any cash dividends in the foreseeable future.


                                       22

<PAGE>

ITEM 7. FINANCIAL STATEMENTS.

                          INDEX TO FINANCIAL STATEMENTS



<TABLE>
<CAPTION>
                                                                                                           PAGE
                                                                                                           ----
<S>                                                                                                        <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS......................................................    24

FINANCIAL STATEMENTS

    Balance Sheets as of March 31, 2001 and 2000........................................................    25

    Statements of Operations for the years ended March 31, 2001 and 2000................................    26

    Statements of Cash Flows for the years ended March 31, 2001 and 2000................................    27

    Statements of Stockholders' Equity as of March 31, 2001 and 2000....................................    28

    Notes to Financial Statements.......................................................................    29
</TABLE>




                                       23



<PAGE>

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



Board of Directors
ZeroPlus.com, Inc.

            We have audited the accompanying balance sheets of ZeroPlus.com,
Inc. (a Delaware corporation), as of March 31, 2001 and 2000, and the related
statements of operations, cash flows and stockholders' equity for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

            In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of ZeroPlus.com, Inc.,
as of March 31, 2001 and 2000, and the results of its operations and its cash
flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.

            The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note A, the
Company announced the shutdown of its operations and immediate termination of a
majority of its employees. In addition, the Company has a working capital
deficiency of $1,772,969 and has incurred net losses since its inception in
1995. These factors, among others, as discussed in Note A to the financial
statements, raise substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.


Grant Thornton, LLP



Vienna, Virginia
May 23, 2001 (except for note A as to which the date is June 5, 2001)


                                       24

<PAGE>


                               ZEROPLUS.COM, INC.
                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS

<TABLE>
<CAPTION>
                                                                                          MARCH 31
                                                                                 -----------------------------
                                                                                      2001            2000
                                                                                  ------------    ------------
<S>                                                                               <C>             <C>
CURRENT ASSETS
     Cash and cash equivalents                                                    $  1,821,580    $  3,497,936
     Short-term investments                                                            802,252       6,296,637
     Accounts receivable                                                                66,605          55,308
     Insurance claim receivable and prepaid expenses                                   216,606         191,414
                                                                                  ------------    ------------

TOTAL CURRENT ASSETS                                                                 2,907,043      10,041,295

DEPOSITS AND OTHER ASSETS                                                               39,699          37,947

INVESTMENTS                                                                               --           993,750

PROPERTY AND EQUIPMENT, NET                                                            358,400         695,169
                                                                                  ------------    ------------
                                                                                  $  3,305,142    $ 11,768,161
                                                                                  ============    ============


                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
     Accounts payable--trade                                                      $    811,446    $    494,679
     Notes Payable, net of discount                                                  1,926,761          31,884
     Accrued liabilities                                                             1,941,805         943,587
                                                                                  ------------    ------------
TOTAL CURRENT LIABILITIES                                                            4,680,012       1,470,150

LONG TERM DEBT                                                                         116,010         151,937

TOTAL LIABILITIES                                                                    4,796,022       1,622,087

STOCKHOLDERS' EQUITY (DEFICIT)
     Common stock, $.01 par value, 50,000,000 shares authorized; 10,669,268 and
       10,459,307 shares issued; 10,347,830 and 10,457,307 outstanding
       at March 31, 2001 and 2000, respectively                                        104,691         104,593
     Treasury stock, at cost                                                          (250,209)        (10,500)
     Additional paid-in capital                                                     40,968,996      40,835,830
     Retained deficit                                                              (42,314,358)    (30,783,849)
                                                                                  ------------    ------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)                                                (1,490,880)     10,146,074
                                                                                  ------------    ------------
                                                                                  $  3,305,142    $ 11,768,161
                                                                                  ============    ============
</TABLE>

The accompanying notes are an integral part of these statements.

                                       25


<PAGE>



                               ZEROPLUS.COM, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                               FOR THE YEARS ENDED


<TABLE>
<CAPTION>
                                                                    MARCH 31
                                                          ----------------------------
                                                               2001           2000
                                                          ------------    ------------
<S>                                                       <C>             <C>
SALES
     Products                                             $       --      $      7,004
     Services                                                1,165,656         476,164
                                                          ------------    ------------
Total sales                                                  1,165,656         483,168

COST OF PRODUCT SOLD AND SERVICE PROVIDED
     Products                                                     --             3,614
     Inventory writedown                                          --           575,078
     Services                                                1,972,991         351,492
                                                          ------------    ------------
Total cost of product sold and service provided              1,972,991         930,184

GROSS PROFIT (LOSS)                                           (807,335)       (447,016)

OPERATING EXPENSES
     General and administrative                              4,448,483       4,573,269
     Selling and marketing                                   4,158,946       1,954,747
     Restructuring costs                                          --         1,055,649
     Impairment of assets                                      977,062            --
     Research and development                                1,273,403       1,768,111
                                                          ------------    ------------
LOSS FROM OPERATIONS                                       (11,665,229)     (9,798,792)

OTHER INCOME (EXPENSE)
     Legal settlement                                             --          (405,938)
     Other expenses                                           (182,180)       (246,485)
     Interest income                                           316,900         311,097
                                                          ------------    ------------
LOSS BEFORE INCOME TAXES                                   (11,530,509)    (10,140,118)

INCOME TAX PROVISION                                              --              --
                                                          ------------    ------------
NET LOSS                                                  $(11,530,509)   $(10,140,118)
                                                          ============    ============
LOSS PER SHARE - BASIC AND DILUTED                        $      (1.11)   $      (1.13)
                                                          ============    ============
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED     10,371,343       8,948,488
</TABLE>


The accompanying notes are an integral part of these statements.

                                       26

<PAGE>


                               ZEROPLUS.COM, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                               FOR THE YEARS ENDED


<TABLE>
<CAPTION>
                                                                                         MARCH 31
                                                                                ----------------------------
                                                                                    2001            2000
                                                                                ------------    ------------
<S>                                                                             <C>             <C>
  INCREASE (DECREASE) IN CASH AND
     CASH EQUIVALENTS


CASH FLOWS FROM OPERATING ACTIVITIES
     Net loss                                                                   $(11,530,509)   $(10,140,118)
     Adjustments to reconcile net loss to net cash from operating activities
        Depreciation and amortization                                                384,258         429,653
        Loss on retirement of fixed assets                                             5,736          12,790
        Stock-based compensation                                                       7,393          49,477
        Inventory writedown                                                             --           575,078
        Loss on Impairment of assets                                                 977,062            --
        Stock issued for services                                                     24,498            --
        Restructuring costs paid                                                        --           177,699
        Non-Cash restructuring costs                                                (160,000)        877,950
        Amortization of discount on notes payable                                     27,292            --
        Non-Cash settlement costs                                                       --           405,938
        Changes in operating assets and liabilities
           (Increase) Decrease in accounts receivable                                (11,297)        374,476
           Decrease (Increase) in inventory                                             --             8,556
           (Increase) Decrease in prepaid expenses, deposits and other assets        (26,944)        (64,165)
           Increase in accounts payable and accrued liabilities                    1,443,101         143,713
                                                                                ------------    ------------
NET CASH USED IN OPERATING ACTIVITIES                                             (8,859,410)     (7,148,953)
                                                                                ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES
     Capital expenditures                                                         (1,044,282)       (354,490)
     Proceeds from sale of assets                                                     13,995
     Proceeds received from short term securities at maturity                      6,488,135       7,568,595
     Investment in short term securities                                            (993,750)     (9,246,645)
     Proceeds from (Investment in) long term securities                              993,750        (993,750)
                                                                                ------------    ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES                                5,457,848      (3,026,290)
                                                                                ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES

     Proceeds from issuance of common stock                                           20,485      11,925,511
     Purchase of treasury stock                                                     (295,279)        (10,500)
     Proceeds from short-term debt                                                 2,000,000            --
     Cash paid for warrant recission                                                    --            (2,482)
     Payments of common stock subscriptions receivable                                  --                23
                                                                                ------------    ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES                                          1,725,206      11,912,552
                                                                                ------------    ------------
Net Increase in cash and cash equivalents                                         (1,676,356)      1,737,309

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                   3,497,936       1,760,627
                                                                                ------------    ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                                      $  1,821,580    $  3,497,936
                                                                                ============    ============

SUPPLEMENTAL DISCLOSURES:
     Income taxes paid                                                          $       --      $       --
                                                                                ============    ============
     Interest paid                                                              $     20,343    $      6,754
                                                                                ============    ============
</TABLE>

The accompanying notes are an integral part of these statements.

                                       27

<PAGE>

                               ZEROPLUS.COM, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                                             COMMON STOCK
                                                       --------------------------
                                                                                              STOCK
                                                                                          SUBSCRIPTIONS          ADDITIONAL
                                                        NO. OF                               AND NOTES             PAID IN
                                                        SHARES             AMOUNT           RECEIVABLE             CAPITAL
                                                        ------             ------           ----------             -------
<S>                                                   <C>            <C>                <C>                    <C>
BALANCE, APRIL 1, 1999                                8,291,955      $     82,919       $         (23)         $ 28,479,060

Issuance of common stock associated with:
     Stock option exercises                             278,699             2,787                  -              1,095,951
     Broadwing, Inc.                                  1,888,653            18,887                                10,807,886

Stock-based compensation                                    -                 -                    -                 49,477

Payment of stock subscriptions                              -                 -                     23                  -

Purchase of treasury stock                              (2,000)               -                    -                    -

Warrant rescission                                          -                 -                    -                (2,482)

Legal settlement                                            -                 -                    -                405,938

Net loss                                                    -                 -                    -                    -
                                                     ----------         ---------             --------         ------------
BALANCE, MARCH 31, 2000                              10,457,307      $    104,593    $             -           $ 40,835,830

Issuance of common stock associated with:
    Stock option exercises                                9,836                                      -               20,387
    Priceline Agreement                                  23,852                98                    -             (34,320)
                                                                               -
Stock based compensation                                      -                 -                    -                7,393

Purchase of treasury stock                            (143,165)                 -                    -                    -

Warrants issued                                                                                                     139,706

Net loss
                                                     ----------         ---------             --------         ------------
BALANCE, MARCH 31, 2001                              10,347,830         $ 104,691               $    0         $ 40,968,996
                                                     ==========         =========             ========         ============
</TABLE>


<TABLE>
<CAPTION>
                                                                                                     TOTAL
                                                     TREASURY              RETAINED              STOCKHOLDERS
                                                       STOCK                DEFICIT            EQUITY (DEFICIT)
                                                       -----                -------            ----------------
<S>                                             <C>                      <C>                   <C>
BALANCE, APRIL 1, 1999                          $            -           $ (20,643,731)           $   7,918,225

Issuance of common stock associated with:
     Stock option exercises                                  -                      -                 1,098,738
     Broadwing, Inc.                                                                                 10,826,773

Stock-based compensation                                     -                      -                    49,477

Payment of stock subscriptions                               -                      -                        23

Purchase of treasury stock                              (10,500)                    -                  (10,500)

Warrant rescission                                           -                      -                   (2,482)

Legal settlement                                             -                      -                   405,938

Net loss                                                     -             (10,140,118)            (10,140,118)
                                                     -----------          -------------           -------------
BALANCE, MARCH 31, 2000                            $    (10,500)        $  (30,783,849)            $ 10,146,074

Issuance of common stock associated with:
    Stock option exercises                                     -                      -                  20,485
    Priceline Agreement                                   55,570                      -                  21,250


Stock based compensation                                       -                      -                   7,393

Purchase of treasury stock                             (295,279)                      -               (295,279)

Warrants issued                                                                                         139,706

Net loss                                                                   (11,530,509)            (11,530,509)
                                                     -----------          -------------           -------------
BALANCE, MARCH 31, 2001                              $ (250,209)          $(42,314,358)           $ (1,490,880)
                                                     ===========          =============           =============
</TABLE>

 The accompanying notes are an integral part of these statements.


                                       28

<PAGE>

                               ZEROPLUS.COM, INC.
                          NOTES TO FINANCIAL STATEMENTS


NOTE A--SUSPENSION OF OPERATIONS

            The accompanying financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern.
However, the Company has incurred substantial net losses from operations since
its inception and as of March 31, 2001, had a working capital deficit of
$1,772,969 and an accumulated deficit of $42,314,358.

            On June 5, 2001, the Company announced the shutdown of its
operations and the immediate termination of all services and most employees in
order to conserve cash while seeking to pursue and consider any possible
alternatives for attaining value for the Company's technology and strategic
relationships. The Company however, has not been able to identify and secure a
suitable source of immediate funding, nor can any assurance be provided that the
Company will be able to secure such funding to enable it to continue as a going
concern.

            The accompanying financial statements do not include any adjustments
that might be necessary if the Company is unable to continue as a going concern.

            In response to the Company's June 5, 2001 suspension of operations
and termination of the majority of its employees, an impairment loss was
recorded to the March 31,2001 financial statements. Assets were re-valued to
their estimated net realizable value as of March 31, 2001. Management reviewed
each group of assets to estimate either the resale value or the value relative
to the Company's intellectual property. The difference between the net book
value at March 31, 2001 and the estimated net realizable value, $977,062, was
recognized as an impairment loss and is included in "Operating Expenses" on the
Company's Statement of Operations. The Company's liabilities have been stated at
their respective book values at March 31, 2001, as management has not yet
engaged in negotiations to reasonably estimate final settlement values of its
liabilities.


            The table below lists the gross value and net (impaired) value of
each asset group:

<TABLE>
<CAPTION>
                                                                        Gross Value              Impaired Value (estimate)
<S>                                                                     <C>                      <C>
Property & equipment -  office furniture and equipment                     1,125,722                        168,800
Property & equipment - network equipment                                     982,535                        189,600
Property & equipment - capitalized software                                   96,920                              -
Property & equipment - leasehold improvements                                232,829                              -
Accumulated depreciation                                                 (1,102,544)                              -
                                                                         -----------                      ---------
Total  Net Value                                                          $1,335,462                      $ 358,400
</TABLE>










                                       29

<PAGE>

                               ZEROPLUS.COM, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS

            ZeroPlus.com, Inc. ("ZeroPlus.com" or the "Company"), a Delaware
corporation, was originally incorporated as e-Net, Inc. on January 9, 1995, and
commenced operations on June 8, 1995. Effective February 15, 2000, the corporate
name was changed from e-Net, Inc. to ZeroPlus.com, Inc. As discussed above, the
Company suspended operations on June 5, 2001. Prior to that date, ZeroPlus.com
provided Internet telephony services to consumers worldwide, including free
PC-to-PC phone services, and fee-based PC-to-phone, phone-to-PC and
phone-to-phone services. The Company also developed an e-commerce solution,
ZPCommerce, which enables companies to voice-enable their websites. ZeroPlus.com
routed calls from customers' PCs to existing call centers entirely over the
Internet, thereby drastically reducing e-commerce companies' inbound 800-number
service costs. The company has two office locations: corporate headquarters in
Germantown, Maryland, and a research and development office in Austin, Texas.

            The significant accounting policies used in the preparation of the
accompanying financial statements are as follows:

INVENTORY

            Because of the change in the strategic focus of the Company's
business in mid-1999, the Company no longer carries inventory. In connection
with this restructuring, the Company wrote off approximately $575,000 of
inventory in fiscal 2000. Prior to this change, inventory was stated at the
lower of cost or market value. Cost is determined by the first-in, first-out
method. The elements of cost include subcontracted costs and materials handling
charges.

REVENUE RECOGNITION

            Internet telephony service revenue is recognized as the service is
provided. Prepayments for communications services are deferred and recognized as
the services are provided. Revenue is recognized on the sale of software
products upon shipment unless future obligations exist wherein a portion of the
revenue is deferred until the obligation is satisfied. Revenue from services
rendered is recognized either as the services are rendered or at contractually
determined fixed monthly fees.

            For the years ended March 31, 2001 and 2000, the Company derived 85%
of its sales from two customers. Substantially all of the Company's revenue was
generated from sales to customers in the United States.

ACCOUNTS RECEIVABLE

            Accounts receivable are stated at the unpaid balances, less
allowance on uncollectible accounts, if any. Management periodically reviews its
outstanding accounts receivable to assess collectibility of balances based on
past experience and evaluation of current adverse situations which may affect
collectibility of receivables. At March 31, 2001 and 2000, management
established an allowance for uncollectible accounts in the amount of $122,800
and $872,200, respectively.


                                       30

<PAGE>

                               ZEROPLUS.COM, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)


ADVERTISING COSTS

            The Company expenses the costs of advertising as incurred. Typically
the Company purchases banner advertising on other companies' web sites pursuant
to contracts which have one to three year terms and may include the guarantee of
(i) a minimum number of impressions, (ii) the number of times that an
advertisement appears in pages displayed to users of the web site, or (iii) a
minimum amount of revenue that will be recognized by the Company from customers
directed to the Company's web site as a direct result of the advertisement. The
Company also uses print advertising in trade journals and business publications.
The Company recognizes expense with respect to such advertising ratably over the
period in which the advertisement is displayed.

            For the years ended March 31, 2001 and 2000, advertising expense
totaled approximately $2,088,000 and $827,400, respectively.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

            Preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.

PROPERTY AND EQUIPMENT

            Property and equipment are carried at cost, net of an allowance for
accumulated depreciation and amortization. Prior to March 31, 2001, depreciation
was computed on equipment and furniture, using a straight-line method over a
three-year period. Subsequent to March 31, 2001, these assets were being held
for disposal and accordingly, are not being depreciated. In conjunction with its
announced suspension of operations on June 5, 2001, the Company recognized the
impairment of assets in the amount of $977,100. For the March 31, 2001 Balance
Sheet date, property and equipment are recorded at their estimated realizable
value. While management believes its estimates of these assets' net realizable
value are reasonable, the actual realized value may differ. The impairment cost
is recorded on the Statement of Operations as "Operating Expenses".

INVESTMENTS

            The Company's investments in debt securities, which typically mature
in one year or less, are generally held to maturity and valued at amortized
cost, which approximates fair value. The investments' aggregate fair value at
March 31, 2001 and 2000 was $802,252 and $6,296,637, respectively, for
investments in United States Treasury debt securities. Securities investments
that the Company has the positive intent and ability to hold to maturity are
classified as held-to-maturity securities and recorded as cash and cash
equivalents when maturity is three months or less, as short-term investments
when maturity is longer than three months and less than one year, and as
long-term investments when maturity exceeds twelve months. The aggregate fair
value of long-term investments at March 31, 2001 and 2000 was $0 and $993,750,
respectively, for investments in United States Treasury debt securities.


                                       31

<PAGE>


                               ZEROPLUS.COM, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)


EARNINGS PER SHARE

            The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128 for the fiscal year ended March 31, 1999. SFAS No. 128 replaces
the presentation of primary and fully diluted earnings per share with a
presentation of basic earnings per share and diluted earnings per share, if
dilutive shares are outstanding. Basic earnings per share excludes dilution and
is computed by dividing income or loss available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were converted into common
stock, but such securities or contracts are excluded if their effects would be
anti-dilutive. Pursuant to the requirements of Staff Accounting Bulletin ("SAB")
No. 98 of the Securities and Exchange Commission, issued in February 1998,
common equivalent shares which have an anti-dilutive effect on net loss per
share are no longer included in computing net loss per share for the periods
presented. All prior-period loss per share data has been restated in accordance
with SFAS No. 128 and SAB No. 98.

            Basic loss per common share was calculated by dividing net loss by
the weighted average number of common shares outstanding during the period.
Diluted loss per share was calculated the same as basic loss per share since the
Company has a net loss for all periods presented which would make the conversion
of securities or other contracts to common stock anti-dilutive.

<TABLE>
<CAPTION>
                                                                                          YEAR ENDED
                                                                                           MARCH 31,
                                                                                  2001                   2000
                                                                              -----------            ------------
<S>                                                                           <C>                    <C>
Net Loss                                                                      $(11,530,509)          $(10,140,118)
Loss per common share - basic & diluted                                             $(1.11)                $(1.13)
Number of common shares - basic & diluted                                       10,371,343              8,948,488
</TABLE>


SOFTWARE DEVELOPMENT COSTS

            Prior to the change in the strategic focus of the Company in June
1999, the Company had capitalized certain software development costs incurred
after establishing technological feasibility. Costs incurred prior to such
feasibility and certain hardware-related, development costs have been expensed
as incurred as research and development costs. Software costs are amortized
based upon the greater of amortization computed using the estimated useful life
of the software or units sold as a function to expected units to be sold when
the product is available for general release to customers. In the first quarter
of the fiscal year ended March 31, 2000, management wrote off all capitalized
software costs by charging $400,978 as part of the restructuring of the Company.
Amortization expense for 2001 and 2000 was approximately $0 and $87,600,
respectively.

            Software development costs incurred since June 1999 have been
expensed as incurred as they represent research and development costs or costs
incurred after establishing technological feasibility with very short useful
lives, making the capitalizable amount immaterial to the financial statements.

CASH AND CASH EQUIVALENTS

            For purposes of the statement of cash flows, the Company considers
all cash held in checking and investment accounts with maturity dates of three
months or less to be cash equivalents. The carrying amount approximates fair
value because of the short-term maturity of the instruments.

                                       32

<PAGE>


                               ZEROPLUS.COM, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)


STOCK-BASED COMPENSATION

            The Company accounts for stock options issued to employees using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"). Compensation expense for
stock options issued to employees is measured as the excess of the quoted market
price of the Company's stock at the date of grant over amount an employee must
pay to acquire the stock.

SEGMENT DISCLOSURES

            Statements of Financial Accounting Standards ("SFAS") No. 131,
Disclosure about Segments of an Enterprise and Related Information, was issued
in June 1997. This statement requires use of the "management approach" model for
segment reporting. The management approach model is based on the way a company's
management organizes segments within the company for making operating decisions
and assessing performance. Reportable segments are based on products and
services, geography, legal structure, management structure, or any other manner
in which management disaggregate a company. As the Company operates in one
segment, the adoption of the statement in fiscal 2000 did not have an impact on
its financial statements.


NOTE C--SIGNIFICANT TRANSACTIONS

RESTRUCTURING COSTS

            In the first quarter of the fiscal year ended March 31, 2000, the
Company recorded a charge of approximately $1,710,000 related primarily to a
restructuring program that was substantially implemented by December 31, 1999.
The charge includes a provision for reductions in the carrying value of accounts
receivables of $317,000, inventory of $575,000, capitalized software of $400,000
and the accrual of expenses of $418,000 related to the Company's exit from
network gateway equipment activities. Of this charge, the portion associated
with the write down of inventory was charged to cost of products sold in the
accompanying financial statements. Approximately $80,000 of the accrued expenses
were reversed in the fourth quarter of fiscal 2000 based on current estimates.
Accrued expenses related to restructuring costs at March 31, 2000 were
approximately $160,000 and were associated with estimated equipment and support
costs. The restructuring effort refocuses the Company's operating model based on
a comprehensive strategy of making voice and telephony functions easily
available at common entry points to Digital Data Networks. The Company intends
to use its core technology competency in advancement of its voice-over-digital
data networks business by exploiting markets that it believes pose fewer
competitive risks.

            In the fourth quarter of the fiscal year ended March 31, 2001, the
Company determined that the remaining $160,000 restructuring accrual was no
longer necessary, and therefore, the accrual was reversed.

                                       33

<PAGE>



                               ZEROPLUS.COM, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE C--SIGNIFICANT TRANSACTIONS (CONTINUED)

SHORT TERM DEBT

            In March 2001, the Company secured short-term debt in the amount of
$2,000,000. The note is convertible into common stock at the conversion rate of
$1.00 per share. Interest accrues at an annual rate of 17%. Interest expense and
financing fees (4%) were waived in exchange for the granting of a technology
license. The Company also granted the lender 500,000 common stock warrants with
an exercise price equal to the closing market price ($.4375) of the company
common stock as listed on Nasdaq. Total funds received of $2,000,000 were
allocated $136,458 to the warrants and $1,863,542 to the note payable. The value
allocated to the warrants has been included in additional paid-in capital and
the related discount is being amortized to interest expense over the term of the
note. At March 31, 2001, the unamortized discount on the note payable is
$109,166. The note is secured by the assets of the corporation and was due on
June 12, 2001. On June 12, 2001, the Company and the lender executed a 90-day
Forbearance Agreement, by which the note will mature September 10, 2001.

STOCK ISSUANCE - DISTRIBUTION AGREEMENT

On January 24, 2001, the Company issued 345,290 shares of restricted common
stock to Priceline Long Distance, LLC in accordance with the Internet Protocol
Telephone Service Participation Agreement between Priceline Long Distance, LLC
and the Company dated May 23, 2000. The shares of stock are unregistered and
vest over a 36-month period pursuant to the agreement's daily vesting schedule.
In accordance with Emerging Issues Task Force (EITF) 96-18, Accounting for
Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services, the Company recognized $21,250 of
marketing expense associated with the related shares of common stock vested at
March 31, 2001.

CALL RIGHT

            In December 1999, Cincinnati Bell, Inc. (d/b/a Broadwing Inc.)
exercised its call right to purchase 1,888,653 shares of the Company's stock at
a per share price of $5.742875. As per the agreement, the share price was equal
to 1.25 times the closing price of the Company's common stock as listed on the
Nasdaq SmallCap Market on December 7, 1999. The transaction yielded proceeds,
net of transaction costs, of approximately $10,827,000.


NOTE D--COMPOSITION OF CERTAIN BALANCE SHEET CAPTIONS

PROPERTY AND EQUIPMENT

            Property and equipment consist of the following at March 31:

<TABLE>
<CAPTION>
                                     2001            2000
                                  -----------    -----------
<S>                               <C>            <C>
Furniture and equipment           $ 2,108,257    $ 1,311,619
Capitalized software                   96,920           --
Leasehold improvements                232,829        220,110
                                  -----------    -----------
                                    2,438,006      1,531,729
Less:  Accumulated depreciation    (1,102,544)      (836,560)
Less:  Impairment Adjustment         (977,062)          --
                                  -----------    -----------
Property and equipment--net       $   358,400    $   695,169
                                  ===========    ===========
</TABLE>


                                       34

<PAGE>

                               ZEROPLUS.COM, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE D--COMPOSITION OF CERTAIN BALANCE SHEET CAPTIONS (CONTINUED)

ACCRUED LIABILITIES

            Accrued liabilities consist of the following at March 31:

<TABLE>
<CAPTION>
                                                 2001                2000
                                                 ----                ----
<S>                                           <C>                <C>
Accrued salaries                              $  158,180         $  182,696
Accrued vacation                                 195,681            148,559
Accrued advertising fees                            --               93,874
Accrued bonuses                                  118,292             67,531
Accrued deferred rent                             75,243             79,911
Accrued taxes and payroll liabilities                539             19,729
Accrued restructure costs                           --              160,000
Accrued costs - network related                1,216,703               --
Other accrued costs                              177,167            191,287
                                              ----------         ----------
                                              $1,941,805         $  943,587
                                              ==========         ==========
</TABLE>


NOTE E--INCOME TAXES

            For the periods ended March 31, 2000 and 2001, no benefit from
income taxes associated with net operating losses has been reflected due to
uncertainty as to the realizability of tax benefits associated with net
operating losses to date.

            The income tax provision consists of the following for the period
ended March 31, 2001 and 2000:

<TABLE>
<CAPTION>
                                       2001          2000
                                       ----          ----
<S>                               <C>            <C>
Deferred
            Federal                 3,664,705      3,712,084
            State                     687,992        696,977
            Valuation allowance    (4,352,697)    (4,409,061)
                                  -----------    -----------
            Net provision         $      --      $      --
                                  ===========    ===========
</TABLE>


            The effective tax rate for the period ended March 31, 2001, was 0%.
A reconciliation between the U.S. federal statutory rate and the effective tax
rate follows:

<TABLE>
<CAPTION>
                                                          2001                 2000
                                                      ------------          ----------
<S>                                                    <C>                  <C>
Tax (benefit) at U.S. federal statutory rates          (3,911,094)          (3,447,640)
Increase (decrease) resulting from:
            State tax (benefit)                          (455,527)            (401,549)
            Permanent differences                          13,924             (559,872)
            Valuation allowance                         4,352,697            4,409,061
                                                      -----------          -----------
Income tax provision                                  $        --           $       --
                                                      ===========          ===========
</TABLE>

            The Company's reporting period for tax purposes is the calendar
year. Taxes on the net loss for the period January through March are reflected
in the calculation of the deferred tax asset. A valuation allowance has been
recognized in an amount equal to the deferred tax asset.

                                       35

<PAGE>

                               ZEROPLUS.COM, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE E--INCOME TAXES (CONTINUED)

            The tax effect of temporary differences between the financial
statement amounts and tax bases of assets and liabilities which give rise to a
deferred tax asset is as follows at March 31, 2001 and 2000:

<TABLE>
<CAPTION>
                                                                                2001                            2000
                                                                            ------------                    ------------
<S>                                                                         <C>                             <C>
            Net loss for January 1 through March 31,                         $ 1,418,433                    $  1,224,167
            Accounts receivable and inventory reserves                            46,615                         763,876
            Accrued expenses                                                     102,044                          95,170
            Accrued warranty and patent expenses                                       -                          15,795
            Depreciation expense                                                  17,007                          15,636
            Net operating loss                                                12,646,096                       7,769,851
            Deferred rent                                                         18,776                          11,779
            Valuation allowance                                             (14,248,971)                     (9,896,274)
                                                                            ------------                    ------------
            Deferred taxes payable                                           $        -                     $        -
                                                                            ============                    ============
</TABLE>

            The use of net operating losses of the Company in the future to
offset taxable income may be limited in the event of a change in control of the
Company in accordance with Section 382 of the Internal Revenue Code. The Company
has net operating loss carryforwards totaling $ 33,314,000 that expire through
2020.


NOTE F--COMMITMENTS AND CONTINGENT LIABILITIES

LEASE COMMITMENT

            The Company has two leases for office space that provide for
aggregate monthly rent payments of approximately $37,200. At March 31, 2001,
approximate future rental commitments are as follows:

<TABLE>
<CAPTION>
         YEAR ENDING MARCH 31,
         ---------------------
         <S>                                                              <C>
            2002                                                           $ 447,600
            2003                                                             402,600
            2004                                                             385,400
            2005                                                              32,200
            2006                                                                   0
                                                                          ----------
            Total                                                         $1,267,800
                                                                          ----------
</TABLE>

            Rent expense for the years ended March 31, 2001, and March 31, 2000,
totaled $425,602 and $443,678, respectively. With the suspension of operations
on June 5, 2001, the total leased facility space exceeds the Company's current
needs. Currently, the Company is exploring various alternatives to reduce total
leased space. There can be no assurance that the Company will be successful in
reducing our lease commitments.


                                       36

<PAGE>


                               ZEROPLUS.COM, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE F--COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)

CAPITAL LEASE COMMITMENT

As part of the Revenue Sharing, Service Development, and Joint Marketing
Alliance Agreement between the Company and Broadwing Inc., the Company leases
network-related equipment from Broadwing Inc. As specified in the agreement, the
lease term is 60 months with an interest rate of 12%. If the Revenue Sharing
agreement is terminated prior to the end of the lease term, Broadwing may
require the Company to purchase the equipment at the then current book value. As
of March 31, 2001, the Company has leased approximately $195,600 in
network-related equipment. This lease is accounted for as a capital lease. At
March 31, 2001, approximate future minimum lease payments are as follows:

<TABLE>
<CAPTION>
            YEAR ENDING MARCH 31,
            ---------------------
            <S>                                                                         <C>

                  2002                                                                  $ 52,226
                  2003                                                                    52,226
                  2004                                                                    52,226
                  2005                                                                    31,144
                                                                                        --------
                  Gross amounts due                                                      187,822
                  Less:  Interest portion                                                 35,885
                                                                                        --------
                  Present value of net minimum lease payments                          $ 151,937
                                                                                       =========
                  Less:  Current portion                                               $  35,927
                                                                                       =========
                  Long term                                                            $ 116,010
                                                                                       =========
</TABLE>

EMPLOYMENT AGREEMENT

            The Company has an employment agreement with an officer with minimum
future annual salary commitments of the Company under the agreements as follows:

<TABLE>
<CAPTION>
            YEAR ENDING MARCH 31,             SALARY                             BONUS                          TOTAL
            ---------------------             ------                             -----                          -----
            <S>                              <C>                                 <C>                          <C>
                    2002                     $230,000                              -                          $230,000
                    2003                     $230,000                              -                          $230,000
                    2004                     $230,000                              -                          $230,000
                    2005                     $230,000                              -                          $230,000
                    2006                     $230,000                              -                          $230,000
</TABLE>

            The agreement also provides for bonuses upon certain performance
criteria of the Company and the determination of the Board of Directors.
Pursuant to the agreement, employment may be terminated by the Company with
cause or by the executive with or without good reason. Termination by the
Company without cause, or by the executive for good reason, would subject the
Company to liability for an amount equal to six months of the terminated
executive's salary at the date of termination plus comparable insurance benefits
being received prior to termination.


                                       37

<PAGE>


                               ZEROPLUS.COM, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE F--COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)

NETWORK SERVICES AGREEMENT

            The Company has entered into agreements with various network service
providers and communications firms to support its network capacity. These
agreements may include a minimum commitment over the term of the contract. At
March 31, 2001, approximate future minimum commitments for network capacity are
as follows:

<TABLE>
<CAPTION>
Year ending March 31,
<S>                                                               <C>
2002...................................................           $     600,000
2003...................................................           $      50,000
</TABLE>

LITIGATION

            The Company is a co-defendant in civil litigation brought by
Prudential Securities, Inc., which seeks to recover in excess of $3 million in
alleged losses associated with a margin loan made to a non-affiliated
shareholder of ZeroPlus.com. The action alleges that either the Company or
American Stock Transfer & Trust Co., the transfer agent for the Company's common
stock, improperly removed a restrictive legend from the stock certificate
underlying the shares used to collateralize the margin loan. The Company filed a
cross-claim against American Stock Transfer seeking indemnity. American Stock
Transfer has filed a cross-claim against the Company for, among other things,
indemnity, to recover any amounts it pays Prudential or expends in defending the
suit. American Stock Transfer has cross-claimed against the non-affiliate
shareholder, and also against Dean Witter Reynolds, Inc. On May 19, 2000,
Prudential amended its complaint to add six additional counts. These new claims
include allegations of negligence, intentional concealment, deceit, constructive
fraud, and injurious falsehood. After withdrawing our counterclaim against
Prudential, we moved for summary judgment as to the original complaint and moved
to strike to amended complaint. On June 30, 2000, the Court entered a Final
Judgment dismissing all of Prudential's claims. On July 28, 2000, Prudential
filed a Notice of Appeal in the Maryland Court of Special Appeals. Briefing has
been completed and the appellate argument took place on May 9, 2001. Although we
cannot assure you of this result, we believe the claims against us are without
merit and that our actions will cause the matter to be either entirely dismissed
or will otherwise eliminate us from any liability.

            The Company was one of eight defendants in a patent infringement
suit filed on February 15, 2000, in the United States District Court for the
District of Minnesota. The plaintiff, Multi-Tech Systems, Inc., alleged that all
defendants have infringed one or more patents relating to concurrent
transmission of voice and data information. As a result of our June 5, 2001
announced suspension of operations, Multi-Tech Systems, Inc. filed a request to
dismiss the Company from the defined action without prejudice. The request was
subsequently granted. Although the dismissal without prejudice temporarily
minimizes future legal expenses associated with the Company's defense, the
nature of the dismissal permits the plaintiff to re-assert its claim(s) at any
point in the future. An adverse outcome of this matter could have a material
adverse effect on the Company's financial position and results of operations.



                                       38

<PAGE>


                               ZEROPLUS.COM, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)


NOTE G--RELATED PARTY TRANSACTIONS

            Through February 2001, the Company rented an aircraft for business
purposes from an entity owned by the Company's president. For the years ended
March 31, 2001 and 2000, the Company paid $166,700 and $187,519, respectively,
for the rental of the aircraft.

            The Company entered into a consulting agreement with the chairman of
the board to provide services for a fixed monthly amount of $1,000 per month.
For each of the years ended March 31, 2001 and 2000, the Company paid $12,000,
respectively under the consulting agreement.

            The Company entered into a consulting agreement with a relative of a
corporate officer and less than 5% shareholder to provide services at a rate of
$150 per hour payable 50% cash and 50% stock options with valuation based on
current market price. For each of the years ended March 31, 2001 and 2000, the
Company paid $13,492 and $23,986, respectively under the consulting agreement.
In addition, the Company issued 1,678 and 3,491 stock options per the agreement,
respectively in the years ended March 31, 2001 and 2000.

            On August 11, 2000, ZeroPlus.com, Inc. repurchased from its Chief
Executive Officer, Mr. Robert A. Veschi, in a private transaction, 143,165
shares of its common stock at a price per share of $2.0625, such price being the
closing price of such stock on NASDAQ as of the close of business on August 7,
2000. The purchase was accomplished in order to allow Mr. Veschi to repay an
existing general purpose loan secured by his stock in the Company, which loan
was then due and payable. The transaction was approved by the outside directors
of the Company on August 7, 2000.


NOTE H--DEFINED CONTRIBUTION PLAN

            The Company established a Profit Sharing Plan and Trust (the "Plan")
in December 1995. In January 1998, the Plan was converted into a retirement plan
qualified under section 401(k) of the Internal Revenue Code (the 401(k) Plan).
All full time employees over the age of 21 are eligible to participate in the
plan. The 401(k) Plan allows the Company to determine the matching amount on an
annual basis. The matching amount in effect for plan years beginning January 1,
2000 and 2001 was established at 50% of employee deferrals up to 5% of eligible
wages. The Company's matching contributions to the 401(k) Plan for the years
ended March 31, 2001 and 2000, were approximately $80,000 and $73,000,
respectively.

            In conjunction with the suspension of operations and termination of
the majority of its employees, the Company terminated its 401(k) plan effective
June 5, 2001. The Company will be responsible for filing annual tax reports for
the plan until all participants have withdrawn their funds from the plan.


                                       39

<PAGE>

                               ZEROPLUS.COM, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)


NOTE I--STOCK OPTION PLANS

            At March 31, 2001, the Company has three stock-based compensation
plans which are described below. As permitted under generally accepted
accounting principles, grants under those plans are accounted for following APB
Opinion No. 25 and related interpretations. Accordingly, only the compensation
cost associated with grants to non-employees or non-directors of the Company or
for employees who had their options re-priced have been recognized for the years
ended March 31, 2001 and 2000 in the amounts of $7,393 and $49,477,
respectively. The fair value for options issued in 2001 has been estimated at $
1,095,000 as of the grant date using the Black Scholes model with the following
weighted average assumptions: risk free interest rate of 4.7%; volatility factor
of the expected market price of 191.4%; and a weighted average expected life of
the option of 1 year. Because option valuation models require the input of
highly subjective assumptions and because changes in the assumptions can
materially affect the fair value estimate, the existing model may not
necessarily provide a reliable measure of the fair value of its stock options.
Had compensation cost for the three stock-based compensation plans been
determined based on the grant date fair values of the awards (the method
prescribed in SFAS No. 123), reported net loss and loss per common share would
have been reduced to the pro forma amounts shown below.


<TABLE>
<CAPTION>
                                                                      YEAR ENDED
                                                                       MARCH 31
                                                               2001                  2000
                                                           -----------            ---------
<S>                                                     <C>                   <C>
Net Loss
     As reported                                        $  (11,530,509)       $  (10,140,118)
     PRO FORMA                                             (11,985,262)          (11,124,485)

Loss per common share - basic & diluted
    As reported                                         $        (1.11)       $        (1.13)
    PRO FORMA                                                    (1.16)                (1.24)
</TABLE>

Stock option plans:

            In April 1998, the Board of Directors approved the adoption of the
ZeroPlus.com, Inc. 1997 Non-Qualified Stock Option Plan, including the
allocation of up to 500,000 shares for option grants. In December 1998, the
shareholders approved the adoption of the ZeroPlus.com, Inc. 1998 Stock
Compensation Plan, including the allocation of 1,000,000 shares for option
grants. In December 1999, the shareholders approved the adoption of the
ZeroPlus.com, Inc. 1999 Stock Compensation Plan, including the allocation of up
to 1,000,000 shares for option grants. The options are exercisable at fair
market value measured at the grant date with varying vesting schedules. Options
granted and vested under the plan to non-employees or directors in the twelve
months ended March 31, 2001 and 2000 were recorded as compensation expense of
$7,393 and $49,477, respectively. Since April 1, 2000, the Company has granted
830,261 options, of which 26,761 are exercisable at March 31, 2001. Generally,
stock options are granted at fair market value as determined by a moving average
of trading activity prior to the grant date.

                                       40

<PAGE>


                               ZEROPLUS.COM, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)


NOTE I--STOCK OPTION PLANS (CONTINUED)

<TABLE>
<CAPTION>
                                                                                               STOCK OPTIONS
                                                                                               -------------
                                                                                                             WEIGHTED
                                                                                                              AVERAGE
                                                                                     OUTSTANDING          EXERCISE PRICE
                                                                                     -----------          --------------
<S>                                                                                  <C>                  <C>
           Balance at March 31, 1999                                                    926,254                $4.94
                                                                                        -------                -----
                   Granted in FY 2000                                                   531,528                 4.64
                   Exercised in FY 2000                                               (278,699)                 3.94
                   Canceled in FY 2000                                                 (85,397)                 3.64
                                                                                       --------                 ----
           Balance at March 31, 2000                                                  1,093,686                 5.10
                   Granted in FY 2001                                                   787,097                 2.01
                   Exercised in FY 2001                                                 (9,836)                 2.07
                   Canceled in FY 2001                                                (115,749)                 4.63
                                                                                      ---------                 ----
           Balance at March 31, 2001                                                  1,755,198                $3.88
</TABLE>


<TABLE>
<CAPTION>
                                                                                                    NUMBER OF OPTIONS
                                                                                                    -----------------
                                                                                                        YEAR ENDED
                                                                                                          MARCH 31
                                                                                                  2001              2000
                                                                                                  ----              ----
<S>                                                                                              <C>               <C>
           Exercisable, end of year                                                              744,623           431,356
           Weighted-average fair value per option of options granted during the year            $   1.39          $   4.57
</TABLE>


<TABLE>
<CAPTION>
                                             OPTIONS OUTSTANDING                                 OPTIONS EXERCISABLE
                     --------------------------------------------------------------       ------------------------------
                                                     WEIGHTED
                                                     AVERAGE              WEIGHTED                              WEIGHTED
                                                     REMAINING            AVERAGE                                AVERAGE
       RANGE OF                NUMBER               CONTRACTUAL           EXERCISE           NUMBER             EXERCISE
   EXERCISE PRICES           OUTSTANDING               LIFE                PRICE          EXERCISABLE             PRICE
   ---------------           -----------               ----                -----          -----------             -----
  <S>                        <C>                    <C>                   <C>             <C>
  $ 0.00 to $ 1.73             469,695                 7.7                 $1.21             32,944               $1.28
  $ 1.74 to $ 3.45             312,001                 6.5                  2.60             81,335                3.42
  $ 3.46 to $ 5.18             660,752                 6.0                  4.38            353,760                4.25
  $ 5.19 to $ 6.91               1,000                 4.7                  6.64              1,000                6.64
  $ 6.92 to $ 8.64             270,000                 5.0                  7.49            270,000                7.49
  $ 8.65 to $10.36               3,000                 6.8                 10.18              1,000               10.18
  $10.37 to $12.09              13,750                 6.8                 10.99              4,584               10.99
  $12.10 to $13.82              25,000                 7.0                 13.00                  0                   0
                                ------                 ---                 -----            -------               -----
            Totals           1,755,198                 6.4                 $3.88            744,623               $5.26
</TABLE>


                                       41

<PAGE>


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

None.


PART III

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


            Our executive officers and directors as of the date hereof are as
follows:

<TABLE>
<CAPTION>
                 NAME                                              AGE               TITLE
                 ----                                              ---               -----
                 <S>                                               <C>               <C>
                 Alonzo E. Short                                   60                Chairman of the Board

                 Robert A. Veschi                                  39                President, Chief Executive Officer, Director

                 Donald J. Shoff                                   46                Vice President, Finance, Chief Financial
                                                                                     Officer and Director

                 William W. Rogers, Jr.                            59                Director

                 Clive Whittenbury, Ph.D.                          67                Director

                 William L. Hooton                                 50                Director

                 Michael A. Viren, Ph.D.                           59                Director
</TABLE>


            Each of our directors holds office for a term of one year or until
his or her successor is elected and qualified. There are no family relationships
among any of our officers or directors and none of our officers and directors
had been involved in any material legal proceedings during the past five years.
Our officers devote full time to our business.

            The principal occupation and business experience for each officer
and director for at least the last five years are as follows:

            ALONZO E. SHORT, JR., Lt. Gen., USA (ret.), 60, has been chairman of
the board since January 1996. General Short has more than 30 years experience in
executive management, operations and the engineering, design and development of
large-scale telecommunications and data systems. General Short retired from the
service in 1994 following a career that included serving as deputy commanding
general (1988-1990) and commanding general (1990-1991) of the U.S. Army
Information Systems Command, a major information technology organization, which
was responsible for all telecommunications during the Desert Shield/Desert Storm
operation, among other responsibilities. From 1991 to 1994, General Short was
director of the Defense Information Systems Agency, a major information
technology organization which is responsible for telecommunications and related
services to the President of the United States, Secret Service, Joint Chiefs of
Staff, Secretary of Defense, among other high level federal entities. From
1994-1997, General Short was president and chief executive officer of MICAH
Systems, Inc., a Washington, D.C. metropolitan area based information,
technologies management and consulting firm. In September 1997, General Short
joined Lockheed Martin, an aerospace, defense, and information technology
company, as a Vice-President. In March 2001, he became President and Chief
Operating Officer of Houston Associates, a provider of telecommunications and

                                       42

<PAGE>

systems engineering services to government and industry. Since January 1996,
General Short has been instrumental in the organization and development of
ZeroPlus.com's business.

            ROBERT A. VESCHI, 39, has been ZeroPlus.com's president, chief
executive officer, and a director since January 1995. Mr. Veschi founded
ZeroPlus.com, which began its operations in June 1995. Mr. Veschi has
significant experience in executive management, operations and the engineering,
design and development of telecommunications and computer products and systems.
From 1986 to 1990, Mr. Veschi was manager of systems engineering for
International Telemanagement, Inc., a Washington, D.C. metropolitan area based
information, data and network systems firm. From 1990 to 1994, Mr. Veschi was a
group president of I-Net, Inc., a Washington, D.C. metropolitan area based
information, data and network systems firm. From December 1994 to May 1995, for
approximately six months, Mr. Veschi was president and chief executive officer
of Octacom, Inc., a Washington, D.C. metropolitan area based information, data
and network systems firm, and a wholly-owned subsidiary of Octagon, Inc., an
Orlando, Florida metropolitan area based publicly held technical services firm.
From July 1994 to May 1995, for approximately nine months, Mr. Veschi was a vice
president of telecommunications for Octagon, Inc., and from January 1995 to May
1995, for approximately four months, Mr. Veschi was a member of the board of
directors of that company. Since June 1995, Mr. Veschi has been instrumental in
ZeroPlus.com's organization, development and promotion.

            DONALD J. SHOFF, CPA, 46, has been, secretary since February 1999
and a director since December 1999. Prior to that, Mr. Shoff was vice president
of finance and chief financial officer from November 1997 to June 2001. Prior to
November 1997, Mr. Shoff was director of finance and assisted ZeroPlus.com as a
consultant prior to employment. Mr. Shoff has 21 years of significant experience
in both public accounting firms and with high technology companies, both public
and private. From 1977 to 1981, Mr. Shoff was a staff accountant and senior
accountant on the staff of local Washington, D.C. public accounting firms. From
1982 to 1986, Mr. Shoff was the corporate cost accounting manager and a group
controller for Science Applications International Corporation, a high technology
products and professional services public corporation, where he was responsible
for the corporate cost accounting functions and controllership of a high
technology services operation group. From 1987 to 1992 and from 1993 to 1996,
Mr. Shoff consulted independently and as a Senior Manager of Grant Thornton LLP,
a major accounting and management consulting firm, with public and privately
held high technology companies doing business with the Federal government. From
1992 to 1993 Mr. Shoff was vice president of finance and administration for
Comsis Corporation, a Washington, D.C. based privately held engineering and
technology company doing business with the Federal and various state
governments. Mr. Shoff holds a B.B.A. degree from the Pennsylvania State
University and is a certified public accountant.

            WILLIAM W. ROGERS, JR., 59, has been a director since January 1997.
Mr. Rogers has substantial senior management, operations and technical and
engineering services experience. From 1972 to 1987, Mr. Rogers was a general
manager engaged in operations, technical and engineering services for Boeing
Computer Services, Inc. From 1987 to 1989, Mr. Rogers was president and chief
executive officer of International Telemanagement, Inc., a McLean, Virginia
based telecommunications and systems engineering and services company. From 1989
to 1991, Mr. Rogers was a vice president of Fluor-Daniel, where he was
responsible for telecommunications and systems integration services. From 1991
through 1998, Mr. Rogers was a vice president with Computer Sciences
Corporation, a McLean, Virginia based technology products, systems and services
company, where he is responsible for systems integration and related technical
services. From 1998 to 1999, Mr. Rogers was a senior vice president of CACI,
Inc., a Washington, D.C. based information technology company. From October 1999
to April 2000, for approximately six months, Mr. Rogers was Director-Sales of
Advanced Communication Systems, Inc., a Washington, D.C. based information
technology company. Since April 2000, Mr. Rogers has been vice president of
business development for Science Applications International Corporation, a high
technology products and professional services public corporation. Since January
1997, Mr. Rogers has been instrumental in the ZeroPlus.com's organization and
development. Mr. Rogers holds a B.A. degree from West Virginia University.

                                       43

<PAGE>


            WILLIAM L. HOOTON, 50, has been a director since January 1996. Mr.
Hooton has substantial experience in the management, design, operation,
marketing and sales of image conversion systems, electronic imaging system
integration, data automation and high performance data storage subsystems. From
1990 to 1993, Mr. Hooton was vice president of operations and technical and
business development of the Electronic Information Systems Group of I-Net, Inc.,
a Washington, D.C. metropolitan area based information, data and network systems
firm. From 1993 to 1998, Mr. Hooton was president and chief executive officer of
Q Corp., a Washington, D.C. metropolitan area high technology consulting firm
specializing in digital imaging systems and other complex imagery in media. In
September 1998, Mr. Hooton became chief executive officer of Tower Software
Corporation, a Northern Virginia based records management software company. He
is currently Corporate Vice President of SAIC, a high technology products and
professional services public corporation. Since January 1996, Mr. Hooton has
been a director of ZeroPlus.com and has been instrumental in its organization
and development. Mr. Hooton holds a B.B.A. degree from the University of Texas.

            CLIVE G. WHITTENBURY, Ph.D., 67, has been a director since June
1996. Dr. Whittenbury has substantial senior management, operations and
technical advisory experience. From 1972 to 1979, Dr. Whittenbury was a senior
vice president and, from 1976 to 1986, a director of Science Applications
International Corporation ("SAIC"), a La Jolla, California based major
international systems engineering firm with current annual revenues of
approximately $4.7 billion. Since 1979, Dr. Whittenbury has been a director of
the Erickson Group, Inc., a major international diversified products firm. Dr.
Whittenbury is a member of the International Advisory Board for the British
Columbia Advanced Systems Institute, which manages commercialization programs in
technology at the three major Vancouver/Victoria universities, a member of the
Advisory Board of Compass Technology Partners, an investment fund, and is a
member of the NIF Programs Review Committee for the Lawrence Livermore
National Laboratory. Dr. Whittenbury has also served as a technical advisor
to three U.S. Congressional Committees, the Grace Commission and numerous major
U.S. and foreign companies. Since June 1996, Dr. Whittenbury has been
instrumental in ZeroPlus.com's organization and development. Dr. Whittenbury
holds a B.S. degree (physics) from Manchester University (England) and a
Ph.D. degree (aeronautical engineering) from the University of Illinois.

            MICHAEL A. VIREN, Ph.D, 59, has been a director since December 1999.
Dr. Viren has over 35 years of experience as an engineer, economist and
executive in the electric utilities and telecommunications industries. From 1991
to 1998, Dr. Viren served as the Director of Product Development, Vice President
of Product Development and Information Services and Senior Vice President of
Engineering, IS and Strategic Planning for Intermedia Communications, Inc., an
interexchange and internet company located in Florida. In 1998, Dr. Viren, along
with several Intermedia employees, founded 2nd Century Communications, a
telecommunications service provider located in Tampa, Florida. In July 1999, Dr.
Viren resigned from his position with 2nd Century, though he currently serves on
its board of directors. Since August 1999, Mr. Viren has been president of
Intellysis Capital Advisors, a venture capital firm located in Florida. Dr.
Viren received a Bachelor of Science in Mechanical Engineering from California
State University, Long Beach and a Ph.D. in Economics from the University of
Kansas in December 1970.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

            Section 16(a) of the Exchange Act requires our officers and
directors, and persons who own more than ten percent of a registered class of
our equity securities, to file reports and changes in ownership of such
securities with ZeroPlus.com and with the Securities and Exchange Commission.
The following information is based solely on a review of Forms 3, 4 and 5 and
amendments thereto furnished to us pursuant to Rule 16a-3(e) under the
Securities and Exchange Act of 1934, as amended, and other information provided
to us, with respect to our most recent fiscal year, to the best of our knowledge
and information.

            David W. Wells, a former executive officer, sold certain of his
shares of common stock on April 15, 16 and 20, 1999, but did not file a Form 4
reflecting those sales until June 29, 1999.

            Michael A. Viren was elected to the Board of Directors on December
20, 1999, but did not file a Form 3 reflecting that election until March 3,
2000.

                                       44

<PAGE>

ITEM 10. EXECUTIVE COMPENSATION.

SUMMARY COMPENSATION TABLE

            The following table sets forth certain compensation information for
the fiscal years ended March 31, 1999, 2000 and 2001 with regard to the Chief
Executive Officer and the Chief Financial Officer (the "Named Officers"). There
were no other executive officers (as determined at March 31, 2001) whose annual
salary and bonus for the fiscal year ended on that date was at least $100,000.


SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                                           OTHER
                                                                                                           ANNUAL       SECURITIES
                                                                                                           COMPEN-      UNDERLYING
NAME OF INDIVIDUAL         POSITION WITH COMPANY                YEAR         SALARY         BONUS         SATION(1)      OPTIONS
------------------         ---------------------                ----         ------         -----         ---------     ----------
<S>                        <C>                                  <C>          <C>            <C>           <C>            <C>
Robert A. Veschi           President, Chief Executive           2001         175,000         87,500          ---         300,000
                             Officer, Director                  2000         175,000        175,000(2)       ---         150,000
                                                                1999         175,000        190,000(2)       ---         200,000
Donald J. Shoff  (3)       Vice President, Finance,             2001         150,150         50,000          ---          30,000
                             Chief Financial Officer            2000         130,000         25,000          ---          25,000
                             and Secretary                      1999         125,329         16,500          ---          72,750
</TABLE>

-----------------
(1)         Our officers may receive remuneration as part of an overall group
            insurance plan providing health, life and disability insurance
            benefits for our employees. The amount allocable to each Named
            Officer cannot be specifically ascertained, but, in any event, did
            not in any reported fiscal year exceed the lesser of $50,000 and
            such Named Officer's combined salary and bonus. We have purchased
            key-man term life insurance on Mr. Veschi in the amount of $2
            million, which designates us as the owner and beneficiary of the
            policy.

(2)         In the fiscal year ended March 31, 2000, Mr. Veschi received a
            discretionary bonus in December 1999 and a contractual bonus in
            March 2000, both for $87,500 and in the fiscal year ended March 31,
            1999, Mr. Veschi's contractual bonuses for the fiscal years ending
            March 31, 1999 and 1998 were paid in the same year.

(3)         Effective with the suspension of operations on June 5, 2001, Donald
            Shoff's employment with the Company was terminated. Mr. Shoff will
            continue his affiliation with the Company as an outside director.


DIRECTOR COMPENSATION

            Our directors, with the exception of Mr. Veschi and Mr. Shoff, are
entitled to annual remuneration of $24,000 pursuant to oral agreements. Mr.
Viren has chosen to receive his annual remuneration in the form of options to
purchase 13,000 shares of our common stock. In addition, General Short receives
$1,000 per month under a consulting services agreement for his additional
specific business services on our behalf.

            Each outside director is also entitled to receive reasonable
expenses incurred in attending meetings of the Board of Directors.


                                       45

<PAGE>

OPTION GRANTS IN LAST FISCAL YEAR

            The following table sets forth certain information related to the
options granted to the Named Officers during the fiscal year ended March 31,
2001.

<TABLE>
<CAPTION>
                                  NUMBER OF              PERCENT OF
                                  SECURITIES             TOTAL OPTIONS
                                  UNDERLYING OPTIONS     GRANTED TO EMPLOYEES
NAME                              GRANTED                IN FISCAL YEAR          EXERCISE PRICE      EXPIRATION DATE
----                              -------                ---------------------   --------------      ---------------
<S>                               <C>                    <C>                     <C>                 <C>
Robert A. Veschi                  300,000(1)                    38%              $ 1.2281            December 8, 2010
Donald J. Shoff                    30,000(2)                     4%              $ 2.3266            October 1, 2008
</TABLE>

-----------------
(1)         Options vest equally over two years from grant date.

(2)         Options vest equally over three years from grant date.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES

            The following table sets for the certain information related to
option exercises by the Named Officers during the fiscal year ended March 31,
2001 and the value of their unexercised options at March 31, 2001:

<TABLE>
<CAPTION>
                                                                            NUMBER OF SECURITIES
                                                                            UNDERLYING UNEXERCISED             VALUE OF UNEXERCISED
                                                                             OPTIONS AT FISCAL                IN-THE-MONEY OPTIONS
                                                                                YEAR END (#)                  AT FISCAL YEAR END($)
                                   SHARES ACQUIRED           VALUE              EXERCISABLE/                       EXERCISABLE/
       NAME                          ON EXERCISE           REALIZED            UNEXERCISABLE                      UNEXERCISABLE
       ----                          -----------           --------            -------------                      -------------
<S>                                <C>                     <C>              <C>                               <C>
Robert A. Veschi                         ---                  $---            250,000/400,000                         $0/0(1)
Donald J. Shoff                          ---                   ---              81,084/46,666                         $0/0(1)
</TABLE>

----------------
(1) The closing price of ZeroPlus.com's common stock on March 31, 2001, as
reported on the Nasdaq SmallCap Market, was $0.5312 per share.

                                       46

<PAGE>


EMPLOYMENT AGREEMENT

            We have entered into an employment agreement with Robert A. Veschi,
our president and chief executive officer, dated as of April 1, 1996. The
initial agreement was due to expire on March 31, 2001. Prior to its expiration,
the agreement was extended through March 31, 2006. The current annual salary
under Mr. Veschi's agreement is $230,000, which salary may be increased to
reflect annual cost of living increases and may be supplemented by discretionary
merit and performance increases as determined by our Board of Directors of the
Company.

            Mr. Veschi's agreement provides, among other things, for
participation in an equitable manner in any profit-sharing or retirement plan
for employees or executives and for participation in other employee benefits
applicable to our employees and executives. The agreement provides for the use
of an automobile, payment of club dues and other fringe benefits commensurate
with his duties and responsibilities. The Agreement also provides for benefits
in the event of disability. The agreement also contains non-compete provisions
which are limited in geographical scope to the Washington, D.C. metropolitan
area.

            Pursuant to Mr. Veschi's agreement, his employment may be terminated
by us with cause or by Mr. Veschi with or without good reason. Termination by us
without cause, or by Mr. Veschi for good reason, would subject us to liability
for liquidated damages in an amount equal to Mr. Veschi's current salary and a
PRO RATA portion of his bonus for the remaining term of the agreement, payable
in a lump sum cash payment, without any set-off for compensation received from
any new employment. In addition, Mr. Veschi would be entitled to continue to
participate in and accrue benefits under all employee benefit plans and to
receive supplemental retirement benefits to replace benefits under any qualified
plan for the remaining term of the agreement to the extent permitted by law.


                                       47

<PAGE>

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

                  The following table sets forth certain information regarding
ZeroPlus.com's common stock owned as of June 20, 2001 by (i) each person who is
known by us to own beneficially more than five percent of our common stock; (ii)
each of our directors; (iii) each Named Officer; and (iv) all executive officers
and directors as a group. With regard to five percent beneficial owners who are
not either a director or an officer, the information set forth below reflects
the most recent reliable information available to us. Unless otherwise indicated
and subject to applicable community property and similar statutes, insofar as is
known by us, all persons listed below have sole voting and investment power over
all shares of common stock beneficially owned. Share ownership has been computed
in accordance with the Securities and Exchange Commission rules and does not
necessarily indicate beneficial ownership for any other purpose.

<TABLE>
<CAPTION>
                                                                                               NUMBER
NAME AND ADDRESS                                         POSITION WITH COMPANY                OF SHARES       PERCENTAGE OF SHARES
----------------                                         ---------------------                ---------       --------------------
<S>                                                      <C>                                  <C>             <C>
Alonzo E. Short, Jr., Lt. Gen.,                          Chairman of the Board                  108,334             1.01
  USA (ret.) (1)
Robert A. Veschi (2)                                     President, Chief Executive           1,481,835            13.57
                                                           Officer, Director
Donald J. Shoff (3)                                      Secretary and Director                 131,084             1.22
William L. Hooton (4)                                    Director                                68,334              .64
Clive W. Whittenbury, Ph.D. (5)                          Director                                68,334              .64
William W. Rogers, Jr. (6)                               Director                                23,334              .22
Michael A. Viren, Ph.D. (7)                              Director                                14,667              .14
Broadwing Inc. (8)                                       Stockholder                          1,838,653             17.2
All Executive Officers and Directors
 as a Group (7 persons) (9)                                                                   1,895,922             15.1
</TABLE>

------------------
(1)         c/o Houston Associates, Inc., 4601 North Fairfax Drive, Suite 1200,
            Arlington, Virginia 22203. Includes vested options to purchase
            18,334 shares of common stock.

(2)         c/o ZeroPlus.com, Inc., 12800 Middlebrook Road, Suite 400,
            Germantown, Maryland 20874. Includes vested options to purchase
            250,000 shares of common stock.

(3)         8807 Kenilworth Drive, Springfield, Virginia 22151. Includes vested
            options to purchase 81,084 shares of common stock.

(4)         c/o SAIC, 78990 Science Applications Court, Vienna, Virginia 22183.
            Includes vested options to purchase 18,334 shares of common stock.

(5)         511 Trinity Avenue, Yuba City, California 95991. Includes vested
            options to purchase 18,334 shares of common stock.

(6)         c/o SAIC, 7990 Science Applications Court, Vienna, Virginia 22183.
            Includes vested options to purchase 18,334 shares of common stock.

(7)         505 South River Hills Drive, Temple Terrace, Florida 33617. Includes
            vested options to purchase 14,667 shares of common stock.

(8)         201 East Fourth Street, Cincinnati, Ohio 45202.

(9)         Includes vested options to purchase 419,087 shares of Common Stock.

                                       48

<PAGE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

            Through February 2001, we rented an aircraft for business purposes
from an entity owned by Robert A. Veschi, our President and Chief Executive
Officer. For the years ended March 31, 2001 and 2000, the Company paid $166,700
and $187,519, respectively, for the rental of the aircraft.

            On April 16, 1997, we entered into a consulting agreement with
Alonzo E. Short, Jr., Lt. Gen., USA (ret.), the Chairman of the Board, to
provide services for a fixed monthly amount of $1,000. The amounts paid to him
under that agreement totaled $12,000 for each of the fiscal years ending March
31, 2001 and 2000.

            The Company entered into a consulting agreement with Robert L.
Veshi, the father of our President, Robert A. Veschi, to provide services at a
rate of $150 per hour payable 50% cash and 50% stock options with valuation
based on current market price. For each of the years ended March 31, 2001 and
2000, the Company paid $13,492 and $23,986, respectively, under the consulting
agreement. In addition, the Company issued 1,678 and 3,491 stock options per the
agreement, respectively, in the years ended March 31, 2001 and 2000.

            On August 11, 2000, ZeroPlus.com, Inc. repurchased from its Chief
Executive Officer, Mr. Robert A. Veschi, in a private transaction, 143,165
shares of its common stock at a price per share of $2.0625, such price being the
closing price of such stock on NASDAQ as of the close of business on August 7,
2000. The purchase was accomplished in order to allow Mr. Veschi to repay an
existing general purpose loan secured by his stock in the Company, which loan
was then due and payable. The transaction was approved by the outside directors
of the Company on August 7, 2000.

            All ongoing and future transactions between ZeroPlus.com and any
affiliates will be entered into on terms at least as favorable as could be
obtained from unaffiliated, independent third parties.

                                       49

<PAGE>


ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.

        A.  Exhibits.

<TABLE>
<CAPTION>
EXH. NO.            DESCRIPTION
--------            -----------
<S>                 <C>
3.0                 Restated Certificate of Incorporation, filed December 18, 1998. (3)
3.1                 Restated By-laws. (3)
4.0                 Specimen Copy of Common Stock Certificate. (1)
4.1                 Form of Warrant Certificate. (1)
4.2                 Form of Representative's Warrant Agreement. (1)
4.3                 Form of Warrant Agreement. (1)
10.0                Employment Agreement, Robert A. Veschi, dated April 1, 1996 (management contract or compensatory
                    plan or arrangement).(1)
10.1                United States Patent, Notice of Allowance, dated January 23, 1996. (1)
10.2                Assignment of Patent Rights, dated March 22, 1996. (1)
10.3                1997 Nonqualified Stock Option Plan (management contract or compensatory plan or arrangement). (2)
10.4                Registration Rights Agreement dated as of April 8, 1998 with the purchaser signatories thereto. (3)
10.5                Consulting Agreement dated as of April 16, 1997, with Gen. Alonzo Short (management contract or
                    compensatory plan or arrangement). (4)
10.6                1998 Stock Compensation Plan (management contract or compensatory plan or arrangement). (4)
10.7                Broadwing Master Service Agreement dated September 28, 2000 by and between Broadwing Communications
                    Services, Inc. and ZeroPlus.com, Inc. (5)
10.8                Qwest Communications Corporation Carrier Services Agreement. (6)
11.0                Computation of Per Share Loss. (7)
21.0                Subsidiaries. (7)
23.0                Consent of Grant Thornton LLP. (7)
</TABLE>

------------------
(1)         Incorporated by reference from ZeroPlus.com's Registration Statement
            on Form SB-2, Registration No. 333-3860, as amended and declared
            effective on April 7, 1997 (the "IPO Registration Statement").

(2)         Incorporated by reference from Post-Effective Amendment No. 1 to the
            IPO Registration Statement, as declared effective on May 8, 1999.

(3)         Incorporated by reference from Post-Effective Amendment No. 1 to
            ZeroPlus.com's Registration Statement on Form SB-2, Registration No.
            333-58109, as amended through Post-Effective Amendment No. 3 thereto
            and declared effective on January 27, 1999.

(4)         Incorporated by reference from ZeroPlus.com's Annual Report on Form
            10-KSB for the period ended March 31, 1999.

(5)         Incorporated by reference from ZeroPlus.com's Quarterly Report on
            Form 10-QSB for the period ended September 30, 2000.

(6)         Incorporated by reference from ZeroPlus.com's Quarterly Report on
            Form 10-QSB for the period ended December 31, 2000.

(7)         Filed herewith.

        B.  Reports on Form 8-K.

During the last quarter of our fiscal year ended March 31, 2001, we filed the
following reports on Form 8-K: None.

                                       50

<PAGE>

SIGNATURES

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



                                          ZEROPLUS.COM, INC.
July 13, 2001

                                           By:  /s/ ROBERT A. VESCHI
                                             ----------------------------
                                                Robert A. Veschi
                                                President, Chief Executive
                                                Officer and Director


            In accordance with the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
                                    NAME                                                        TITLE            DATE
                                    ----                                                        -----            ----
<S>                                                                      <C>                                    <C>
 /s/ ALONZO E. SHORT, JR., LT. GEN., USA (RET.)                          Chairman of the Board                  July 13, 2001
--------------------------------------------------------------
        Alonzo E. Short, Jr., Lt. Gen., USA (ret.)

                   /s/ ROBERT A. VESCHI                                  President, Chief                       July 13, 2001
--------------------------------------------------------------           Executive Officer,
                       Robert A. Veschi                                  Director


                   /s/ DONALD J. SHOFF                                   Secretary and                          July 13, 2001
--------------------------------------------------------------           Director
                      Donald J. Shoff

                  /s/ WILLIAM L. HOOTON                                  Director                               July 13, 2001
--------------------------------------------------------------
                      William L. Hooton

               /s/ CLIVE WHITTENBURY, PH.D.                              Director                               July 13, 2001
--------------------------------------------------------------
                Clive Whittenbury, Ph.D.

                /s/ WILLIAM W. ROGERS, JR.                               Director                               July 13, 2001
--------------------------------------------------------------
                    William W. Rogers, Jr.


               /s/ MICHAEL A. VIREN, PH.D.                               Director                               July 13, 2001
--------------------------------------------------------------
                   Michael A. Viren, Ph.D.
</TABLE>


                                       51

<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
                 EXH. NO.        DESCRIPTION
                 --------        -----------
                 <S>             <C>
                 11.0            Computation of Per Share Loss.
                 21.0            Subsidiaries.
                 23.0            Consent of Grant Thornton LLP.
</TABLE>



                                       52