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**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

_______________

**FORM 10-Q**

| ý | **Quarterly report under Section 13 or 15(d) of the Securities ExchangeAct of 1934**        |
|----------|---------------------------------------------------------------------------------------------|
|     | **For the quarterly period ended September 30, 2003**                                       |
|  ̈    | **Transition report pursuant to Section 13 or 15(d) of the SecuritiesExchange Act of 1934** |

_______________

**Commission File Number: 0-29625**

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**Summus, Inc. (USA)***(Exact Name of Registrant as Specified in its Charter)*

| **Florida**                       | **7370, 5045**                     | **65-0185306**        |
|-----------------------------------|------------------------------------|-----------------------|
| *(State or other jurisdiction of* | *(Primary Standard*                | *(I.R.S. Employer*    |
| *incorporation or organization)*  | *Industrial Classification Codes)* | *Identification No.)* |

_______________

**434 Fayetteville Street, Suite 600Raleigh, North Carolina 27601(919) 807-5600***(Address, Including Zip Code, and Telephone Number, Including Area Codeof Registrant's Principal Executive Offices)*

_______________

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

          Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).            Yes  ̈ No þ

          As of October 31, 2003, theregistrant had 63,691,227 shares of its Common Stock, par value $.001 per share, issued and outstanding.

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**FORM 10-Q**

**FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003**

**TABLE OF CONTENTS**

|              |                                                                     | **Page No.** |
|-------------------|--------------------------------------------------------------------------|--------------|
|              |                                                                     |         |
| **PART  I**  | **FINANCIAL INFORMATION**                                                |         |
|              |                                                                     |         |
| Item 1.           | Financial Statements (Unaudited)                                         |         |
|              |                                                                     |         |
|              |   Consolidated Balance Sheets asof September 30, 2003               |         |
|              |      (Unaudited) and December 31, 2002               | **3**        |
|              |                                                                     |         |
|              |   Consolidated Statements of Operations for the Three-Month         |         |
|              |     Periods Ended September 30, 2003 and 2002 (Unaudited) | **4**        |
|              |                                                                     |         |
|              |   Consolidated Statements of Operations for the Nine-Month          |         |
|              |     Periods Ended September 30, 2003 and 2002 (Unaudited) | **5**        |
|              |                                                                     |         |
|              |   Consolidated Statement of Shareholders' Deficitas of         |         |
|              |     September 30, 2003 (Unaudited)                        | **6**        |
|              |                                                                     |         |
|              |   Consolidated Statements of Cash Flows for the Nine-Month          |         |
|              |     Periods Ended September 30, 2003 and 2002 (Unaudited) | **8**        |
|              |                                                                     |         |
|              | Notes to Consolidated Financial Statements(Unaudited)                    | **9**        |
|              |                                                                     |         |
| Item 2.           | Management's Discussion and Analysis of Financial Condition              |         |
|              |   and Results of Operations                                         | **24**       |
|              |                                                                     |         |
| Item 3.           | Quantitative and Qualitative Disclosures About Market                    |         |
|              |   Risk                                                              | **38**       |
|              |                                                                     |         |
| Item 4.           | Controls and Procedures                                                  | **38**       |
|              |                                                                     |         |
| **PART  II** | **OTHER INFORMATION**                                                    |         |
|              |                                                                     |         |
| Item 1.           | Legal Proceedings                                                        | **39**       |
|              |                                                                     |         |
| Item 2.           | Changes in Securities and Use of Proceeds                                | **39**       |
|              |                                                                     |         |
| Item 6.           | Exhibits and Reports on Form 8-K                                         | **41**       |

2
Table of Contents

**PART I.FINANCIAL INFORMATION**

**Item****1.       Financial Statements**

**SUMMUS, INC. (USA)****CONSOLIDATED BALANCE SHEETS**

** **

 

 **September 30, 2003**

** **

** **

** **

**December 31, 2002**

 

** **

 

 

(Unaudited)

 

 
 
 

 

**ASSETS**

 

 
 
 

 

 

 

 

Current assets:

 

 
 
 

 

 

 

 

 

Cash

 

$

387,112

 

 

$

25,990

 

 

Accounts receivable

 

 

312,427

 

 

 

74,261

 

 

Prepaids and other current assets

 

 

71,797

 

 

 

70,000

 

 

 

Total current assets

 

 

771,336

 

 

 

170,251

 

 

Equipment, software and furniture, net

 

 

284,696

 

 

 

496,733

 

 

Other assets

 

 

36,291

 

 

 

34,190

 

 

 

Total assets

 

$

1,092,323

 

 

$

701,174

 

**LIABILITIESAND SHAREHOLDERS' DEFICIT**        
Accounts payable and accrued expenses

 

$

1,779,662

 

 

$

4,186,610

 

Accrued salaries and related costs

 

 

918,161

 

 

 

564,260

 

Preferred stock dividends payable

 

 

188,023

 

 

 

46,878

 

Deferred revenue

 

 

-

 

 

 

7,285

 

Notes payable, current portion

 

 

276,841

 

 

 

269,588

 

Capital lease obligations, current portion

 

 

17,296

 

 

 

77,690

 

 

 

Total current liabilities

 

 

3,179,983

 

 

 

5,152,311

 

 

 

 

 

 

 

 

 

 

 

 

Notes payable, less current portion

 
 
264,797

 

 

 

12,917

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ deficit:

 

 

 

 

 

 

 

 

 

Preferred stock, Series A, $.01 par value; authorized     10,000 shares, 2,078 and 2,328 shares issued and     outstanding at September 30, 2003 and December 31, 2002,     respectively (liquidation preference of $1,000 per share)

 

 

2,078,312

 

 

 

2,328,312

 

 

Preferred stock, Series C, $1,000 stated value; authorized     3,000 shares, 1,250 shares issued and outstanding     at September 30, 2003 (liquidation preference of     $1,000 per share)

 

 

145,991

 

 

 

-

 

 

Preferred stock, Series D, $1,000 stated value; authorized     4,000 shares, 650 shares issued and outstanding at     September 30, 2003 (liquidation preference of     $1,000 per share)

 

 

433,333

 

 

 

-

 

 

Common stock, $.001 par value; authorized 100,000,000     shares, 62,976,959 and 54,919,276 shares issued and     outstanding at September 30, 2003 and December 31, 2002,     respectively

 

 

62,977

 

 

 

54,919

 

 

Additional paid-in capital

 

 

41,998,648

 

 

 

36,669,211

 

 

Deferred compensation

 

 

(94,690

) 

 

 

(227,132

) 

 

Accumulated deficit

 

 

(46,749,409

) 

 

 

(43,061,745

)

 

Treasury stock, at cost (38,500 shares)

 

 

(227,619

) 

 

 

(227,619

)

 

 

Total shareholders’ deficit

 

 

(2,352,457

) 

 

 

(4,464,054

)

 

 

Total liabilities and shareholders’ deficit

 

$

1,092,323

 

 

$

701,174

 

*The accompanying notes constitute an integral part of these consolidatedfinancial statements.*

3
Table of Contents

**SUMMUS, INC. (USA)**

**CONSOLIDATED STATEMENTS OFOPERATIONS (UNAUDITED)**

 

**Three-Month PeriodEnded**

** **

** **

**September 30, 2003**

 

 

**September 30, 2002**

** **

 

 

 

 

** **

Revenues:

 

 

 

 

 

    Wireless applications and contracts

$

182,391 

 

 $

36,435 

    Wireless license fees

 

1,000 

 

 

 – 

            Totalrevenues

 

183,391 

 

 

36,435 

Cost of revenues:

 

 

 

 

 

     Wireless applications and contracts

 

109,633 

 

 

 52,261 

     Wireless license fees

 

 – 

 

 

 – 

             Total costof revenues

 

109,633 

 

 

52,261 

Gross profit

 

73,758 

 

 

(15,826)

 

 

 

 

 

 

Selling, general and administrative expenses

 

1,232,317 

 

 

 1,547,452 

Non-cash compensation

 

44,148 

 

 

44,146 

Research and development

 

280,236 

 

 

152,819 

Non-cash consulting expense

 

5,454 

 

 

79,143 

Interest expense, net

 

27,334 

 

 

429,926 

Non-cash settlements

 

(69,741)

 

 

– 

Net loss

$

(1,445,990)

 

 $

(2,269,312)

 

 

 

 

 

 

 

 

 

 

 

 

Net loss applicable to common shareholders:

 

 

 

 

   

    Net loss

 $

(1,445,990)

 

 $

(2,269,312)

    Beneficial conversion feature of preferred stock
 
(579,324)
  
– 

    Preferred stock dividends

 

 (47,952)

 

 

(45,952)

Net loss applicable to common shareholders

$

(2,073,266)

 

 $

(2,315,264)
      
Per share amounts (basic and diluted)

$

(0.03)

 

 $

(0.05)
 
 

 

 

 

 

Weighted average shares of common stock outstanding

 

62,681,297 

 

 

49,196,685 

*The accompanying notes constitute an integral part of these consolidatedfinancial statements.*

4
Table of Contents

**SUMMUS, INC. (USA)**

**CONSOLIDATED STATEMENTS OFOPERATIONS (UNAUDITED)**

 

**Nine-Month Period Ended**

** **

** **

**September 30, 2003**

 

 

**September 30, 2002**

** **

 

 

 

 

** **

Revenues:

 

 

 

 

 

     Wireless applications and contracts

$

  529,921 

 

$

86,435 

     Wireless license fees

 

248,201 

 

 

 – 

      Contracts and license fees

 

 –  

 

 

228,568 

             Totalrevenues

 

778,122 

 

 

315,003 

Cost of revenues:

 

 

 

 

 

      Wireless applications and contracts

 

 337,752 

 

 

52,261 

      Wireless license fees

 

 – 

 

 

– 

      Contracts and license fees

 

 – 

 

 

84,434 

              Total costof revenues

 

337,752 

 

 

136,695 

Gross profit

 

440,370 

 

 

178,308 

 

 

 

 

 

 

Selling, general and administrative expenses

 

3,712,981 

 

 

5,088,280 

Non-cash compensation

 

132,442 

 

 

319,854 

Research and development

 

809,207 

 

 

468,661 

Non-cash consulting expense

 

110,192 

 

 

797,161 

Interest expense, net

 

51,775 

 

 

459,186 

Non-cash settlements

 

(1,409,031)

 

 

  – 

Net loss

$

(2,967,196)

 

 $

(6,954,834)

 

 

 

 

 

 

 

 

 

 

 

 

Net loss applicable to common shareholders:

 

 

 

 

   

     Net loss

 $

 (2,967,196)

 

 $

(6,954,834)

     Beneficial conversion feature of preferred stock
 
(579,324)
  
  – 

     Preferred stock dividends

 

 (141,144)

 

 

 (136,162)

Net loss applicable to common shareholders

$

  (3,687,664)

 

 $

(7,090,996)
       
Per share amounts (basic and diluted)

$

  (0.06)

 

 $

(0.16)

 

 

 

 

 

 

Weighted average shares of common stock outstanding

 

 59,862,164 

 

 

45,066,489 

*The accompanying notes constitute an integral part of these consolidatedfinancial statements.*

5
Table of Contents

  **SUMMUS, INC. (USA)**

**CONSOLIDATED STATEMENT OFSHAREHOLDERS' DEFICIT**

 

**Preferred Stock**
**Common Stock**
 
**Series A****Series C****Series D** 
 

**Shares**

**Amount**

**Shares**

**Amount**

**Shares**

**Amount**

**Shares**

**Amount**

Balance at December 31, 2002

2,328 

$2,328,312 

– 

$           – 

–

$            – 

54,919,276

$ 54,919

   Common stock and warrants sold for cash

– 

– 

– 

– 

–

– 

2,703,903

2,704

   Series C and D preferred stock sold for cash

– 

– 

1,250 

1,250,000 

650

650,000 

–

–

   Recognition and accretion of beneficial       conversion feature of Series       C and D preferred stock

– 

– 

– 

(479,576)

–

– 

–

–

   Value of Series C and D warrants

– 

– 

– 

(624,433)

–

(216,667)

–

–

   Common stock and options issued        for services

    – 

    – 

    – 

– 

–

– 

219,266

219

   Preferred stock dividends

– 

– 

– 

– 

 –

 – 

 –

  –

   Common stock and warrants issued     in settlement of   vendor liabilities

– 

– 

– 

– 

–

– 

 878,265

 878

    Common stock issued in  non-cash          settlements

– 

– 

– 

– 

–

– 

1,461,717

 1,462

   Amortization of deferred      compensation

 – 

 – 

 – 

– 

 –

 – 

–

–

   Conversion of Series A preferred stock

(250)

(250,000)

 – 

– 

 –

 – 

17,557

18

   Warrant exercises

– 

– 

– 

– 

 –

 – 

 2,776,975

 2,777

   Net loss for the period

– 

– 

– 

– 

–

– 

 –

 –

Balance September 30, 2003 (Unaudited)

2,078 

$2,078,312 

1,250 

$145,991 

650

$  433,333 

62,976,959

$ 62,977

CONTINUED ON NEXT PAGE
6
Table of Contents

**Consolidated Statement of Shareholder's Deficit (continued)**

 

**Additional**
   
**Total**

 

**Paid-in**

**Deferred**

**Accumulated**

**Treasury**

**Shareholders'**

 

**Capital**

**Comp**

**Deficit**

**Stock**

**Deficit**

Balance at December 31, 2002

$ 36,669,211 

$ (227,132)

$(43,061,745)

 $ (227,619)

$ (4,464,054)

   Common stock and warrants sold for cash

 1,323,903 

– 

 – 

– 

1,326,607 

   Series C and D preferred stock sold for cash

(35,263)

– 

– 

– 

1,864,737 

   Recognition and accretion of beneficial       conversion feature of Series       C and D preferred stock

1,058,900 

– 

(579,324)

– 

– 

   Value of Series C and D warrants

841,100 

– 

– 

– 

– 

   Common stock and options issued        for services

97,742 

– 

 – 

– 

  97,961 

   Preferred stock dividends

– 

– 

(141,144)

– 

  (141,144)

   Common stock and warrants issued     in settlement of   vendor liabilities

 500,453 

– 

– 

– 

501,331 

    Common stock issued in  non-cash          settlements

516,042 

– 

– 

– 

 517,504 

   Amortization of deferred      compensation

– 

132,442 

– 

– 

132,442 

   Conversion of Series A preferred stock

249,982 

 – 

 – 

 – 

  – 

   Warrant exercises

776,578 

 – 

– 

 – 

  779,355 

   Net loss for the period

  – 

– 

(2,967,196)

– 

(2,967,196)

Balance September 30, 2003 (Unaudited)

$ 41,998,648 

$(94,690)

$(46,749,409)

$(227,619)

$ (2,352,457)

*The accompanying notes constitute an integral part of these consolidatedfinancial statements.*

7
Table of Contents

**SUMMUS, INC. (USA)**

**CONSOLIDATED STATEMENTS OFCASH FLOWS (UNAUDITED)**
  
**Nine-Month Period Ended**

 

 

**September 30, 2003**

** **

** **

**September 30, 2002**

**Operating activities**

 

 

 

 

 

Net loss

$

(2,967,196)

 

$

(6,954,834)

Adjustments to reconcile net loss to net cash used in operating

 

 

 

 

  

  activities:

 

 

 

 

  

     Non-cash compensation

 

132,442 

 

 

319,854 

     Non-cash settlements

 

(1,409,031)

 

 

— 

     Common stock and options issued for services

 

110,192 

 

 

797,161 

     Loss on disposal of fixed assets
 
12,671
  
— 

     Depreciation

 

211,087 

 

 

287,229 

     Convertible debt, non-cash interest

 

— 

 

 

390,250 

Changes in operating assets and liabilities:

 

 

 

 

    

     Accounts receivable

 

(238,166)

 

 

64,589 

     Other assets

 

(3,898)

 

 

(58,704)

     Accounts payable and accrued expenses

 

293,561 

 

 

(697,817)

     Accrued salaries and related costs

 

353,901 

 

 

78,352 

     Deferred revenue

 

(7,285)

 

 

25,000 

Net cash used in operations

 

 (3,511,722)

 

 

 (5,748,920)

**Investing activities**

 

 

 

 

 

Purchases of computer equipment

 

(11,721) 

 

 

(38,886)

Net cash used in investing activities

 

(11,721) 

 

 

  (38,886)

**Financing activities**

 

 

 

 

 

Proceeds from sale of common stock and warrants

 

1,326,607 

 

 

  5,779,231 

Proceeds from issuance of convertible preferred stock
 
1,864,737 
  
500,000 

Proceeds from exercise of warrants

 

779,355 

 

 

— 

Principal payments on capital lease obligations and notes

 

(86,134)

 

 

 (208,439)

Net cash provided by financing activities

 

3,884,565 

 

 

6,070,792 

Net increase in cash

 

361,122

 

 

282,986 

Cash at beginning of period

 

25,990 

 

 

115,972 

Cash at end of period

$

387,112

 

 $

398,958 

**Supplemental disclosures of cash flow information**

 

 

 

 

 

Cash paid for interest

$

16,705 
 
$

15,880 

*The accompanying notes constitute an integral part of these consolidatedfinancial statements.*

8
Table of Contents

**Summus, Inc. (USA)**

**Notes to Consolidated Financial Statements**

 

**1.          Business, Organizationand Basis of Presentation**

*Business*

                       Summus, Inc. (USA) ("Summus, Inc.” or the "Company"), formerly known as High Speed Net Solutions, Inc., is engaged primarilyin the development of efficient information processing solutions for the mobile and wireless markets. Prior to the second quarterof 2002, Summus’ primary business activities included providing services under research and development contracts forgovernmental agencies in the areas of complex imaging and object recognition as well as the licensing to third parties its Photo IDand WI compression and decompression technology. Although the Company’s core business activities are now focused on themobile and wireless market, Summus will continue to evaluate business opportunities related to services and products that it hadformerly provided as they become available, particularly opportunities that offer growth potential with the business objectives andmission of the Company’s BlueFuel platform.  The core of the Company's business plan is to focus on the emergingwireless and mobile market. Summus, Inc. has developed software, technology and applications to enable information processing andresource management to include, but not be limited to, the creation, transmission, playing and management of content over wirelessnetworks. The Company's technology platform, which provides the foundation for its current and future products and services, isdesigned to address the bandwidth, power, memory, and usability constraints of existing wireless network infrastructure. Thisplatform will enable more efficient use of existing and future bandwidth allocations, resulting in a perceived bandwidth increaseby the mobile end-user. The platform’s objective is to create a superior mobile end-user experience, which will impactdevices, wireless carrier infrastructure and mobile applications. 

                       The Company has completed development of and has launched sixteen (16) wireless applications. Nine (9) wireless carriers in theUnited States and six (6) international wireless carriers currently deploy at least one or a combination of the sixteen (16)wireless applications that have been completed by the Company. It launched its first wireless application during the second quarterof 2002. These applications can be purchased by the end-user as a one-time purchase, or a monthly subscription, depending oncontent, product function, and/or carrier preferences. The Company earns revenue, which is net of all third-party platform and/orwireless carriers distribution fees, from the deployment of these applications in three methods:
- Revenue earned from an application is shared with content providers in accordance withcontent provider agreements;
- Revenue earned from an application is retained by the Company and the Company pays thecontent provider a fixed monthly fee for the rights for its content; and
- The Company retains all of the revenue earned on applications it develops internally,without content partners.

                       The majority of the applications completed and deployed by the Company, as well as planned future applications, have been developedby the Company through a process that involves securing agreements with content providers and carriers, and developing andlaunching the applications. The Company outsources the infrastructure needed to host and deliver the transactions for itsapplication end-users.

*Organization*

                       On February 16, 2001, High Speed Net Solutions, Inc. (“High Speed”) and Summus, Ltd. entered into a contract whereby,in legal form, High Speed acquired all the assets of Summus, Ltd. Although the legal form of the transaction was an acquisition ofassets, in substance the transaction represented a Summus, Ltd. capital transaction accompanied by a recapitalization. Since theSummus, Ltd. shareholders were the majority owners of the entity after this transaction was completed, the transaction wasaccounted for as an issuance of stock by Summus, Ltd. in exchange for the net monetary assets of High Speed, accompanied by arecapitalization of Summus, Ltd. The accounting for the transaction was essentially equivalent to that resulting from a reverseacquisition, except that no goodwill or other intangible assets were recorded.

9
Table of Contents

**1.          Business, Organizationand Basis of Presentation (continued)**

                       Prior to this recapitalization transaction, High Speed was a publicly-traded entity and Summus, Ltd. was a privately-held company.Since the legal form of the transaction was an acquisition of Summus, Ltd. by High Speed, the legal entity, which represented thecombined, recapitalized Summus, Ltd., continued to use the High Speed trade name and its stock continued to trade in the publicmarket under the High Speed name.  As a result of the transaction, the historical financial statements of Summus, Ltd., foraccounting purposes, are deemed to be those of the Company.

                       On February 27, 2002, the Company officially changed its legal name from High Speed Net Solutions, Inc. to Summus, Inc. (USA).Therefore, the financial statements presented herein and labeled as the financial statements of Summus, Inc. (USA) represent thehistorical financial statements of Summus, Ltd., now renamed Summus, Inc. (USA) and also referred to herein as “theCompany.” References herein to “High Speed” refer to High Speed Net Solutions prior to the February 16, 2001recapitalization transaction.

*Basis of Presentation*

                       The condensed consolidated financial statements of the Company included in this quarterly report on Form 10-Q are unaudited. In theopinion of management, such financial statements contain all adjustments (consisting of normal recurring adjustments) necessary topresent fairly the financial position of the Company as of September 30, 2003; the results of operations for the three andnine-month periods ended September 30, 2003 and 2002; shareholders' deficit as of September 30, 2003; and cash flows for thenine-month periods ended September 30, 2003 and 2002.

                       The accompanying unaudited condensed consolidated financial statements as of and for the three and nine-month periods endedSeptember 30, 2003 have been prepared in accordance with accounting principles generally accepted in the United States for interimfinancial information and in accordance with Article 10 of Regulation S-X. Certain information and note disclosures normallyincluded in the Company's annual financial statements prepared in accordance with generally accepted accounting principles havebeen condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with thefinancial statements and accompanying notes included in the Company’s audited financial statements for the year endedDecember 31, 2002, which were filed with the Securities and Exchange Commission on March 31, 2003, in the Company's annual reporton Form 10-K for the fiscal year ended December 31, 2002. The Form 10-K is available through the Internet in the SEC's EDGARdatabase at www.sec.gov or from the Company upon request.

                       The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets andthe satisfaction of liabilities in the normal course of business. As shown in the financial statements at September 30, 2003, theCompany has incurred a net loss for the quarter of approximately $1,445,990, has experienced negative cash flows from operations,and has a significant deficiency in working capital at September 30, 2003. The Company’s continuation as a going concern isdependent on its ability to generate sufficient cash flow to meet its obligations on a timely basis, to obtain additionalfinancing, and ultimately to attain profitability. The Company is actively promoting and expanding its product line and pursuingadditional financing from third parties. Management expects to be able to attract additional capital to continue to fund and expandoperations and also expects that increased revenues will reduce its operating losses in future periods. However, there can be noassurance that management’s plan will be executed as anticipated. The financial statements presented herein do not includeany adjustments relating to the recoverability of assets and classification of liabilities that might be necessary should theCompany be unable to continue as a going concern.

**2.          Summary of SignificantAccounting Policies**

*Estimates*

                       The preparation of financial statements in conformity with accounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses duringthe reporting period. Actual results could differ from those estimates.

10
Table of Contents

**2.          Summary of SignificantAccounting Policies (continued)**

*Revenue Recognition and Related Costs*

*                     Wireless applications and contracts*

                     Commencing during the second quarter of 2002, our resources were dedicated to the development of solutions for the mobile andwireless markets.  Revenues earned from wireless applications are recognized upon delivery and acceptance by the end-usereither as a one-time purchase or a monthly subscription.  Wireless application revenue reported by Summus is net of allthird-party platform and/or carrier distribution fees, and any revenue Summus shares with its content partners.  TheCompany’s accounts receivable balance includes amounts earned by Summus, as well as amounts to be collected on behalf of itscontent partners.  The Company’s accounts payable balance includes amounts payable to its content partners based onnegotiated contract terms.

                       Costs associated with the sale and delivery of wireless applications primarily consist of third party hosting fees and contentinformation provided by certain content providers. These costs are incurred on a monthly basis and are primarily fixed in natureregardless of the revenue generated by the related applications.

                       During January of 2002, the Company entered into a strategic partnership agreement with a global leader in semiconductor,telecommunication and digital convergence technology, related to the mobile and wireless markets for which it received$100,000.  Revenue earned under this agreement was recognized ratably over the twelve-month term of theagreement. 

                       Periodically, we enter into non-recurring engineering arrangements with our content partners.  Generally, under the terms ofthese agreements, we receive funding upfront to complete projects. The funding we receive upfront is recorded as deferred revenueand is recognized as revenue under the terms of the individual arrangements.  Deferred revenue represents amounts received forwhich the Company has not yet completed its contractual obligations.

*                       Wireless License Fees* 

                       We recognize revenue from licensee fees for wireless software applications in accordance with the provisions of AICPA Statement ofPosition 97-2, “Software Revenue Recognition”, as amended by AICPA Statement of Position 98-9 “Modification ofSOP No. 97-2 Software Revenue Recognition with Respect to Certain Transactions.” Revenue from software license fees isgenerally recognized upon delivery provided that a contract has been executed, the vendor fee is fixed or determinable, nosignificant vendor obligations or uncertainties surrounding customer acceptance remain, and collection of the resulting receivableis deemed probable.

                       There were no costs related to the wireless license fee revenue generated during the nine months ended September 30, 2003 as thelicense fee revenue related to technology that had been previously developed by the Company, and there were no costs forinstallation, delivery or customization, or other related costs.

*                       Contracts and license fees *

                       During the first quarter of 2002, we derived our revenues primarily from research and development contracts for governmentalagencies and the commercial licensing of our technology.  We recognized revenue on these contracts at the time services wererendered based upon the terms of individual contracts.  Regarding the commercial licensing of our technology, we followed theprovisions of AICPA Statement of Position 97-2, “Software Revenue Recognition”, as amended by AICPA Statement ofPosition 98-9 “Modification of SOP No. 97-2 Software Revenue Recognition with Respect to Certain Transactions.” Revenuefrom software license fees is generally recognized upon delivery provided that a contract has been executed, the vendor fee isfixed or determinable, no significant vendor obligations or uncertainties surrounding customer acceptance remain, and collection ofthe resulting receivable is deemed probable.

                       Historically, costs of Contracts and License Fee revenue were primarily costs of providing contract services.  The costs oflicense fee revenue have not been separately maintained and have historically been insignificant. 

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**2.          Summary of SignificantAccounting Policies (continued)**

*Segments*

                       Management has structured the Company's internal organization as one business segment from which all operating decisions andoperating results are made and evaluated.

*Equipment, Software, and Furniture*

                       Equipment, software, and furniture is stated at cost. Depreciation is computed over the estimated useful lives of the assets(generally three to seven years) using the straight-line method. Amortization of capital lease assets is included in depreciationexpense.

*Software Development Costs*

*                     *Costs for the development of new software and substantial enhancements to existing software are expensed as incurredand are classified as Research and Development costs until technological feasibility has been established, at which time anyadditional costs would be capitalized. The Company believes its current process for developing software is essentially completeconcurrently with the establishment of technological feasibility; accordingly, no costs have been capitalized on the accompanyingbalance sheet.

*Income Taxes*

                       Income taxes are accounted for using the liability method in accordance with Statement of Financial Accounting Standards ("SFAS")No. 109, *"Accounting for Income Taxes."* Under SFAS 109, deferred tax assets or liabilities are computed based upon thedifference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rateapplicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits arebased on the changes in the asset or liability from period to period. If available evidence suggests that it is more likely thannot that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce thedeferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance would beincluded in the provision for deferred income taxes in the period of change.

S*tock-Based Compensation*

                       The Company has stock-based compensation plans for employees, consultants and directors.  The Company accounts for those plansunder the intrinsic value method prescribed by APB Opinion No. 25, *Accounting for Stock Issued to Employees (“APB25”)* and related interpretations.  For options granted under those plans with an exercise price equal to the marketvalue of the stock on the date of grant, no compensation cost is recognized in net operations as reported in the consolidatedstatement of operations.  Compensation cost is recognized in net earnings/loss for awards granted under those plans with anexercise price less than the market value of the underlying common stock on the date of grant.  Such costs are recognizedratably over the vesting period.  The Company recorded non-cash compensation related to the amortization of deferredcompensation arising from stock options granted in prior periods with exercise prices below the fair market value of the underlyingstock on the date of grant, subject to vesting totaling $132,442 and $319,854, for the nine-month periods ended September 30, 2003and 2002, respectively and $44,148 and $44,146, for the three-month periods ended September 30, 2003 and 2002,respectively.

                       The following table illustrates the effect on net loss and net loss per share as if the Company had applied the fair valuerecognition provision of Statement of Financial Accounting Standards No. 123, *Accounting for Stock-Based Compensation(“SFAS 123”). * In accordance with SFAS 123, the fair value of each option grant was determined by using theBlack-Scholes option pricing model with the following weighted average assumptions for the three and nine-month periods endedSeptember 30, 2003 and 2002: dividend yield of 0%; volatility of 1.379 and 1.789, respectively; risk-free interest rate of 2.75%and 4.50%, respectively, and expected option lives of 5 years.

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**2.          Summary of SignificantAccounting Policies (continued)**

**Three-Month Period Ended September 30 (Unaudited)**

**Nine-Month Period Ended September 30 (Unaudited)**

 

**2003**

**2002**

**2003**

**2002**

Net loss applicable to common shareholders

$

(2,073,266)

$

(2,315,264)

$

(3,687,664)

$

(7,090,996)

 

 

 

 

 

 

 

 

 

Non-cash compensation charges included in net loss

         44,148 

        44,146 

         132,442 

      319,854 

Stock-based employee compensation cost that     would have been  included in net loss under the     fair value method

 (71,765)

  (102,936)

 (242,203)

  (1,200,795)

 

 

 

 

 

Adjusted net loss applicable to common     shareholders

 $

 (2,100,883)

 $

 (2,374,054)

 $

 (3,797,425)

 $

 (7,971,937)

 

 

 

 

 

Basic and diluted loss per share:

 

 

 

 

Reported net loss applicable to common     shareholders

 $

  (0.03)

 $

  (0.05)

 $

 (0.06)

 $

 (0.16)

Non-cash compensation charges included in net     loss

         0.00 

          0.00 

         0.00 

          0.01 

Stock-based employee compensation cost that     would have been included in net loss under the     fair value method

 $

  (0.00)

         (0.00)

 $

 (0.00)

         (0.03)

 

 

 

 

 

Adjusted basic and diluted loss per share applicable to      common shareholders

         $

 (0.03)

   $

 (0.05)

 $

 (0.06)

   $

 (0.18)

                       The Company accounts for stock-based compensation to non-employees of the Company, primarily consultants and advisors, at the fairvalue of the equity instrument in accordance with the provisions of SFAS No. 123 at the time the services are performed. Non-cashconsulting expense related to such stock based compensation for the three -month periods ended September 30, 2003 and 2002 was$5,454 and $79,143, respectively.

*Loss Per Share*

                       Loss per share has been calculated in accordance with SFAS No. 128, *"Earnings Per Share."* Basic loss per share was computedby dividing the net loss applicable to common shareholders for each period presented by the weighted average number of shares ofcommon stock outstanding for such period, as adjusted for the recapitalization. Although the Company has potential common stockequivalents related to its outstanding stock options, warrants and preferred stock, these potential common stock equivalents werenot included in diluted loss per share for each period presented because the effect would have been antidilutive.

*New Accounting Pronouncements*

                       In August 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards143, *“Accounting for Asset Retirement Obligations”* (“SFAS 143”).  SFAS 143 requires an entityto record a liability for an obligation associated with the retirement of an asset at the time that the liability is incurred bycapitalizing the cost as part of the carrying value of the related asset and depreciating it over the remaining useful life of thatasset.  The standard is effective for financial statements for fiscal years beginning after June 15, 2002 and was adopted bythe Company on January 1, 2003.  The adoption of SFAS 143 had no impact on the Company’s results of operations,financial position or cash flows.

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**2.          Summary of SignificantAccounting Policies (continued)**

                       In April 2002, the FASB issued Statement of Financial Accounting Standards 145, *“Rescission of FASB Statements No. 4, 44,and 62, Amendment of FASB Statement No. 13, and Technical Corrections”* (“SFAS 145”).  SFAS 145 requiresgains and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than asextraordinary items as previously required under FASB Statement No. 4.  Extraordinary treatment will be required for certainextinguishments as provided in APB 30.  SFAS 145 also amends FASB Statement No. 13 to require certain modifications to capitalleases be treated as a sale-leaseback and modifies the accounting for sub-leases when the original lessee remains a secondaryobligor (or guarantor).  SFAS 145 is effective for all fiscal years beginning after May 15, 2002 and was adopted by theCompany on January 1, 2003.  The adoption of SFAS 145 had no impact on the Company’s results of operations, financialposition or cash flows.

                       In July 2002, the FASB issued Statement of Financial Accounting Standards 146, *“Accounting for Costs Associated with Exitor Disposal Activities”* (“SFAS 146”).  SFAS 146, which superseded EITF Issue 94-3, *“LiabilityRecognition for Certain Employee Termination Benefits and Other Cost to Exit an Activity (including Certain Costs Incurred in aRestructuring)”*, requires that a liability for a cost associated with an exit or disposal activity be recognized when theliability is incurred.  Under Issue 94-3, a liability for an exit cost was recognized at the date of an entity’scommitment to an exit plan.  The provisions of SFAS 146 are effective for exit or disposal activities that are initiated afterDecember 31, 2002.  The adoption of SFAS 146 had no impact on the Company’s results of operations, financial position orcash flows.

                       In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, *Accounting for Stock-BasedCompensation*   - *Transition and Disclosure* (“SFAS 148”).  SFAS 148 provides transition guidancefor companies that adopt the fair value method for stock-based employee compensation and has certain disclosure provisions that areeffective as of December 31, 2002.  Due to the Company continuing to apply the intrinsic value provisions of APB 25, theadoption of SFAS 148 did not have any impact on its net loss or financial position.  The disclosure provisions of thisstatement have been incorporated herein.

                       In November 2002, the FASB issued FASB Interpretation No. 45 (“FIN 45”), which expands previously issued accountingguidance and disclosure requirements for certain guarantees. FIN 45 requires companies to recognize an initial liability for thefair value of an obligation assumed by issuing a guarantee.  The provision for initial recognition and measurement of theliability will be applied on a prospective basis to guarantees issued or modified after December 31, 2002.  The Company doesnot expect the adoption of FIN 45 to have a material impact on the Company’s results of operations, financial position orcash flows.

                       In January 2003, the FASB issued FIN 46, *Consolidation of Variable Interest Entities* (“FIN 46”).* *FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the beneficiaryin the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for theentity to finance its activities without additional subordinated financial support from other parties.  The Company wasrequired to adopt the provisions of FIN 46 effective July 1, 2003, however, the FASB has deferred application of theInterpretation in limited circumstances. The Company does not expect the adoption of FIN 46 to have a material impact on theCompany’s results of operations, financial position or cash flows.

                       In May 2003, the FASB issued SFAS No. 150, *Accounting for Certain Financial Instruments with Characteristics of both Liabilitiesand Equity* ("SFAS 150"). This SFAS 150 changes the accounting for certain financial instruments, which under previous guidancecould be accounted for as equity. SFAS 150 requires that those instruments be classified as liabilities in statements of financialposition. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effectivefor fiscal periods beginning after December 15, 2003. The Company has not issued any equity instruments of this type since May 31,2003 and is currently evaluating the impact of adoption of SFAS 150 on its financial position and results operations.

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**3.          Notes Payable**

                       On September 4, 2000, the Company entered into an agreement to obtain the rights to certain software technology. In exchange forthese rights, the Company agreed to pay $200,000 in eight equal installments of $25,000 beginning in 2001 and continuing over thenext two years. On July 19, 2002, the payment terms of this agreement were amended for an adjustment in the payment terms, wherebythe Company issued 235,000 shares of unregistered common stock with registration rights to repay $87,500 of the outstandingbalance.  The remaining balance of $77,500 was scheduled to be repaid in 6 equal monthly installments commencing July 19,2003, however no payments have been made on this balance subsequent to July 19, 2003, and therefore the agreementis in default. Theoutstanding principal balance of this note as September 30, 2003 is $77,500. 

                       On May 23, 2003, the Company executed a settlement agreement with Holland & Knight LLP (“H&K”).  The termsof the H&K agreement are more fully described in Note 7 below.  Under the terms of the H&K agreement, the Companyentered into a note payable agreement whereby it agreed to make payments totaling $325,000, consisting of monthly payments of$9,028 over a three year period commencing on June 1, 2003. Since the H&K agreement did not provide for an interest ratecomponent pertaining to this payment plan, a rate 20% per annum was used to present value the note, as more fully described in Note7, resulting in a net present value of $242,926.  As of September 30, 2003, the current portion of this note totaled $71,190and the non-current portion totaled $145,995.

                       On September 30, 2003, the Company executed a settlement agreement with Raytheon Company (“Raytheon”), regarding a notepayable agreement that had previously been in default and had accrued interest at a rate of 18% per annum.  The terms of theRaytheon agreement are more fully described in Note 7 below.  Under the terms of the Raytheon agreement, the Company enteredinto a note payable agreement whereby it agreed to make payments totaling $87,516, consisting of an initial payment of $10,000(paid on October 3, 2003); six (6) equal monthly installments of $3,000; fourteen (14) monthly installments of $4,000; and onefinal installment of $3,516.  Since the Raytheon agreement did not provide for an interest rate component pertaining to thispayment plan, a rate 20% per annum was used to present value the note, as more fully describe in Note 7, resulting in a net presentvalue of $74,305.  As of September 30, 2003, the current portion of this note totaled $38,151 and the non-current portiontotaled $36,154.

                       On September 3, 2003, the Company negotiated a revised settlement agreement with Analysts International Corporation(“AIC”), a former service provider.  The terms of the revised AIC settlement agreement are more fully described inNote 7 below.  Under the terms of the revised AIC settlement agreement, the Company agreed to pay a monthly payment of $7,500until the total indebtedness, including interest, is paid in full.  As of September 30, 2003, the current portion of this notetotaled $90,000 and the non-current portion totaled $82,648. Prior to the revised AIC settlement agreement on September 3, 2003,the amount due to AIC was recorded as a current liability, included in Accounts Payable and Accrued Expenses, since the Companywas in default under the terms of the initial settlement agreement.

**4.          Common Stock andWarrants**

                       From January 1, 2003 through September 30, 2003, the Company sold to private accredited investors in negotiated transactions2,703,903 shares of its unregistered common stock, warrants to purchase an additional 316,000 shares of common stock, and re-priced4,242,261 previously issued warrants. These transactions were in two forms.  The first form involved purchases of common stockat prices which were above the trading value of the Company’s freely-tradable shares and allowed these investors to reducethe exercise price of a certain number of their previously purchased warrants, typically allowing them to reprice 2 warrants forevery share purchased. The other form allowed warrant holders to reduce the exercise price of previously issued warrants if theholder exercised those repriced warrants immediately. The original exercise prices of the repriced warrants ranged between $0.60and $5.25, per share.  The repriced exercise prices ranged between $0.25 and $1.69, per share.  Total cash proceeds fromthe sale of the shares; new warrants and the exercise of repriced existing warrants was $1,326,607. 

                       From January 1, 2003 through September 30, 2003, the Company issued 2,776,975 shares of unregistered common stock upon the exerciseof warrants with exercise prices ranging from $0.25 to $0.47 per share.  Of the 2,776,975 exercised warrants, 2,767,075 wereexercised in connection with the repricing of the exercise price of the warrants as described in the previous paragraph.  Theinitial exercise prices of the warrants ranged between $0.60 and $5.25. The repriced exercise prices ranged between $0.25 and$1.69. The exercise of these warrants generated gross proceeds of $779,355.

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**4.          Common Stock and Warrants(continued)**

                       During the nine month period ended September 30, 2003, Summus issued to consultants 219,266 shares of unregistered common stock and56,800 stock options for services provided to the Company for an aggregate value of $90,571.  The shares of the unregisteredcommon stock were valued at $78,595 based on the negotiated terms of each contract and the options were valued at $11,976 using theBlack-Scholes option-pricing model.  Also during the nine month period ended September 30, 2003, the Company granted 33,000options to the sole member of its Advisory Board.  This option vests quarterly over a one year period and has an exerciseprice equal to the traded per share value of the underlying common stock on the date of grant. The value of the vested portion ofthe option of $4,621 was determined using the Black-Scholes option-pricing model and was recorded as non-cash consulting expenseduring the nine month period ended September 30, 2003.

                       During the nine-month period ended September 30, 2003, Summus issued 878,265 shares of its unregistered common stock valued at$301,331 to entities as payment on outstanding vendors balances.  During June 2003, Summus issued 333,333 warrants to DonaldT. Locke, a consultant who acts in the capacity of the general counsel to Summus, as payment for $200,000 of fees owed to Mr.Locke. Mr. Locke earned these fees since he became a consultant to the Company in November 2001.  The warrants have anexercise price of $0.60 per share and have a contractual life of 5 years.

                       As of September 30, 2003, the Company has reserved shares of its authorized 100,000,000 shares of common stock for future issuanceas follows:

Series A convertible preferred stock and related dividends

159,131

Series C convertible preferred stock

5,000,000

Series D convertible preferred stock

3,250,000

Outstanding common stock warrants

34,822,502

Outstanding stock options

8,159,538

Possible future issuance under stock option plans

340,462

          Total

51,731,633

**5.     Preferred Stock**

**                     **In accordance with its amended and restated certificate of incorporation, the Company is authorized to issue up to5,000,000 shares of preferred stock.  Except as required by Florida state law, the holders of the outstanding shares of SeriesA, C, D & E preferred stock are not entitled to vote on matters submitted to the Company's shareholders for voting. However,approval of holders of a majority of the outstanding shares of Series A, C, D & E preferred stock is required prior to theissuance of a new series of preferred stock that ranks senior to such preferred stock.

**Series A Preferred Stock**

                       As of September 30, 2003, the Company had 2,078 shares of Series A convertible preferred stock issued and outstanding. The holdersof the Series A convertible preferred stock are entitled to receive cumulative cash dividends at a rate of 8% per annum of theinitial liquidation preference of $1,000 per share (the " Series A Liquidation Preference"). The Company, at its election, canprovide for the payment of dividends on the Series A convertible  preferred stock through the issuance of additional shares ofSeries A preferred stock having an aggregate initial liquidation preference equal to the amount of cash dividends otherwisepayable. Dividends are cumulative from the date of issuance and are payable, when, as and if declared by the Board of Directors, onMarch 31 and September 30 of each year, commencing on September 30, 2000.  As of September 30, 2003, cumulative dividendsaccrued were $188,023.

                       Each share of the Series A convertible preferred stock is convertible at the option of the holder, at any time after the date ofissuance, into shares of common stock equal to the Series A Liquidation Preference divided by the initial conversion price of$14.24. The conversion price is subject to adjustment in accordance with the Company's articles of incorporation. During  2003, a holder of the Series A convertible preferred stock converted 250 shares of Series A preferred stock into17,557 shares of the Company’s unregistered common stock.

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**5.     Preferred Stock (continued)**

***Series C Preferred Stock***

                       In July 2003, the Company amended its articles of incorporation to establish its Series C convertible preferred stock.  Thenewly established Series C convertible preferred stock has an issued price of $1,000 per share and has the following rights andprivileges:
- no voting rights except with respect to (i) the amendment or alteration of the statement of rights and preferences applicable tothe Series C convertible preferred stock, and (ii) any matters for which voting rights are provided under Florida law; 
- shares of the Series C convertible preferred stock shall rank on a parity with Summus’ Series A and Series D convertiblepreferred stock as to liquidation preference upon dissolution, liquidation or winding up the of Summus; 
- a liquidation preference, subject to adjustment for any combinations, consolidations, stock distributions or stock dividendswith respect to the Series C convertible preferred stock, of $1,000 per share payable in the event of any liquidation, dissolutionor winding up of Summus, Inc.; and 
- the right to convert each share of Series C convertible preferred stock into shares of our common stock at any time, at theoption of the Series C convertible preferred stockholder, after nine (9) months from the date of its issuance. Each share of SeriesC convertible preferred stock shall be convertible into 4,000 fully paid and nonassesable shares of the Company’s commonstock.

                       During July and August 2003, the Company sold 1,250 shares of its Series C convertible preferred stock and issued warrants inconnection with such sale to purchase 5.0 million shares of unregistered common stock with an exercise price of $0.75 per share forgross proceeds of $1,250,000.  The value of the warrants issued in this offering, totaling $624,433, was determined utilizingthe Black Scholes pricing model, limited to the pro-rata fair value of the Series C offering proceeds allocable to thewarrants.  Cash commissions of $35,263 were paid in connection with the Series C offering.

***Series D Preferred Stock***

                       In September 2003, the Company amended its articles of incorporation to establish its Series D convertible preferred stock. The newly established Series D convertible preferred stock has an issued price of $1,000 per share and has the following rights andprivileges:
- no voting rights except with respect to (i) the amendment or alteration of the statementof rights and preferences applicable to the Series D convertible preferred stock, and (ii) any matters for which voting rights areprovided under Florida law; 
- shares of the Series D convertible preferred stock shall rank on a parity withSummus’ Series A and Series C convertible preferred stock as to liquidation preference upon dissolution, liquidation orwinding up the of Summus; 
- a liquidation preference, subject to adjustment for any combinations, consolidations,stock distributions or stock dividends with respect to the Series D convertible preferred stock, of $1,000 per share payable in theevent of any liquidation, dissolution or winding up of Summus, Inc.; and 
- the right to convert each share of Series D convertible preferred stock into shares ofour common stock at any time, at the option of the Series D preferred stockholder. Each share of Series D preferred stock shall beconvertible into 5,000  fully paid and nonassesable shares of the Company’s common stock.

                       During September 2003, the Company sold 650 shares of its Series D convertible preferred stock and issued warrants in connectionwith such sale to purchase 3,250,000 shares of unregistered common stock with an exercise price of $0.35 per share for grossproceeds of $650,000.  The value of the warrants issued in this offering, totaling $216,667, was determined utilizing theBlack Scholes pricing model, limited to the pro-rata fair value of the Series D offering proceeds allocable to thewarrants. 

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**5.     Preferred Stock (continued)**

                       The accounting treatment for the Series C and D convertible preferred stock (the “Preferred Stock”) involved allocatingthe value of the principal amount received from the Preferred Stock offerings between the Preferred Stock, the associated warrantsand a beneficial conversion feature (“BCF”) associated with the Preferred Stock.  A BCF existed because theconversion rate of the Preferred Stock was below the traded value of the Company’s common stock on the date the PreferredStock was issued.  The BCF for the Preferred Stock totaling $1,058,900 was recorded as a discount to the Preferred Stock andadditional paid-in capital on the date the Preferred Stock was issued.  Since the Series C convertible preferred stock becomesconvertible at any time after nine months from its issuance, the value of its BCF totaling  $625,567 will be amortized toretained deficit over a nine month period commencing with its issuance. Amortization of the Series C convertible preferred stockBCF for the three-month period ended September 30, 2003 was $145,991.  Since the Series D convertible preferred stock wasconvertible immediately, the value of its beneficial conversion feature totaling $433,333 was fully amortized to retained deficiton the date of issuance.

**6.          Commitments andContingencies**

                       In connection with the recapitalization transaction on February 16, 2001 (see Note 1), the Company entered into a three-yearemployment agreement with Dr. Bjorn Jawerth. The employment agreement provides an initial base salary of $350,000, which is to beincreased on an annual basis by at least 10%; however, Dr. Jawerth has not taken any increase in cash compensation to this initialbase salary.  As of February 16, 2003, Dr. Jawerth was to receive an annual salary of $423,500 pursuant to his agreement;however, Dr. Jawerth elected on July 31, 2002, to reduce his cash compensation temporarily to $262,500 on an annual basis to helplower the Company’s current cash consumption.  The difference between the original contract amount of $350,000 and thecurrent cash salary amount is paid to Dr. Jawerth on a bi-monthly basis in the form of options to buy common stock under theCompany’s Alternative Compensation Plan.  These options are priced at the closing market price of the Company’scommon stock at the end of each bi-monthly pay period.  The difference between the current salary amount of $423,500 owed toDr. Jawerth and the original base salary of $350,000 in his employment agreement is being deferred and accrued by the Company untilthe Board of Directors and Dr. Jawerth determine when and how these deferred and accrued amounts may be paid. The 10% annualincreases provided for in Dr. Jawerth’s employment contract have been recorded as accrued salaries in the Company’sbalance sheet as September 30, 2003.

                       Under the terms of the recapitalization transaction, Summus, Inc. agreed to use reasonable commercial efforts to assist Dr. Jawerthin the private sale of up to 1,666,667 shares of Summus, Inc. common stock held by Dr. Jawerth at a per share price of not lessthan $1.50 per share (representing $2.5 million in value). No assurance can be provided that Summus will be able to attract such aninvestment or that it will be able to assist Dr. Jawerth in effecting a private sale of these shares.  Under the terms of Dr.Jawerth's employment agreement, the Company is obligated to issue to Dr. Jawerth options, with an exercise price of $1.50 pershare, exercisable for three times the number of shares of common stock sold in the private sale as describe above. The optionswill be exercisable during the second through the fifth year after the options are issued. Non-cash compensation may be recordedupon the issuance of these options.  Under current accounting literature, the non-cash compensation will be determined underthe provisions of APB 25, pursuant to which the compensation cost will be based on the difference, if any, between the stock optionexercise price of $1.50 per share and the traded value of the Summus, Inc. common stock on the date the options are issued. As ofSeptember 30, 2003, Dr. Jaweth has sold no shares subject to this agreement.  The Board of Directors of Summus is in theprocess of renegotiating Dr. Jawerth’s employment agreement with him.  It is contemplated that the provisions describedin this paragraph will be addressed as part of that renegotiation; however, no assurances can be made as to the outcome of suchrenegotiations.   

                       At the request of the Company’s Board of Directors, outside counsel was engaged to advise the Company with respect to theinterpretation of certain of these terms related to Dr. Jawerth’s employment agreement.  The Company has not accrued anyamounts which may be owed to Dr. Jawerth related to these terms in its consolidated financial statements as of September 30, 2003,as the possible exposure to the Company, if any, cannot be reasonably estimated, while the review by outside counsel isongoing.

                       Pursuant to the terms of his employment agreement and in accordance with corporate policy, all intellectual property developed byDr. Jawerth in connection with his employment by the Company is the exclusive property of the Company.  Without any impact onthe Company’s ownership of the intellectual property, the employment agreement grants Dr. Jawerth, personally, anon-exclusive, non-transferable, world-wide license, without right to sublicense, to make and use New Technology (as defined in theInventions Award Plan) that is developed****during the twelve months following the closing of the recapitalization transaction.Any rights of Dr. Jawerth under this license are subject to his fiduciary obligations as a director and/or officer of theCompany.  This license shall terminate on the later of the date twelve months from the closing of the recapitalizationtransaction or such later date as may be set by the Board, excluding Dr. Jawerth.  If Summus ceases to be a going concernprior to the license termination date, the

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**6.          Commitments andContingencies (continued)**

license shall be perpetual and shall include the rights to sell and offer products andservices using the licensed New Technology, and the right to sublicense such New Technology. 

                       The Company has entered into consulting agreements that provide for the issuance of options to purchase restricted shares of theCompany’s common stock primarily on a monthly basis as services are performed.  These options vest on a monthly basis asthey are earned and have exercise prices equal to the traded value of the Company’s unrestricted common stock at the end ofeach month.  During the three and nine-month periods ended September 30, 2003, the Company issued 15,100 and 56,800 optionsunder these consulting agreements, respectively.  These options were valued at $2,896 and $11,976, respectively, using theBlack-Scholes option-pricing model.  The term of these agreements is generally twelve months. 

                       Commencing August 15, 2002, the Company adopted an alternative compensation arrangement for its executives. Under the terms of thisarrangement, electing executives may receive a portion of their annual cash compensation in the form of fully vested stockoptions.  The stock options will have an exercise price equal to the fair market value of the Company’s common stockbased on the closing price of the common stock at the end of each respective payroll period.  The amount of compensation to bereceived in stock options (the “target compensation”) is to be determined by the participating executive based onincrements of 5% commencing with a minimum level of 15% of the participant’s annual compensation.  The number of sharesunderlying each option will be determined by dividing the dollar value of the target compensation by the closing price at the endof each respective payroll period.  Once this election is made, it will remain effective for a minimum of three months and canbe terminated early at the full discretion of the Company. Four of the Company’s executives participated in this arrangementfrom its inception through the six-month period ended June 30, 2003 and three of these four executives continued to participate inthis arrangement during the three month period ended September 30, 2003, at reduced salary levels ranging between 25% and 35% oftheir respective annual compensation. During the three and nine-month periods ended September 30, 2003, the Company issued 137,298and 415,071 fully vested stock options with exercise prices ranging between $0.28 and $0.51 per share under this plan.

                       On July 19, 2002, the Company entered into an irrevocable common stock equity line that was intended to provide funding to theCompany in amounts up to $10.0 million. The Company filed a registration statement on Form S-1 with the Securities and ExchangeCommission on July 31, 2002 relating to this common stock equity line agreement.  Based on comments received from theSecurities and Exchange Commission and related communications with the SEC, the Company understood that the terms of the equityline financing arrangement were such that it would not be able to resolve the staff’s comments in a timely manner and seekeffectiveness of the registration statement in a timely manner.  Due to these developments, the length of time involved incompleting the transaction, and other factors, the Company determined that it was in its best interest to withdraw the registrationstatement and not proceed with the equity line.  Accordingly, on September 17, 2002, the Company submitted to the SEC arequest to withdraw the registration statement and cancelled all agreements associated with the common stock equity line.  Inconnection with the cancellation of the agreements associated with the common stock equity line, Talisman, the intended purchaserunder the equity line, indicated to the Company its intention to retain ownership of the warrants to purchase 500,000 shares of theCompany’s unregistered common stock at an exercise price of $0.47 per share that were issued to Talisman upon the executionof the equity line agreements. It is management’s position, with the advice of legal counsel, that the cancellation of thesewarrants became effective with the cancellation of the equity line agreements and that no loss contingency exists.  Therefore,the Company has not recorded the issuance of these 500,000 warrants in its consolidated financial statements nor disclosed them aspart of outstanding warrants.  The Company has sent correspondence to Talisman stating its position that the warrants havebeen cancelled.  To date, the Company has not received correspondence back from Talisman indicating itsconcurrence.

                       The Company established the Inventions Awards Plan, effective October 30, 2000, to provide incentives to certain eligible employeesby providing them with opportunities to receive additional compensation as a result of their development of enhancements or newmethods that generate revenue for the Company.

                       Under the terms of the Inventions Awards Plan, the Company is obligated to reserve 5% of the gross revenues derived from thelicensing or sale of  “New Technology”, as defined in such plan, for distribution among eligible employees. If the Company sells the rights to New Technology, eligible employees shall be entitled to an award of 10% of the gross proceeds ofsuch sale. 

                       In addition, the Company may, at its option, initiate a spin-off company to develop New Technology.  If the eligible employeeaccepts a position in the spin-off company, his or her rights to awards under the plan are to be surrendered for 25% of thefounders’ equity in the spin-off company.

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**6.          Commitments andContingencies(continued)**

As of September 30, 2003, there are several eligible employees who have been credited withthe development of New Technology since the establishment of the Inventions Awards Plan.  As awards are earned under thisplan, the value is recorded as cost of revenues of wireless applications and contracts.  The value of amounts earned underthis plan for the nine-month period ended September 30, 2003 was approximately $26,500.   As of the date of this report,no amounts have been paid to the eligible employees under the Inventions Awards Plan.

**7.          Settlements ofContractual Disputes and Litigation**

**                       Non-cash Settlements**

                       On February 21, 2003, the Company signed and executed a mutual release of all claims with a former law firm that had provided legalservices to the Company.  Under the terms of this agreement, both parties agreed to a mutual release of any and all claimsbetween the parties, as well as a cancellation of the unpaid fees owed by the Company to the law firm, totaling $886,557.  TheCompany did not issue any cash or equity securities or enter into any other obligations in connection with this release.  Thesettlement gain resulting from this transaction was $886,557.

                       On June 7, 2002, AT&T filed a civil lawsuit in the United States District Court for the Eastern District of North Carolinaagainst Summus, Inc. (USA).  In this suit, AT&T claims that it is entitled to payment in the amount of $238,783 fortelephone calls and services rendered to the Company.  In March 2003, the Company and AT&T settled the claim between them,whereby both parties agreed to reduce the total amount owed by the Company to AT&T to $120,000 and this reduced amount berepaid over an 18 month period commencing in March 2003.  The settlement gain resulting from this transaction was$118,783.

                       On February 27, 2003, Holland & Knight LLP (“H&K”) filed a civil lawsuit in the Superior Court for the Districtof Columbia against Summus.  In this suit, H&K claims that it was entitled to $867,268, plus interest, for servicesrendered to Summus.  Summus and H&K entered into an agreement on May 23, 2003 settling this litigation, whereby bothparties agreed to the following terms:
- $217,268 of the total balance due was forgiven by H&K, resulting in a portion of thesettlement gain of this transaction. 
- $325,000 of the total balance due will be paid over a three-year period with monthly installments of $9,028, commencing on June1, 2003.   The settlement agreement did not provide for an interest rate component pertaining to the three-year paymentplan.  Therefore, an interest rate of 20% per annum was used to present value the note, resulting in a net present value of$242,926. The difference between the face value of $325,000 and the net present value of $242,926, totaling $82,074, was recordedas a portion of the settlement gain. The 20% rate of interest was considered appropriate to fair value the note based on theCompany’s financial condition, including its negative working capital and negative net worth position. In the event that theCompany fails to make a scheduled payment as set forth in this settlement agreement, H&K may execute on a consent judgment andseek to satisfy the judgment from the assets of the Company in accordance with the laws of the state of North Carolina.  
- The remaining amount of the recorded liability due to H&K of $325,000 was satisfiedthrough the issuance to H&K of 738,636 shares of the Company’s unregistered common stock, with registration rights. Thefair value of the 738,636 shares of unregistered common stock was estimated at $273,295, based on the traded value of theCompany’s common stock on the date the settlement agreement became effective.  The difference between the estimated fairvalue of the 738,636 unregistered common shares and the recorded value of the liability of $325,000, totaling $51,705, was recordedas a portion of the settlement gain. The unregistered shares have since been registered, and H&K has contractually agreed tosell no more than 18,000 shares in any one (1)-business day. 
- Therefore, the aggregate settlement gain resulting from this transaction totaled$351,047.

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**7.        Settlements of Contractual Disputesand Litigation (continued)**
- The settlement agreement also provided that if the Company raised $5.0 million or more incapital at one time, all remaining unpaid amounts owed under the $325,000 note agreement shall become immediately due andpayable.  This note is unsecured, and upon default of the terms of the agreement, the unpaid balance shall become immediatelydue and payable and such amount shall include pre-judgment interest in the amount of 6% accruing as of April 3, 2002 and post-judgment interest at a rate to be determined.

                       On June 5, 2003, the Company signed and executed an agreement pertaining to the payment of amounts owed to a current serviceprovider. Under the terms of the agreement, the Company issued 427,419 shares of its unregistered common stock, with registrationrights, for full payment of $132,500 owed to the service provider. The fair value of the 427,419 shares of unregistered commonstock was estimated at $149,597, based on the traded value of the Company’s common stock on the date the settlement agreementbecame effective.  The difference between the estimated fair value of the 427,419 unregistered common shares and the recordedvalue of the liability of $132,500 was recorded as a settlement loss of $17,097. The service provider has contractually agreed tosell no more than 5,000 shares in any one (1)-business day.

                       On August 29, 2003, the Company signed and executed an agreement pertaining to past due amounts owed to a current service providertotaling $62,500.  Under the terms of the agreement, the service provider agreed to forgive $14,500 of the total past dueamounts. The remaining amount due of $48,000 is to be paid in twelve-monthly installments of $4,000 each.  The non-cashsettlement gain resulting from this transaction totaled $14,500.

          During1999, the Company entered into an agreement with Raytheon Company (“Raytheon”) to repurchase 1,533 shares of its commonstock from Raytheon for an aggregate value of $268,373, of which $268,075 represented a termination fee for a development contractand $298 represented the fair value of the shares repurchased. In connection with this agreement, the Company entered into apromissory note with Raytheon whereby the Company agreed to pay approximately $10,000 per month over a 27-month period to fund thistransaction. The Company did not make all required monthly installments and thus defaulted on the promissory note. Consequently,the note began accruing interest at 18% per annum.   On September 30, 2003, the Company executed a settlement agreementwith Raytheon whereby both parties agreed to the following terms.
- $ 49,128 of the total balance due was forgiven by Raytheon, resulting in a portion of the settlement gain of thistransaction. 
- $87,516 of the total balance due will be paid over a 22 month period, with an initial payment of $10,000 (paid on October 3,2003); six (6) equal monthly installments of $3,000; fourteen (14) monthly installments of $4,000; and one final installment of$3,516.  The settlement agreement did not provide for an interest rate component pertaining to the 22-month paymentplan.  Therefore, an interest rate of 20% per annum was used to present value the note, resulting in a net present value of$74,306. The difference between the face value of $87,516 and the net present value of $74,306, totaling $13,210 was recorded as aportion of the settlement gain. The 20% rate of interest was considered appropriate to fair value the note based on theCompany’s financial condition, including its negative working capital and negative net worth position. In the event that theCompany fails to make a scheduled payment as set forth in this  settlement agreement, Raytheon may execute on a consentjudgment and seek to satisfy the judgment from the assets of the Company in accordance with the laws of the state of NorthCarolina.  
- The remaining amount of the recorded liability due to Raytheon of $87,516 was satisfied through the issuance to Raytheon of295,662 shares of the Company’s unregistered common stock, with registration rights. The fair value of the 295,662 shares ofunregistered common stock was estimated at $94,613, based on the traded value of the Company’s common stock on the date thesettlement agreement became effective.  The difference between the estimated fair value of the 295,662 unregistered commonshares and the recorded value of the liability of $87,516, totaling $7,097, was recorded as an offset to the settlement gain. Raytheon has contractually agreed to sell no more than 15,000 shares in any one (1)-business day.

Therefore, the aggregate settlement gain resulting from this transaction totaled$55,241.

                       The aggregate value of these non-cash settlements totaling $69,741 and $1,409,031, have been recorded as reductions to theCompany’s accounts payable and credits in the Company’s Statement of Operations for the three and nine-month periodsended September 30, 2003.

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**7.        Settlements of Contractual Disputesand Litigation (Continued)**

**                       Analysts International Corporation Litigation **

                       Under the terms of a settlement agreement dated August 7, 2001 with Analysts International Corporation ("AIC"), we agreed to paythe sum of $358,426, plus interest accruing at the rate of 8% per annum from March 31, 2000, according to the following paymentschedule: (i) $20,000 upon execution of the settlement agreement, (ii) $5,000 per month for a period of nine months, commencing onemonth after execution of the agreement, and (iii) $10,000 per month thereafter until the balance of the indebtedness was paid infull.  We ceased making payments under this settlement agreement on November 15, 2002 due to liquidity constraints, andtherefore, we were in default under the terms of the initial agreement. The Company received notification of its default from AICon July 9, 2003, and the 3-day cure period to which the Company was entitled under the terms of the settlement agreement expired,which would allow AIC to file a consent judgment against the Company.  While negotiating to amend the settlement agreement inAugust 2003, Summus learned that AIC had filed the consent judgment on February 13, 2002, which Summus believes was in breach ofthe original settlement agreement.  In September 2003, the parties negotiated a revised settlement agreement pursuant to which(i) the consent judgment remains filed and of record, (ii) AIC will file with the court a credit to the judgment reflecting allpayments made by the Company; (iii) the payment terms have been revised to require payment by the Company of $60,000 by September5, 2003, which has been made, and $7,500 per month thereafter until the full amount of the current indebtedness of approximately$172,648 in principal and $85,000 in accrued interest is paid, and (iv) AIC agrees to refrain from executing on the consentjudgment as long as the Company makes the payments required by the revised settlement terms as identified in this paragraph. In the event that the Company fails to make a scheduled payment as set forth in this revised settlement agreement, AIC may executeon the consent judgment and seek to satisfy the judgment from the assets of the Company in accordance with the laws of the state ofNorth Carolina. 

                       Should the Company default on the payment terms of the settlement agreements noted above, the execution of the consent judgmentscontained in each settlement agreement could have a material adverse effect on the ability of the Company to continue inbusiness.  There can be no assurance that we will be able to generate sufficient funds in order to maintain the scheduledpayments under the settlement agreements with noted above.

**Bowne Litigation**

                       On February 25, 2003, Bowne of New York City, LLC (“Bowne”), a financial printing firm, filed a civil summons in theSupreme Court of County of New York in the State of New York, claiming that it is entitled payment in the amount of $276,374, plusaccrued interest, for past services rendered to the Company. The Company disputes the total amount Bowne claims the Company owes.However, the Company has recorded a liability of $276,374 relating to this claim as of December 31, 2002 and September 30,2003.  The Company is in the process of attempting to negotiate a settlement to this claim.

**8.                    Subsequent Events**

                       Subsequent to September 30, 2003, the Company made cash payments totaling $360,142 towards accrued salaries and related costs thatwere incurred as of September 30, 2003.  As a result of these payments, accrued unpaid salaries and related costs that wereearned as of September 30, 2003 have been reduced from $918,161 to $555,019.  Included in accrued salaries and related costsis $133,000 of earned and unpaid vacation.

                       During October, the Company sold 3,350 shares of its Series D convertible preferred stock and issued warrants in connection withsuch sale to purchase 8,375,000 shares of unregistered common stock with an exercise price of $0.35 per share for gross proceeds of$3,350,000.  Additionally, during October, the Company amended its articles of incorporation to establish its Series Econvertible preferred stock that has rights and privileges identical to the Series D convertible preferred stock.  DuringOctober, the Company sold 200 shares of its Series E convertible preferred stock and issued warrants in connection with such saleto purchase 500,000 shares of unregistered common stock with an exercise price of $0.35 per share for gross proceeds of$200,000. 

                       In October 2003, the Company issued 714,268 shares of its unregistered common stock upon the exercise of warrants with exerciseprice of $0.20 per share.  The Company received $142,854 in gross proceeds from the exercise of these warrants.

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**8.                    Subsequent Events (continued)**

As of October 31, 2003, the Company had 63,691,227 of its common shares issued andoutstanding and has reserved shares of its authorized 100,000,000 shares of common stock for future issuance as follows:

Series A convertible preferred stock and related dividends

160,268

Series C convertible preferred stock

5,000,000

Series D convertible preferred stock

20,000,000

Series E convertible preferred stock

1,000,000

Outstanding common stock warrants

42,983,234

Outstanding stock options

8,159,538

Possible future issuance under stock option plans

340,462

          Total

77,643,502

Based on the number of issued and outstanding shares as of October 31, 2003 and the numberof shares reserved for future issuance as noted in the foregoing table, the Company is currently in excess of its authorized amountof 100,000,000 shares of common stock.  In order to address this matter, the Company is holding a shareholders’ meetingon December 2, 2003, at which time the shareholders will vote on an increase in the number of authorized shares from 100,000,000 to185,000,000.
 
 

 

 

 

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**Item 2.     Management'sDiscussion and Analysis of FinancialCondition and Results of Operations**

***Forward-Looking Statements***

                     This Form 10-Q contains certain forward-looking statements that we believe are within the meaning of Section 27A of the SecuritiesAct of 1933 and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbors created bysuch acts. For this purpose, any statements that are not statements of historical fact may be deemed to be forward-lookingstatements, including the statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations"regarding our strategy, future operations, future expectations or future estimates, financial position and objectives ofmanagement. Those statements in this Form 10-Q containing the words "believes," "anticipates," "plans," "expects" and similarexpressions constitute forward-looking statements, although not all forward-looking statements contain such identifying words.These forward-looking statements are based on our current expectations and are subject to a number of risks, uncertainties andassumptions relating to our operations, results of operations, competitive factors, shifts in market demand and other risks anduncertainties. The most important factors that could prevent us from achieving our stated goals include, but are not limited to,the following:
- a lack of sufficient financial resources to implement the Company's business plan, whichhas resulted in the Company's receiving a "going concern" opinion from its independent auditors with respect to its auditedfinancial statements as of and for the year ended December 31, 2002; 
- our ability to generate sufficient working capital to meet our operatingrequirements; 
- our ability to develop and enter into strategic relationships with wireless serviceproviders, semiconductor and device designers, wireless device manufacturers and content providers; 
- timely deployment by wireless service providers, semiconductor and device designers, andwireless device manufacturers of our software in their networks and mobile information devices; 
- the continued growth in demand for wireless and mobile usage; 
- new product development and acceleration of commercial deployment of suchproducts; 
- technological competition, which creates the risk of the Company's technology beingrendered obsolete or noncompetitive; 
- the lack of patent protection with respect to the Company's technology; and 
- potential infringement of the patent rights of third parties.

                     Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of the assumptions could beinaccurate and actual results may differ from those indicated by the forward-looking statements included in this Form 10-Q. Inlight of the significant uncertainties inherent in the forward-looking statements included in this Form 10-Q, you should notconsider the inclusion of such information as a representation by us or anyone else that we will achieve such results. Moreover, weassume no obligation to update these forward-looking statements to reflect actual results, changes in assumptions or changes inother factors affecting such forward-looking statements.

 

 

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**Overview**

**Recent Developments - Sale of SeriesD and E Convertible Preferred Stock**

                     During the end of September and in early October 2003, the Company sold a totalof 4,000 shares of its Series D convertible preferred stock and 200 shares ofits Series E convertible preferred stock in private placements.  TheCompany received $4,200,000 in gross proceeds from these private placements. The Series D and Series E convertible preferred stock have substantiallyidentical rights and privileges.  The 4,000 shares of Series D convertiblepreferred stock are convertible into 20,000,000 shares of the Company's commonstock, and the 200 shares of Series E convertible preferred stock areconvertible into 1,000,000 shares of the Company's common stock.  TheCompany also issued warrants in connection with the sales of the Series D andSeries E convertible preferred stock to purchase a total of 10,500,000 shares of theCompany's common stock at a price of $0.35 per share.

**Key Developments in 2003**

*                     Focus on Mobile and*Wireless*Market; Development of BlueFuelTM Platform*

                     Summus is continuing to develop a mobile solutions platform, called BlueFuel, which will enable end-users to experience an entirelynew mobile environment, one that frees an individual from location and time dependence and opens new possibilities as to how mobiledevices are used.   Focused on the end-user experience, BlueFuel enables application developers, device manufacturers,wireless infrastructure providers, and content providers to bring a reliable, high quality mobile information experience toconsumers through their mobile devices.

                     Instead of attempting to introduce a new platform and infrastructure immediately, Summus is pursuing focused“applications” and “activities,” that piece-by-piece are assembling the BlueFuel platform and thesupporting environment.  The strategy incorporates the release and distribution of revenue-generating products, each buildingto the Company’s vision. By integrating the BlueFuel platform, the end-users are offered products and services, whichoptimize the individual mobile experience. As the BlueFuel platform evolves and products propagate, Summus will introduce a programfor third-party developers using the BlueFuel platform that will further expand the portfolio of BlueFuel enabled mobile end-userservices available.

*                     Relationships with Content Providers and New Application Development*

                     Summus continues to position itself as a supplier of solutions that can run on multiple wireless platforms supporting the mobileand wireless marketplace.  Summus has developed, and continues to develop, wireless applications utilizing BlueFuel,Summus’ Superfast, SuperthinTM platform designed for efficient and easy interaction with information in the mobileenvironment.  BlueFuel supports applications and services on the BREWTM, JavaTM 2 Micro Edition (J2ME TM),SymbianTM OS, PocketPC, Palm OS and Wireless Application Protocol (WAP) wireless operating systems orplatforms. 

                     Our business development activities continue to expand with major content brands.  During the third quarter of 2003, Summushas launched a number of high profile applications, including the Summus and ESPN application X-Games Top Shots. Summus partneredwith Agence France-Presse to promote a limited time offer to receive Tour de France breaking news and photographs through***exego****.  **exego*** is our first BlueFuel based end-user application that we developed for managementand exchange of information.  In addition, Summus partnered with C2 Pictures to distribute a ringtone and wallpaperapplication based on the motion picture Terminator®3: Rise of the MachinesTM.  During the three-month period endedSeptember 30, 2003, up to nine (9) wireless carriers in the United States and six (6) international carriers currently deployed atleast one or a combination of the sixteen (16) wireless applications that have been completed by the Company. 

*                     Carrier Relationships and International Expansion *

                     Currently,Summus has signed agreements with nine (9) wireless carriers in the U.S. (representing 92% of theU.S. wireless consumers) and an additional six (6) carriers abroad.  In July 2003,Summus signed anagreement and launched an application on the Sprint PCS Network,the largest all-digital, all-PCS nationwidewireless network in the United States. Commencing in the third quarter of 2003, Summus began generating revenue from “APPhotos, News & Sports” on the Sprint PCS network. Additional applications are being tested in field trials with Sprint,and we expect these applications to be launched shortly.  Also during the third quarter of 2003, Summus launched its Nineballgame application on the T-Mobile wireless network.

                     During the third quarter of 2003, Summus’ international expansion goals have continued to be realized through agreements withthree South American wireless carriers and two Canadian carriers.  Summus began generating revenue from several of thesecarriers during the third quarter of 2003.

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*                     Business Advancement, Awards and Recognition*

                     During the third quarter of 2003, QUALCOMM, developer of the Binary Runtime Environment for Wireless (BREWTM) applicationplatform, entered into an agreement with Summus designating it a BREW Global Publisher (“BGP”). BGPs are preferred BREWdevelopers that are authorized to publish, market and distribute BREW-based applications in their territory from developersthroughout the world.This agreement is expected to open new avenues for revenue growth. QUALCOMM ischanneling international application developers to Summus who will help develop applications, prepare them for BREW certification,and distribute and market the applications in the U.S. market. In exchange, Summus will receive a portion of the revenue expectedto be generated from each application.

In July 2003, QUALCOMM demonstrated the concept of BGPs at its BREWTM 2003 – Seoul Developers Conference in South Korea.Summus, based on an invitation from QUALCOMM, gave a presentation to Korean developers on behalf of QUALCOMM, and providedattendees with information about the process of exporting their applications globally.

*                     Wireless License*Fees**

                     During the nine-month period ended September 30, 2003, the Company earned revenue totaling $248,201 from the sale and delivery ofexisting image software for use in wireless transmission, Windows-based applications.  The license of this existing softwarebuilds on an existing relationship that may offer an opportunity to deploy BlueFuel in the law enforcement and militarycommunications market.  The Company intends to build this relationship and generate interest in BlueFuel for thiscustomer.  There are several scenarios where a shift to a BlueFuel solution would improve the customers offering and fit wellwith the Company’s business focus.  There can be no assurance that the Company will generate additional revenue fromwireless license fees in the future.

*                     Non-cash settlements*

                     During the nine month period ended September 30, 2003, the Company executed six settlement agreements with creditors of theCompany. Two settlement agreements were executed in the three-month period ended March 31, 2003, two settlement agreements wereexecuted during the three-month period ended June 30, 2003 and the remaining two settlement agreements were executed in thethree-month period ended September 30, 2003.  The detail of each of the settlement agreements has been provided in the Resultsof Operations, set forth below.

                     The aggregate values of these non-cash settlements totaling $69,741 and $1,409,031, have been recorded as reductions to theCompany’s accounts payable and credits in the Company’s Statement of Operations for the three and nine-month periodsended September 30, 2003.

**Results of Operations**

**Three-Month Period Ended September 30, 2003 Compared to Three-Month Period EndedSeptember 30, 2002**

*Revenues*

*                     Wireless Applications and Contracts.*  Revenue from wireless applications and contracts increased$145,956 to $182,391 in the three-month period ended September 30, 2003, up 400.6% from $36,435 in the three-month period endedSeptember 30, 2002. The increase in revenue from wireless applications and contracts resulted from the cumulative number ofwireless applications developed by the Company, launched by several wireless carriers and purchased by end-users.  During thethree-month period ended September 30, 2003, up to nine (9) wireless carriers in the United States and six (6) internationalcarriers currently deployed at least one or a combination of the sixteen (16) wireless applications that have been completed by theCompany.  Each of the applications deployed were developed following agreements with a content partner to provide access totheir content, except the **exegoTM** application, which was internally developed by Summus.

                     Revenue earned from wireless applications is recognized upon delivery and acceptance by the end-user either as a one-time purchaseper use or a monthly subscription.  Wireless application revenue reported by Summus is net of all third-party platform and/orcarrier distribution fees, and any revenue Summus shares with its content partners.  Revenue totaling $25,000 fromwireless applications and contracts during the three-month period ended September 30, 2002 resulted solely from a strategicpartnership agreement related to the mobile and wireless markets.  Revenue under this agreement was recognized ratably overthe year ended December 31, 2002.

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*                     Wireless License Fees. *Revenue earned from wireless license fees totaled $1,000 in the three-monthperiod ended September 30, 2003. During this period, the Company had sold and delivered existing image software for use in wirelesstransmission applications. The licensing of this existing software provides Summus an opportunity to expand an existing customerrelationship that may offer an opportunity to deploy BlueFuel in the law enforcement and militarycommunications market. The Company intends to build this relationship and generate interest in BlueFuel for this customer. Although the Company had previously developed this software, it had not been deployed as an opportunity to promote theCompany’s BlueFuel platform prior to the three-month period ended September 30, 2002.

*Costs of Revenues*

                     *Wireless Applications and Contracts.*  Costs of wireless applications and contracts increased $57,372 to $109,633 duringthe three-month period ended September 30, 2003, up 109.8% from $52,261 for the three-month period ended September 30, 2002. These costs are direct costs associated with the sale and delivery of wireless applications and primarily consist of third-partyhosting fees and content information provided by certain of our content providers for wireless applications which were deployedduring the three-month periods ended September 30, 2003 and 2002. These costs are incurred on a monthly basis and are primarilyfixed in nature regardless of the revenue generated by the related applications. During the three-month period ended September 30,2002, there were no direct costs associated with $25,000 of wireless applications and contracts revenue earned from a strategicpartnership agreement because there were no specific, direct costs associated with the agreement related to the mobile and wirelessmarkets. 

*                     Wireless**License Fees. * There were no costs of revenues relating to wireless license feesduring the three-month period ended September 30, 2003 since the license fee agreements consummated during this period related totechnology that had been previously developed by the Company. During the three month period ended September 30, 2002, the Companydid not generate any revenue or costs of revenue related to wireless license fees.*             *

*Gross Profit*

*                     Wireless Applications and Contracts. *Gross profit resulting from thedevelopment and deployment of wireless applications totaled $72,758 or 39.9% of wireless applications and contracts revenue for thethree-month period ended September 30, 2003.  During the three months ended September 30, 2002, the Company generated anegative gross profit of $(15,826) relating to its wireless applications and contracts. The gross profit and negative gross profitresulting from these activities is a result of deducting costs that are primarily fixed in nature, consisting mostly of third-partyhosting fees and fees associated with content information provided by certain of our content providers, from the related earnedrevenue.  During the three-month period ended September 30, 2002 the Company earned $25,000 in wireless application andcontract revenue, representing the pro-rata share of the revenue earned under the strategic partnership agreement related to themobile and wireless markets.  There were no specific direct costs associated with this contract.

*                     Wireless License Fees. *  Gross profit resulting from wireless license fees totaled$1,000.  The Company did not incur any specific direct costs associated with the sale, delivery or installation of thesoftware underlying the license agreements consummated during this period.  Additionally, the Company does not expect to incurany future obligations relating to these license fees. During the three month period ended September 30, 2002, the Company did notgenerate any revenue, costs of revenue or gross profit related to wireless license fees.

                     *Selling, General and Administrative Expenses.*  Selling, general and administrative expenses consist primarily ofsalaries, consulting fees, office operations, administrative and general management activities, including legal, accounting andother professional fees. Selling, general and administrative expenses for the three-month period ended September 30, 2003, were$1,232,317, compared to $1,547,452 for three-month period ended September 30, 2002. The decrease in selling, general andadministrative expenses during the current period as compared to the prior period reflect a reduction in several expensecategories, namely salaries, third-party consulting fees, travel and general office administration costs.  The reductions inthese categories reflect continued cost reduction efforts implemented by management. 

*                     Non-Cash Compensation.*  Non-cash compensation for the three-month period ended September 30, 2003was $44,148 compared to $44,146 for the three-month period ended September 30, 2002.  Non-cash compensation for each of thethree-month periods ended reflects the amortization for three months of deferred compensation resulting from stock options grantedin prior years, at prices below the fair value of the underlying common stock.

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                     Resea*rch and Development.*  Research and development expenses for the three-month period ended September 30, 2003, were$280,236 compared to $152,819 for the three-month period ended September 30, 2002. The increase in research and developmentexpenses is a result of the increased number of new wireless applications the Company has contracted to develop. In order tominimize these expenses, the Company increased its utilization of software developers in Croatia.  Personnel costs in Croatiaare lower than those in the United States. 

*                     Non-Cash Consulting Expense. *Non-cash consulting expense for the three-month period ended September30, 2003, in the amount of $5,454 is attributable to: (1) 15,100 stock options granted to consultants for services valued at$2,896, such value was determined by using the Black-Scholes option-pricing model; and (2) $2,558, representing the fair value, asdetermined using the Black-Scholes option-pricing model, of the vested portion of 33,333 options granted to a member on theCompany’s advisory board.

                      Non-cash consulting expense for the three months ended September 30, 2002, in the amount of $79,143 isattributable to:  (1) the issuance of 125,000 shares of restricted common stock and 39,032 options and warrants to purchaserestricted common stock to consultants for services valued at $38,155; (2) $25,988 of amortization of deferred consulting expenserelating to three stock options granted to three new members of our Advisory Board during 2002; and (3) a stock option granted to amember of our Advisory Board for consulting services resulting in total deferred consulting expense of $40,000, of which $15,000was charged to expense during the three months ended September 30, 2002. The remaining amount, $25,000, has been deferred and willbe charged to expense as future vesting of the stock option occurs. The value of the stock options granted to the members of theBoard of Advisors was determined by using the Black-Scholes option-pricing model.

*                     Interest*Expense*.*  Interest expense for the three-month period ended September 30, 2003, was$27,334, compared to interest expense of $429,926 for the corresponding period of the prior year. Net interest expense for thethree-month period ended September 30, 2003 related to interest costs associated with capital lease obligations and note payableagreements.

*                     *Net interest expense for the threemonths ended September 30, 2002, was $429,926. Net interest expense for the three-month period ended September 30, 2002 includes$9,676 of interest costs associated with capital lease obligations and note agreements, plus the following items associated to theconvertible debentures issued on July 19, 2002:
- $190,000, relating to the value, as determined by the Black-Scholes pricing model, of the 1,724,138 warrantsissued to the debentures holders;
- $189,655, relating to the value of the beneficial conversion feature associated with the convertibledebentures;
- $39,310, relating to placement agent fees, consisting of a cash commission of $30,000 and a warrant to purchase51,724 shares of common stock that was valued at $9,310 using the Black-Scholes pricing model and;
- $1,285, relating to interest expense incurred while the debentures remained outstanding based on the stated rateof 6% per annum.  At the Company’s election, theses interest costs were paid through the issuance of shares of commonstock based on the conversion rate of $0.29, resulting in the issuance of 4,429 shares of common stock.

The value of the warrants issued to the debenture holders was initially recorded as adiscount to the $500,000 face value of the debentures.  This discount was to be amortized to interest expense over the term ofthe debentures. Since all of the debentures were converted into common stock during the three months ended September 30, 2002, thetotal value assigned to the warrants became fully amortized to interest expense during the quarter. The beneficial conversionfeature was recorded since the conversion price of the debentures was below the fair market value of our common stock on the datethe convertible debentures were issued.  This non-cash charge was recorded immediately as interest expense because thedebentures were convertible upon issuance. 

*                      Non-cash Settlements. *Non-cash settlements totaling $69,741, resulted from the settlement of unpaid amountsfrom two of the Company’s creditors during the three-month period ended September 30, 2003.  Thefirst settlement agreement was in connection with an agreement executed on August 29, 2003 pertaining to past due amounts owed to acurrent service provider totaling $62,500.  Under the terms of the agreement, the service provider agreed to forgive $14,500of the total past due amounts. The remaining amount due of $48,000 is to be paid in twelve-monthly installments of $4,000each.  The non-cash settlement gain resulting from this transaction totaled $14,500.

*                     *The second non-cash settlement was in connection with the settlement of a promissory notewith Raytheon Company (“Raytheon”).  The Company had been in default under the terms of the promissory noteagreement with Raytheon and consequently interest had been accruing at 18% per annum.   On September 30, 2003, theCompany executed a Settlement Agreement (the “Agreement”) with Raytheon whereby both parties agreed to the followingterms.

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- $ 49,128 of the total balance due was forgiven by Raytheon, resulting in a portion of the settlement gain of thistransaction. 
- $87,516 of the total balance due will be paid over a 22 month period, with an initial payment of $10,000; six (6) equal monthlyinstallments of $3,000; fourteen (14) monthly installments of $4,000; and one final installment of $3,516.  The settlementagreement did not provide for an interest rate component pertaining to the 22-month payment plan.  Therefore, an interest rateof 20% per annum was used to present value the note, resulting in a net present value of $74,306. The difference between the facevalue of $87,516 and the net present value of $74,306, totaling $13,210 was recorded as a portion of the settlement gain. The 20%rate of interest was considered appropriate to fair value the note based on the Company’s financial condition, including itsnegative working capital and negative net worth position.
- The remaining amount of the recorded liability due to Raytheon of $87,516 was satisfied through the issuance to Raytheon of295,662 shares of the Company’s unregistered common stock, with registration rights. The fair value of the 295,662 shares ofunregistered common stock was estimated at $94,613, based on the traded value of the Company’s common stock on the date thesettlement agreement became effective.  The difference between the estimated fair value of the 295,662 unregistered commonshares and the recorded value of the liability of $87,516, totaling $7,097, was recorded as as an offset to the settlementgain.  Raytheon has contractually agreed to sell no more than 15,000 shares in any one (1)-business day.

Therefore, the aggregate settlement gain resulting from this transaction totaled$55,241.

The aggregate value of these non-cash settlements totaling $69,741, has been recorded as areduction to the Company’s accounts payable and a credit in the Company’s Statement of Operations for the three-monthperiod ended September 30, 2003.

                     Net Loss.  As a result of the factors discussed above, the net losses for the three-month periods ended September 30, 2003 and2002 were $1,445,990 and $2,269,312, respectively.

**Nine-Month Period Ended September 30, 2003 Compared to Nine-Month Period EndedSeptember 30, 2002**

*Revenues*

                     Wireless*Applications and Contracts.*  Revenue from wireless applications and contracts increased $443,486 to $529,921 inthe nine-month period ended September 30, 2003, up 513.1 % from $86,435 in the nine-month period ended September 30, 2002. Theincrease in revenue from wireless applications and contracts resulted from the cumulative number of wireless applications developedby the Company, launched by several wireless carriers and purchased by end-users.  During the nine-month period endedSeptember 30, 2003, up to nine (9) wireless carriers in the United States and six (6) international carriers currently deployed atleast one or a combination of the sixteen (16) wireless applications that have completed by the Company.  Each of theapplications deployed were developed following agreements with a content partner to provide access to their content, except the**exegoTM** application, which was internally developed by Summus.

                     Revenue earned from wireless applications is recognized upon delivery and acceptance by the end-user either as a one-time purchaseper use or a monthly subscription. Wireless application revenue reported by Summus is net of all third-party platform and/orcarrier distribution fees, and any revenue Summus shares with its content partners.   Revenue totaling $75,000 fromwireless applications and contracts during the nine-month period ended September 30, 2002 resulted solely from a strategicpartnership agreement related to the mobile and wireless markets.  Revenue under this agreement was recognized ratably overthe year ended December 31, 2002.

                       *Wireless License Fees.* Revenue earned from wireless license fees totaled $248,201 in the nine-month period ended September30, 2003. During this period, the Company had sold and delivered existing image software for use in wireless transmissionapplications. The licensing of this existing software provides Summus an opportunity to expand an existing customer relationshipthat may offer an opportunity to deploy BlueFuel in the law enforcement and military communications market. The Company intends tobuild this relationship and generate interest in BlueFuel for this customer.  Although the Company had previously developedthis software, it had not been deployed as an opportunity to promote the Company’s BlueFuel platform prior to the nine-monthperiod ended September 30, 2003.

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*                     Contracts and License Fees. *The Company did not generate any revenue from its former line ofbusiness that included providing governmental contract services and the commercial licensing of its technology in non-wirelessenvironments. Revenue earned during the nine-month period ended September 30, 2002 was generated from providing governmentalcontract services and the commercial licensing of technology. The Company shifted its primary focus during the second quarter of2002 from providing governmental contract services and the commercial licensing of it established technology to the development ofsolutions for the mobile and wireless markets.

*Costs of Revenues*

                     *Wireless Applications and Contracts.*  Costs of wireless applications and contracts increased $285,491 to $337,752during the nine-month period ended September 30, 2003, up 546.3% from $52,261 for the nine-month period ended September 30, 2002.These costs are direct costs associated with the sale and delivery of wireless applications and primarily consist of third-partyhosting fees and fess associated with content information provided by certain of our content providers for wireless applicationswhich were deployed during the nine-month period ended September 30, 2003. These costs are incurred on a monthly basis and areprimarily fixed in nature regardless of the revenue generated by the related applications. During the nine-month period endedSeptember 30, 2002, there were no direct costs associated with $75,000 of wireless applications and contracts revenue earned from astrategic partnership agreement because there were no specific, direct costs associated with the agreement related to the mobileand wireless markets.* *

                     *Wireless License Fees. * There were no costs of revenues regarding wireless license fees during the nine-month periodended September 30, 2003 since the license fee agreements consummated during this period related to technology that had beenpreviously developed by the Company. During the nine month period ended September 30, 2002, the Company did not generate anyrevenue or costs of revenue related to wireless license fees.

*                     Contracts and License Fees. *During the nine-month period ended September 30, 2003, the Company didnot generate any costs of revenues from its former line of business that included providing governmental contract services and thecommercial licensing of its technology in non-wireless environments. During the nine-month period ended September 30, 2002, costsof contracts and license fess consisted primarily of salaries and other related costs of providing governmental contract services,as well any direct costs related to the sale, delivery and installation of its commercial software.

*Gross Profit*

*                     Wireless Applications and Contracts. *Gross profit resulting from the development and deployment ofwireless applications totaled $192,169 or 36.3% of wireless applications and contracts revenue for the nine-month period endedSeptember 30, 2003.  During the nine-month period ended September 30, 2002, Summus generated a gross profit of $34,174 or39.5% of wireless applications and contract revenue. The gross profit resulting from these activities is a result of deductingcosts that are primarily fixed in nature, consisting mostly of third-party hosting fees and content information provided by certainof our content providers, from the related earned revenue. During the nine-month period ended September 30, 2002, the Companyearned $75,000, representing the pro-rata share of the revenue earned under the strategic partnership agreement related to themobile and wireless markets.  There were no specific direct costs associated with this contract.

*                     Wireless License Fees. *  Gross profit resulting from wireless license fees totaled$248,201.  The Company did not incur any specific direct costs associated with the sale, delivery, or installation of thesoftware underlying the license agreements consummated during the nine-month period ended September 30, 2003.  Additionally,the Company does not expect to incur any future obligations relating to these license fees. During the nine month period endedSeptember 30, 2002, the Company did not generate any revenue, costs of revenue or gross profit related to wireless licensefees.

*                     Contracts and License Fees. *During the nine-month period ended September 30, 2003, the Company didnot generate any revenue, costs of revenues, or gross profit from its former line of business that included providing governmentalcontract services and the commercial licensing of its technology in non-wireless environments. Gross profit resulting fromgovernmental contract services and the commercial licensing of technology during the nine-month period ended September 30, 2002totaled $144,134 or 63.1% of contracts and license fee revenue. The gross profit from these activities resulted from deductingprimarily salaries and other related costs from the related earned revenue.

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                     *Selling, General and Administrative Expenses.*  Selling, general and administrative expenses consist primarily ofsalaries, consulting fees, office operations, administrative and general management activities, including legal, accounting andother professional fees. Selling, general and administrative expenses for the nine-month period ended September 30, 2003, were$3,712,981, compared to $5,088,280 for nine-month period ended September 30, 2002. The decrease in selling, general andadministrative expenses during the current period as compared to the prior period reflect a reduction in several expensecategories, namely salaries, third-party consulting fees, travel and general office administration costs.  The reductions inthese categories reflect continued cost reduction efforts implemented by management. 

*                     Non-Cash Compensation.*  Non-cash compensation for the nine-month period ended September 30, 2003 was$132,442 compared to $319,854 for the nine-month period ended September 30, 2002.  Non-cash compensation for the nine-monthperiod ended September 30, 2003 reflects the amortization for nine months of deferred compensation resulting from stock optionsgranted in prior years, at prices below the fair value of the underlying common stock.

                     Non-cash compensation for the nine months ended September 30, 2002 was $319,854 reflects $158,496 of amortizationfor nine months of deferred compensation resulting from stock options granted in prior years, at prices below the fair value of theunderlying common stock. The remaining amount of $161,358 reflects stock options that were granted to an employee with exerciseprices below the estimated fair value of the underlying common stock.

*                     Research and Development.*  Research and development expenses for the nine-month period endedSeptember 30, 2003, were $809,207 compared to $468,661 for the nine-month period ended September 30, 2002. The increase in researchand development expenses is a result of two factors.  First, the increased number of new wireless applications the Company hascontracted to develop. In order to minimize these expenses, the Company increased its utilization of software developers inCroatia.  Personnel costs in Croatia are lower than those in the United States.  Second, the increase of the research anddevelopment costs in the current period as compared to the prior period resulted from a reallocation of employees who previouslyworked on governmental contracts.   During the second half of the nine month period ended September 30, 2002, there were nogovernmental contracts in process and accordingly, all employees who were previously assigned to work on such contracts wereassigned to work on research and development activities in the mobile and wireless sector.

*                     Non-*C*ash Consulting Expense. * Non-cash consulting expense for the nine-month period endedSeptember 30, 2003, in the amount of $110,192 is attributable to: (1) the issuance of 219,266 shares of restricted common stockissued to consultants for services valued at $78,595; (2) 56,800 stock options granted to consultants for services valued at$11,976, such value was determined by using the Black-Scholes option-pricing model; (3) the $15,000 of amortization of a deferredexpense recorded in 2002 relating to the issuance of 55,555 shares of restricted common stock, valued at $22,500, for consultingservices to be rendered over a 4.5 month period; and (4) $4,621, representing the fair value, as determined using the Black-Scholesoption-pricing model, of the vested portion of 33,333 options granted to a member on the Company’s advisory board.

                      Non-cash consulting expense for the nine months ended September 30, 2002, in the amount of $797,161 isattributable to the following: (1) the issuance of 298,605 shares of restricted common stock and 436,282 options and warrants topurchase restricted common stock to consultants for services valued at $710,652; (2) stock options granted to three new members ofour Advisory Board during the nine months ended September 30, 2002 resulting in deferred consulting expense of $103,950, of which$71,509 was charged to expense during the nine months ended September 30, 2002; and (3) a stock option granted to a member of ourAdvisory Board for consulting services resulting in total deferred consulting expense of $40,000, of which $15,000 was charged toexpense during the nine months ended September 30, 2002.  The remaining amounts of deferred compensation not charged toexpense will be charged to expense as future vesting of the stock options occurs.   The value of the stock optionsgranted to consultants, including the members of the Board of Advisors, was determined by using the Black-Scholes option-pricingmodel.  

*                       Interest Expense.*  Interest expense for the nine-month period ended September 30, 2003, was$51,775, compared to interest expense of $459,186 for the corresponding period of the prior year. Net interest expense for thenine-month period ended September 30, 2003 related to interest costs associated with capital lease obligations and note payableagreements.

*                       *Net interest expense for thenine-month period ended September 30, 2002, was $459,186 and includes interest costs associated with capital lease obligations andnote payable agreements of $38,936, plus the following items associated to the convertible debentures issued on July 19,2002:

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- $190,000, relating to the value, as determined by the Black-Scholes pricing model, of the 1,724,138 warrantsissued to the debentures holders;
- $189,655, relating to the value of the beneficial conversion feature associated with the convertibledebentures;
- $39,310, relating to placement agent fees, consisting of a cash commission of $30,000 and a warrant to purchase51,724 shares of common stock that was valued at $9,310 using the Black-Scholes pricing model and;
- $1,285, relating to interest expense incurred while the debentures remained outstanding based on the stated rateof 6% per annum.  At the Company’s election, theses interest costs were paid through the issuance of shares of commonstock based on the conversion rate of $0.29, resulting in the issuance of 4,429 shares of common stock.

The value of the warrants issued to the debenture holders was initially recorded as adiscount to the $500,000 face value of the debentures.  This discount was to be amortized to interest expense over the term ofthe debentures. Since all of the debentures were converted into common stock during the three months ended September 30, 2002, thetotal value assigned to the warrants became fully amortized to interest expense during this period. The beneficial conversionfeature was recorded since the conversion price of the debentures was below the fair market value of our common stock on the datethe convertible debentures were issued.  This non-cash charge was recorded immediately as interest expense because thedebentures were convertible upon issuance.

*                     Non-cash Settlements. *Non-cash settlements totaling $1,409,031, during the nine-month period endedSeptember 30, 2003, is comprised of settlements with six creditors of the Company noted below.

                     On February 21, 2003, the Company signed and executed a mutual release of all claims with a former law firm that had provided legalservices to the Company.  Under the terms of this agreement, both parties agreed to a mutual release of any and all claimsbetween the parties, as well as a cancellation of the unpaid fees owed by the Company to the law firm, totaling $886,557.  TheCompany did not issue any cash or equity securities or enter into any other obligations in connection with this release.  Thesettlement gain resulting from this transaction was $886,557.

                     On June 7, 2002, AT&T filed a civil lawsuit in the United States District Court for the Eastern District of North Carolinaagainst Summus.  In this suit, AT&T claims that it is entitled payment in the amount of $238,783 for telephone calls andservices rendered to the Company.  In March 2003, the Company and AT&T settled the claim between them, whereby bothparties agreed to reduce the total amount owed by the Company to AT&T to $120,000 and this reduced amount be repaid over an 18month period commencing in March 2003.  The settlement gain resulting from this transaction was $118,783.

                     On February 27, 2003, Holland & Knight LLP (“H&K”) filed a civil lawsuit in the Superior Court for the Districtof Columbia against Summus.  In this suit, H&K claims that it was entitled to $867,268, plus interest, for servicesrendered to Summus.  Summus and H&K entered into an agreement on May 23, 2003 settling this litigation, whereby bothparties agreed to the following terms.
- $217,268 of the total balance due was forgiven by H&K, resulting in a portion of the settlement gain of thistransaction. 
- $325,000 of the total balance due will be paid over a three-year period with monthly installments of $9,028,commencing on June 1, 2003.   The settlement agreement did not provide for an interest rate component pertaining to thethree-year payment plan.  Therefore, an interest rate of 20% per annum was used to present value the note, resulting in a netpresent value of $242,926. The difference between the face value of $325,000 and the net present value of $242,926, totaling$82,074,  was recorded as a portion of the settlement gain of $82,074.  The 20% rate of return was considered appropriateto fair value the note based on the Company’s financial condition, including its negative working capital and negative networth position. 
- The remaining amount of the recorded liability due to H&K of $325,000 was satisfied through the issuance toH&K of 738,636 shares of the Company’s unregistered common stock, with registration rights. The fair value of the 738,636shares of unregistered common stock was estimated at $273,295, based on the traded value of the Company’s common stock on thedate the settlement agreement became effective.  The difference between the estimated fair value of the 738,636 unregisteredcommon shares and the recorded value of the liability of $325,000, totaling, $51,705, was recorded as a portion of the settlementgain of $51,705. The unregistered shares have since been registered, and H&K has contractually agreed to sell no more than18,000 shares in any one (1) business day. 

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- Therefore, the aggregate settlement gain resulting from this transaction totaled $351,047. 
- The settlement agreement also provided that if the Company raised $5.0 million or more in capital at one time,all remaining unpaid amounts owed under the $325,000 note agreement shall become immediately due and payable.  This note isunsecured, and upon default of the terms of the agreement, the unpaid balance shall become immediately due and payable and suchamount shall include pre-judgment interest in the amount of 6% accruing as of April 3, 2002 and post- judgment interest at a rateto be determined.

                     On June 5, 2003, the Company signed and executed an agreement pertaining to the payment of amounts owed to a current serviceprovider. Under the terms of the agreement, the Company issued 427,419 shares of its unregistered common stock, with registrationrights, for full payment of $132,500 owed to the service provider. The fair value of the 427,419 shares of unregistered commonstock was estimated at $149,597, based on the traded value of the Company’s common stock on the date the settlement agreementbecame effective.  The difference between the estimated fair value of the 427,419 unregistered common shares and the recordedvalue of the liability of $132,500 was recorded as a settlement loss of $17,097. The service provider has contractually agreed tosell no more than 5,000 shares in any one (1) business day. 

                      On August 29, 2003, the Company signed and executed an agreement pertaining topast due amounts owed to a current service provider totaling $62,500. Under the terms of the agreement, the service provider agreed to forgive $14,500of the total past due amounts. The remaining amount due of $48,000 is to be paidin twelve-monthly installments of $4,000 each.  The non-cash settlementgain resulting from this transaction totaled $14,500.

                      During 1999, the Company entered into an agreement with  Raytheon Company(“Raytheon”) to repurchase 1,533 shares of its common stock from Raytheon for an aggregate value of $268,373, of which$268,075 represented a termination fee for a development contract and $298 represented the fair value of the shares repurchased. Inconnection with this agreement, the Company entered into a promissory note with Raytheon whereby the Company agreed to payapproximately $10,000 per month over a 27-month period to fund this transaction. The Company did not make all required monthlyinstallments and thus defaulted on the promissory note. Consequently, the note began accruing interest at 18% perannum.   On September 30, 2003, the Company executed a settlement agreement with Raytheon whereby both parties agreed tothe following terms.
- $49,128 of the total balance due was forgiven by Raytheon, resulting in a portion of the settlement gain of thistransaction. 
- $87,516 of the total balance due will be paid over a 22 month period, with an initial payment of $10,000; six (6) equal monthlyinstallments of $3,000; fourteen (14) monthly installments of $4,000; and one final installment of $3,516.  The settlementagreement did not provide for an interest rate component pertaining to the 22-month payment plan.  Therefore, an interest rateof 20% per annum was used to present value the note, resulting in a net present value of $74,306. The difference between the facevalue of $87,516 and the net present value of $74,306, totaling $13,210 was recorded as a portion of the settlement gain. The 20%rate of interest was considered appropriate to fair value the note based on the Company’s financial condition, including itsnegative working capital and negative net worth position. 
- The remaining amount of the recorded liability due to Raytheon of $87,516 was satisfied through the issuance to Raytheon of295,662 shares of the Company’s unregistered common stock, with registration rights. The fair value of the 295,662 shares ofunregistered common stock was estimated at $94,613, based on the traded value of the Company’s common stock on the date thesettlement agreement became effective.  The difference between the estimated fair value of the 295,662 unregistered commonshares and the recorded value of the liability of $87,516, totaling $7,097, was recorded as an offset to the settlement gain. Raytheon has contractually agreed to sell no more than 15,000 shares in any one (1)-business day.

Therefore, the aggregate settlement gain resulting from this transaction totaled$55,241.

                     The aggregate value of these non-cash settlements totaling $1,409,031, has been recorded as a reduction to the Company’saccounts payable and a credit in the Company’s Statement of Operations for the nine-month period ended September 30,2003.

*Net Loss.*  As a result of the factors discussed above,the net losses for the nine-month periods ended September 30, 2003 and 2002 were $2,967,196 and $6,954,834,respectively.

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**Liquidity and Capital Resources**

                     As of September 30, 2003 we had cash of $387,112, negative working capital of approximately $2.4 million, and approximately $3.2million in current liabilities.  During the three-month period ended September 30, 2003, we funded our operations primarilythrough: (1) the sale of 1,250 shares of our unregistered Series C convertible preferred stock along with warrants to purchase 5.0million shares of the unregistered common stock to individual accredited investors for gross proceeds of $1,250,000; and (2) thesale of 650 shares of our unregistered Series D convertible preferred stock along with warrants to purchase 1,625,000 shares of theunregistered common stock to individual accredited investors for gross proceeds of $650,000. While our net cash used in operationscontinues to decrease, we anticipate that we will continue to utilize our equity securities as the primary source of our liquidityuntil we obtain funding from additional institutional sources and generate positive cash flow from operations.  We arecurrently discussing funding with various institutional investment groups; however, we cannot guarantee that we will be able toraise the necessary capital or that, if we do so, it will be on favorable terms. We may have to sell equity at below market rates,and any future sales of our capital stock to finance our business plan will dilute our existing shareholders' ownership. Ourcontinuation as a going concern depends on our ability to generate sufficient cash flow to meet our obligations on a timely basis,to obtain additional financing as may be required and ultimately to attain profitability.  In light of our financial conditionand operating losses, our auditors have included in their report on our audited consolidated financial statements for the fiscalyear ended December 31, 2002, an explanatory paragraph which expresses substantial doubt about our ability to continue as a goingconcern.

                     During the month of October 2003, the Company sold an additional 3,350 shares of its Series D convertible preferred stock andissued warrants in connection with such sale to purchase 16,750,000 shares of unregistered common stock with an exercise price of$0.35 per share for gross proceeds of $3,350,000.   Additionally, during October, the Company amended its articles ofincorporation to establish its Series E convertible preferred stock that has rights and privileges identical to the Series Dconvertible preferred stock.  During October, the Company sold 200 shares of its Series E convertible preferred stock andissued warrants in connection with such sale to purchase 500,000 shares of unregistered common stock with an exercise price of$0.35 per share for gross proceeds of $200,000.  Company paid cash commissions of $162,763 in connectionwith these offerings.

                     As of the date of this filing, we have not paid 2 of our regularly scheduled bi-monthly payrolls earned in 2003 to all theemployees of Summus totaling $187,500.  In addition, we owe consultants approximately $147,000 for services provided to Summusthrough September 30, 2003.  As of the date of this filing, these amounts remain unpaid and are recorded as accruedliabilities in the period they were incurred.  Commencing August 15, 2002, the Company adopted an alternative compensationarrangement for its executives. Under the terms of the new arrangement, electing executives may receive a portion of their annualcash compensation in the form of fully vested stock options.  The stock options have an exercise price equal to the fairmarket value of the Company’s common stock based on the closing price of the common stock at the end of each respectivepayroll period.  The amount of compensation to be received in stock options (the “target compensation”) is to bedetermined by the participating executive based on increments of 5% commencing with a minimum level of 15% of theparticipant’s annual compensation.  The number of shares underlying each option will be determined by dividing thedollar value of the target compensation by the closing price at the end of each respective payroll period.  Once this electionis made, it will remain effective for a minimum of three months and can be terminated early at the full discretion of the Company.Four of the Company’s executives participated in this arrangement from its inception through the six-month period ended June30, 2003 and three of the Company's executives continued to participate in this arrangement during the three month period endedSeptember 30, 2003, at reduced salary levels ranging between 25% and 35% of their respective annual compensation. During the threeand nine-month periods ended September 30, 2003, the Company issued 137,298 and 415,071 fully vested stock options with exerciseprices ranging between $0.28 and $0.51 per share under this plan.

                     Through the end of our fiscal year ended December 31, 2002 and during 2003, we had entered into settlement agreements orarrangements with several of our vendors under which such vendors have agreed to our payment of less than the amounts due, theextension of payment terms by between 9-36 months and/or the satisfaction of the amounts due through a combination of cash andstock.  As of the date of this filing, we have been able to make all of the required payments established under settlementagreements previously arranged with certain vendors.  We continue to communicate with our vendors to keep them informed of oursituation and discuss payment arrangements amiable to both parties under the current circumstances.  Additionally, as ofSeptember 30, 2003, we had approximately $3.2 million in current liabilities, of which $1.1 million were greater than 90 daysold. 

                     As of the date of this quarterly report, we are a party to one unsettled lawsuit, whereby the claimant has sued us for non-paymentof services provided to the Company.  The aggregate value of this claim is $276,374 (which has been accrued), plusinterest.  Summus has filed an answer to this claim disputing the total amount claimed and is in the process of attempting tonegotiate a settlement with the creditor.

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                     Under the terms of a settlement agreement dated August 7, 2001 with Analysts International Corporation ("AIC"), we agreed to paythe sum of $358,426, plus interest accruing at the rate of 8% per annum from March 31, 2000, according to the following paymentschedule: (i) $20,000 upon execution of the settlement agreement, (ii) $5,000 per month for a period of nine months, commencing onemonth after execution of the agreement, and (iii) $10,000 per month thereafter until the balance of the indebtedness was paid infull.  We ceased making payments under this settlement agreement on November 15, 2002 due to liquidity constraints, andtherefore, we were in default under the initial terms of the agreement. The Company received notification of its default from AICon July 9, 2003, and the 3-day cure period to which the Company was entitled under the terms of the settlement agreement expired,which would allow AIC to file a consent judgment against the Company.  While negotiating to amend the settlement agreement inAugust 2003, Summus learned that AIC had filed the consent judgment on February 13, 2002, which Summus believes is in breach of theoriginal settlement agreement.  In September 2003, the parties negotiated a revised settlement agreement pursuant to which (i)the consent judgment remains filed and of record, (ii) AIC will file with the court a credit to the judgment reflecting allpayments made by the Company; (iii) the payment terms have been revised to require payment by the Company of $60,000 by September5, 2003, which has been made, and $7,500 per month thereafter until the full amount of the current indebtedness of approximately$172,648 in principal and $85,000 in accrued interest is paid, and (iv) AIC agrees to refrain from executing on the consentjudgment as long as the Company makes the payments required by the revised settlement terms as identified in this paragraph. In the event that the Company fails to make a scheduled payment as set forth in this revised settlement agreement, AIC may executeon the consent judgment and seek to satisfy the judgement from the assets of the Company in accordance with the laws of the stateof North Carolina.  The execution of the AIC consent judgment, if effected by AIC, could have a material adverse effect on theability of the Company to continue in business.  There can be no assurance that we will be able to generate sufficient fundsin order to maintain the scheduled payments under this revised settlement agreement with AIC.

                     The success and growth of our business is dependent in large part on our ability to partner and develop relationships within thewireless industry. In order for us to execute fully on our business plan, we anticipate that it will require approximately $4.0 to$5.0 million in additional working capital within the next 12 months to complete the domestic rollout of our operations, as well asthe expansion of our operations to Europe and Asia, where the wireless network infrastructure is currently more developed than itis in North America. We are currently discussing funding with various institutional investment groups; however, we cannot guaranteethat we will be able to raise the necessary capital or that, if we do so, it will be on favorable terms. We may have to sell equityat below market rates, and any future sales of our capital stock to finance our business plan will dilute our existingshareholders' ownership. 

                     *Cash Flow used in Operating Activities.*  Net cash used in operating activities was $3,511,722 in the nine-month periodended September 30, 2003, compared to $5,748,920 in the corresponding period of the prior year. The decrease in net cash used inoperating activities was primarily due to the reduction in the net loss for the current period as compared to the prior period andless cash payments on accounts payable and accrued liabilities in the current period as compared to the prior period.

                     *Cash Flow from Investing Activities.*  Net cash was used in investing activities was $11,721in the nine-month periodended September 30, 2003, compared to $38,886 in the corresponding period of the prior year.  Net cash used in investingactivities for each of the nine-month periods ended September 30 represented the purchase of computer equipment.

                     *Cash Flow from Financing Activities.*  Net cash provided by financing activities was $3,884,565 in the nine-month periodended September 30, 2003 compared to net cash provided by financing activities of $6,070,792 in the corresponding period of theprior year. Net cash provided by financing activities in the nine-month period ended September 30, 2003 related to:
- the sale of 2,703,903 shares of unregistered common stock, along with warrants to purchase an additional 316,000shares of common stock, and the repricing and simultaneous exercise of  4,242,261 previously issued warrants. Thesetransactions were in two forms.  The first form involved purchases of common stock at prices which were above the traded valueand allowed these investors to reduce the exercise price of a certain number of their previously purchased warrants, typicallyallowing them to reprice 2 warrants for every share purchased. The other form allowed warrant holders to reduce the exercise priceof previously issued warrants if the holder exercised those repriced warrants immediately. The original exercise prices of therepriced warrants ranged between $0.60 and $5.25, per share.  The repriced exercise prices ranged between $0.25 and $1.69, pershare.  Total cash proceeds from the sale of the shares, new warrants and the exercise of repriced existing warrants were$1,326,607;
- the sale of 1,250 shares of unregistered Series C convertible preferred stock, along with warrants to purchase anadditional 5.0 million shares of common stock for net proceeds of $1,214,737; 
- the sale of 650 shares of unregistered Series D convertible preferred stock, along with warrants to purchase anadditional 1,625,000 shares of common stock for net proceeds of $650,000; 

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-  the issuance of 2,776,975 shares of unregistered common stock upon the exercise of warrants with exercise pricesranging from $0.25 to $0.47 per share.  Of the 2,776,975 exercised warrants, 2,767,075 were exercised in connection with theserepricing of the exercise price of the warrants as described in the previous paragraph.  The initial exercise prices of thewarrants ranged between $0.60 and $5.25. The repriced exercise prices ranged between $0.25 and $1.69. The exercise of thesewarrants generated gross proceeds of $779,355 and; 
- cash was used for $86,134 in principal payments on capital lease obligations.

Net cash provided by financing activities in the nine-month period endedSeptember 30, 2002 related to:
- the sale of 7,538,813 shares of our common stock, along with warrants to purchase an additional 15,104,560 sharesof common stock, at exercises prices ranging from $0.50 to $2.80 per share (all such securities being "restricted securities" asdefined in Rule 144) to accredited investors, generating aggregate proceeds of $5,756,481; 
- The issuance of 6% convertible debentures, along with warrants to purchase an additional 1,724,138 shares ofcommon stock, at exercise prices ranging from $0.47 to $0.59 per share (all such securities being “restrictedsecurities” as defined in Rule 144) to accredited investors, generating aggregated gross proceeds of $500,000; 
- $22,750 consisting of $12,750 in proceeds from the exercise of stock options and $10,000 in cash collections on astock subscription receivable; and 
- $208,439 in principal payments on capital lease obligations and note payable agreements.

**New Accounting Pronouncements**

                     In August 2001, the Financial Accounting Standards Board (“ FASB”) issued Statement of Financial Accounting Standards143, *“Accounting for Asset Retirement Obligations”* (“SFAS 143”).  SFAS 143 requires an entityto record a liability for an obligation associated with the retirement of an asset at the time that the liability is incurred bycapitalizing the cost as part of the carrying value of the related asset and depreciating it over the remaining useful life of thatasset.  The standard is effective for financial statements for fiscal years beginning after June 15, 2002 and was adopted bythe Company on January 1, 2003.  The adoption of SFAS 143 did not have a material impact on the Company’s results ofoperations, financial position or cash flows.

                     In April 2002, the FASB issued Statement of Financial Accounting Standards 145, *“Rescission of FASB Statements No. 4, 44,and 62, Amendment of FASB Statement No. 13, and Technical Corrections”* (“SFAS 145”).  SFAS 145 requiresgains and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than asextraordinary items as previously required under Statement 4.  Extraordinary treatment will be required for certainextinguishments as provided in APB 30.  SFAS 145 also amends Statement 13 to require certain modifications to capital leasesbe treated as a sale-leaseback and modifies the accounting for sub-leases when the original lessee remains a secondary obligor (orguarantor).  SFAS 145 is effective for all fiscal years beginning after May 15, 2002 and was adopted by the Company on January1, 2003.  The adoption of SFAS 145 did not have a material impact on the Company’s results of operations, financialposition or cash flows.

                      In July 2002, the FASB issued Statement of Financial Accounting Standards 146,*“Accounting for Costs Associated with Exit or Disposal Activities”* (“SFAS 146”).  SFAS 146,which superseded EITF Issue 94-3, *“Liability Recognition for Certain Employee Termination Benefits and Other Cost to Exitan Activity (including Certain Costs Incurred in a Restructuring)”*, requires that a liability for a cost associated withan exit or disposal activity be recognized when the liability is incurred.  Under Issue 94-3, a liability for an exit cost wasrecognized at the date of an entity’s commitment to an exit plan.  The provisions of this Statement are effective forexit or disposal activities that are initiated after December 31, 2002.   The adoption of SFAS 146 had no impact on theCompany’s result’s of operations, financial position or cash flows.

                     In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, *Accounting for Stock-BasedCompensation*   - *Transition and Disclosure* (“SFAS 148”).  SFAS 148 provides transition guidancefor companies that adopt the fair value method for stock-based employee compensation and has certain disclosure provisions that areeffective as of December 31, 2002.  Due to the Company continuing to apply the intrinsic value provisions of APB 25, theadoption of SFAS 148 did not have any impact on its net loss or financial position.  The disclosure provisions of thisstatement have been incorporated herein.

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                     In November 2002, the FASB issued FASB Interpretation No. 45 (“FIN 45”), which expands previously issued accountingguidance and disclosure requirements for certain guarantees. FIN 45 requires companies to recognize an initial liability for thefair value of an obligation assumed by issuing a guarantee.  The provision for initial recognition and measurement of theliability will be applied on a prospective basis to guarantees issued or modified after December 31, 2002.  The Company doesnot expect the adoption of FIN 45 to have a material impact on the Company’s results of operations, financial position orcash flows.

                     In January 2003, the FASB issued FIN 46, *Consolidation of Variable Interest Entities (“FIN 46”). * FIN 46requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the beneficiary in theentity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entityto finance its activities without additional subordinated financial support from other parties.  The Company was required toadopt the provisions of FIN 46 effective July 1, 2003. The Company does not expect the adoption of FIN 46 to have a material impacton the Company’s results of operations, financial position or cash flows.

                     In May 2003, the FASB issued SFAS No. 150, *Accounting for Certain Financial Instruments with Characteristics of both Liabilitiesand Equity* ("SFAS 150"). SFAS 150 changes the accounting for certain financial instruments, which under previous guidance couldbe accounted for as equity. SFAS 150 requires that those instruments be classified as liabilities in statements of financialposition. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effectivefor fiscal periods beginning after December 15, 2003. The Company has not issued any equity securities of this type since May 31,2003 and is currently evaluating the impact of adoption of SFAS 150 on its financial position and results operations.

**Description of Critical Accounting Policies**

                     The preparation of our financial statements in conformity with accounting principles generally accepted in the United Statesrequires us to make estimates and judgments that affect our reported amounts of assets and liabilities, revenues andexpenses.  We have identified the following critical accounting policies that affect the more significant estimates andjudgments used in the preparation of our financial statements.  On an ongoing basis, we evaluate our estimates, includingthose related to the matters described below.  These estimates are based on the information that is currently available to usand on various other assumptions that we believe to be reasonable under the circumstances.  Actual results could vary fromthose estimates under different assumptions or conditions.

*                     Valuation of Equity Instruments*

                     We have utilized our equity securities, including unregistered common stock and options/warrants to purchase unregistered commonstock, pay for services and to settle obligations owed to or claimed by creditors. The issuance of equity instruments as paymentfor services rendered to Summus results in the recording of non-cash compensation or consulting expense as the services areperformed.  We utilize the Black-Scholes option-pricing model to determine the value of options or warrants issued as paymentfor services.  Underlying the Black-Scholes option-pricing model are several assumptions that are evaluated by management andinclude: (1) a dividend yield; (2) a common stock volatility factor; (3) the risk-free interest rate; and (4) the expected life ofthe option or warrant. Management evaluates each of these assumptions on a periodic basis in order to determine the value of theequity instruments used as payment for services as well as to record the associated expense.  As conditions change, ourevaluation of the assumptions underlying the Black-Scholes option-pricing model may change resulting in differing values of equityinstruments issued for services between reporting periods. 

*Revenue Recognition*

                            Wireless applications and contracts

                     Commencing during the second quarter of 2002, our resources were dedicated to the development of solutions for the mobile andwireless markets.  Revenue earned from wireless applications is recognized upon delivery and acceptance by the end-user eitheras a one-time purchase or a monthly subscription.  Wireless application revenue reported by Summus is net of all third-partyplatform and carrier distribution fees, as well as any revenue Summus shares with its content partners.

                     In January 2002, the Company entered into a strategic partnership agreement related to the mobile and wireless markets. Revenue earned under this agreement was recognized ratably over the twelve-month term of the agreement.

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                     Periodically, we enter into non-recurring engineering arrangements with our content partners.  Generally, under the terms ofthese agreements, we receive funding upfront to complete projects. The funding we receive upfront is recorded as deferred revenueand is recognized as revenue under the terms of the individual arrangements.  Deferred revenue represents amounts received forwhich the Company has not yet completed its contractual obligations. 

                            Wireless License Fees 

                     We recognize revenue from licensee fees for wireless software applications in accordance with the provisionsof AICPA Statement of Position 97-2, “Software Revenue Recognition”, as amended by AICPA Statement of Position 98-9“Modification of SOP No. 97-2 Software Revenue Recognition with Respect to Certain Transactions.” Revenue from softwarelicense fees is generally recognized upon delivery provided that a contract has been executed, the vendor fee is fixed ordeterminable, no significant vendor obligations or uncertainties surrounding customer acceptance remain, and collection of theresulting receivable is deemed probable.

                               Contracts and license fees

                     During the first quarter of 2002, we derived our revenues primarily from research and development contracts for governmentalagencies and the commercial licensing of our technology.  We recognized revenue on these contracts at the time services wererendered based upon the terms of individual contracts.  Regarding the commercial licensing of our technology, we followed theprovisions of AICPA Statement of Position 97-2, “*Software Revenue Recognition*”, as amended by AICPA Statement ofPosition 98-9 “*Modification of SOP No. 97-2 Software Revenue Recognition with Respect to Certain Transactions*.”Revenue from software license fees is generally recognized upon delivery provided that a contract has been executed, the vendor feeis fixed or determinable, no significant vendor obligations or uncertainties surrounding customer acceptance remain, and collectionof the resulting receivable is deemed probable.

**Item  3.       Quantitative and QualitativeDisclosures About Market Risk**

                     We do not use any derivative financial instruments for hedging, speculative or trading purposes. Our exposure to market risk iscurrently immaterial.

**Item 4.       Controls andProcedures**

                     Within the 90-day period prior to the filing of this report, an evaluation was carried out under the supervision andwith the participation of the Company's management, including the Chief Executive Officer ("CEO") and Chief Financial Officer("CFO"), of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-14 (c) and 15d-14 (c) under theSecurities Exchange Act of 1934 (the “Exchange Act”).  Based on that evaluation, the CEO and CFO have concludedthat the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by theCompany in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the timeperiods specified in Securities and Exchange Commission rules and forms.  Subsequent to the date of their evaluation, therewere no significant changes in the Company's internal controls or in other factors that could significantly affect the disclosurecontrols, including any corrective actions with regard to significant deficiencies and material weaknesses.
 
 

 

 

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**PART II.OTHER INFORMATION**

 

**Item 1.     *Legal Proceedings***

***                       *Analysts International Corporation Litigation**

                     Under the terms of a settlement agreement dated August 7, 2001 with Analysts International Corporation ("AIC"), we agreed to paythe sum of $358,426, plus interest accruing at the rate of 8% per annum from March 31, 2000, according to the following paymentschedule: (i) $20,000 upon execution of the settlement agreement, (ii) $5,000 per month for a period of nine months, commencing onemonth after execution of the agreement, and (iii) $10,000 per month thereafter until the balance of the indebtedness was paid infull.  We ceased making payments under this settlement agreement on November 15, 2002 due to liquidity constraints, andtherefore, we were in default under the initial terms of the agreement. The Company received notification of its default from AICon July 9, 2003, and the 3-day cure period to which the Company was entitled under the terms of the settlement agreement expired,which would allow AIC to file a consent judgment against the Company.  While negotiating to amend the settlement agreement inAugust 2003, Summus learned that AIC had filed the consent judgment on February 13, 2002, which Summus believes was in breach ofthe original settlement agreement.  In September 2003, the parties negotiated a revised settlement agreement pursuant to which(i) the consent judgment remains filed and of record, (ii) AIC will file with the court a credit to the judgment reflecting allpayments made by the Company; (iii) the payment terms have been revised to require payment by the Company of $60,000 by September5, 2003, which has been made, and $7,500 per month thereafter until the full amount of the current indebtedness of approximately$172,648 in principal and $85,000 in accrued interest is paid, and (iv) AIC agrees to refrain from executing on the consentjudgment as long as the Company makes the payments required by the revised settlement terms as identified in this paragraph. In the event that the Company fails to make a scheduled payment as set forth in this revised settlement agreement, AIC may executeon the consent judgment and seek to satisfy the judgement from the assets of the Company in accordance with the laws of the stateof North Carolina.  The execution of the AIC consent judgment, if effected by AIC, could have a material adverse effect on theability of the Company to continue in business.  There can be no assurance that we will be able to generate sufficient fundsin order to maintain the scheduled payments under this revised settlement agreement with AIC.

**Item 2.     *Changes in Securities and Use ofProceeds ***

                     During the three-month period ended September 30, 2003, the Company issued an aggregate of 295,662 shares of its common stock toone entity; 1,250 shares of our Series C convertible preferred stock to three investors (which is convertible into 5.0 millionshares of the Company’s common stock); and 650 shares of our Series D convertible preferred stock to three investors (whichis convertible into 3,250,000 shares of the Company’s common stock). These securities were not registered under theSecurities Act of 1933. Except as noted below, the securities described below were issued in transactions deemed to be exempt fromregistration under Section 4(2) of the Securities Act as transactions by an issuer not involving any public offering. All of suchsecurities are deemed to be "restricted securities" as defined in Rule 144(a)(3) under the Securities Act. Except as noted below,no commissions were paid in connection with any of the issuances.

 **Stock Issuances for Cash**

**                     Series C Convertible Preferred Stock**

                     During July and August of 2003, we issued an aggregate of 1,250 shares of our unregistered Series C convertible preferred stock,stated value of $1,000 per share, to three investors for an aggregate consideration of $1,250,000.  Each share of the Series Cconvertible preferred stock, which has an issue price and liquidation preference of $1,000 per share, is convertible into 4,000shares of common stock at any time after nine months from the issuance date. In connection with this capital raising activity, wepaid cash commissions totaling $35,263. The shares were issued in transactions deemed to be exempt from registration under theSecurities Act in reliance upon the exemption provided by Rule 506 of Regulation D. 

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Name of Purchaser

Number of Shares

     Donald D. Hammett

500

     Owen Brown

250

     John Williams

500

**Series D Convertible Preferred Stock**

                     During September of 2003, we issued an aggregate of 650 shares of our unregistered Series D convertible preferred stock, statedvalue of $1,000 per share, to three investors for an aggregate consideration of $650,000.  Each share of the Series Dconvertible preferred stock, which has an issue price and liquidation preference of $1,000 per share, is convertible into 5,000shares of our common stock. The shares were issued in transactions deemed to be exempt from registration under the Securities Actin reliance upon the exemption provided by Rule 506 of Regulation D. 

Name of Purchaser

Number of Shares

The Focus Fund LP

300

Jane L. Ellisen

100

Neal I. Goldman

250

**Stock Issuances for Services**

**                     **On September 30, 2003, the Company executed a settlement agreement with Raytheon Company (“Raytheon”)settling a note payable agreement that was currently in default and accruing interest at an annual rate of 18% per annum. Under the terms of the Raytheon agreement, both parties agreed to the following terms.
- $ 49,128 of the total balance due was forgiven by Raytheon, resulting in a portion of thesettlement gain of this transaction. 
- $87,516 of the total balance due will be paid over a 22 month period, with an initialpayment of $10,000; six (6) equal monthly installments of $3,000; fourteen (14) monthly installments of $4,000; and one finalinstallment of $3,516.  The settlement agreement did not provide for an interest rate component pertaining to the 22-monthpayment plan.   Therefore, an interest rate of 20% per annum was used to present value the note,resulting in a net present value of $74,306. The difference between the face value of $87,516 and the net present value of $74,306,totaling $13,210 was recorded as a portion of the settlement gain. The 20% rate of interest was considered appropriate to fairvalue the note based on the Company’s financial condition, including its negative working capital and negative net worthposition. 
- The remaining amount of the recorded liability due to Raytheon of $87,516 was satisfiedthrough the issuance to Raytheon of 295,662 shares of the Company’s unregistered common stock, with registration rights. Thefair value of the 295,662 shares of unregistered common stock was estimated at $94,613, based on the traded value of theCompany’s common stock on the date the settlement agreement became effective.  The difference between the estimated fairvalue of the 295,662 unregistered common shares and the recorded value of the liability of $87,516, totaling $7,097, was recordedas a portion of the settlement gain.  Raytheon has contractually agreed to sell no more than 15,000 shares in any one(1)-business day. 
- Therefore, the aggregate settlement gain resulting from this transaction totaled$55,241.

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**Item 6.       *Exhibits and Reports on Form8-K***
(a)Exhibits:    3.1Amended    and Restated Articles of Incorporation, filed February 28, 2000   3.2Articles    of Amendment and Statement of Rights and Preferences of the 8% Series A    Convertible Preferred Stock, filed March 3, 2000   3.3Articles    of Correction filed June 23, 2000 to Articles of Amendment, filed March 3,    2000   3.4Amendment    to Amended and Restated Articles of Incorporation , filed  February 27,    2002, changing our name to Summus, Inc. (USA)    3.5Amendment    to Amended and Restated Articles of Incorporation, filed February 27, 2002,    increasing our authorized common stock, par value $.001, from 50,000,000    shares to 100,000,000 shares   3.6Articles    of Amendment ofSummus, Inc. (USA) for Series C Convertible Preferred Stock, dated June 16, 2003   3.7Articles    of Amendment ofSummus, Inc. (USA) for Series D Convertible Preferred Stock, dated September 25, 2003   3.8Articles    of Amendment ofSummus, Inc. (USA) for Series E Convertible Preferred Stock, dated October 17, 2003   4.1Form of    Series C Convertible Preferred Stock Subscription Agreement   4.2Form of Series C Convertible    Preferred Stock Registration Rights Agreement   4.3Form of Series D Convertible    Preferred Stock Subscription Agreement   4.4Form of Series D Convertible    Pre4erred stock Registration Rights Agreement   4.5Form of Series E Convertible    Preferred Stock Subscription Agreement   4.6Form of Series E Convertible    Pre4erred stock Registration Rights Agreement   4.7Form of    Warrant issued in connection with the Company's Series E Convertible    Preferred Stock  10.1    Employment Agreement of Greg Dyer, dated as of November 1, 2003  31.1Certificate of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of2002, by Dr. Bjorn D. Jawerth, Chief ExecutiveOfficer  31.2    Certificate of Chief Financial Officer Pursuant to Section 302 of the    Sarbanes-Oxley Act of 2002,  by Robert S. Lowrey, Chief FinancialOfficer  32.1Certificate of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Dr. Bjorn D. Jawerth, Chief Executive Officer  32.2Certificate of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Robert S. Lowrey, Chief Financial Officer     (b)    Reports on Form 8-K: None 
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**SIGNATURES**

                    Pursuant to therequirements of the Securities and Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

Date: November 12, 2003

SUMMUS, INC. (USA)

By:      /s/              BJORN D.JAWERTH                                              BjörnD. Jawerth                                 *Chief Executive Officer*

 

 

Date: November 12, 2003

By:    /s/                ROBERT S.LOWREY                                             RobertS. Lowrey                               *Chief Financial Officer*

**