<PAGE>

                                    FORM 10-K

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

For the fiscal year ended   June 30, 1999
                          -----------------

                                       OR


[  ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
         EXCHANGE ACT OF 1934

For the transition period from                to
                               ---------------  ---------------

Commission File Number 33-28622-A
                      ------------


                                 MSU Corporation
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)


         Florida                                            22-274288
--------------------------------                       --------------------
(State or other jurisdiction of                          (I.R.S. Employer
 incorporation or organization)                         Identification No.)


                        Elder House, 526-528 Elder Gate,
                     Central Milton Keynes, MK9 1LR, England
          ------------------------------------------------------------
          (Address of principal executive offices, including zip code)


Registrant's telephone number, including area code: 441908232100
                                                   --------------

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

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

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

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

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

As of September 30, 1999, the aggregate market value of the voting stock held by
non-affiliates of the registrant, by reference to the closing price for such
stock as reported by Commodity Systems, Inc. through Yahoo! Finance, was
$52,388,994.



As of August 31, 1999, the registrant had issued and outstanding 25,240,748
shares of Common Stock.
<PAGE>

October 5, 1999

                                 FORM 10-K INDEX

                                     PART I

ITEM 1.         BUSINESS

ITEM 2          PROPERTIES

ITEM 3          LEGAL PROCEEDINGS

ITEM 4          SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS


                                    PART II

ITEM 5          MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
                   COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

ITEM 6.         SELECTED CONSOLIDATED FINANCIAL DATA

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

ITEM 8.         FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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


                                    PART III

ITEM 10.        DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

ITEM 11.        EXECUTIVE COMPENSATION

ITEM 12.        SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                   MANAGEMENT

ITEM 13.        CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

                                     PART I

ITEM 1 .        BUSINESS

Business Development

         MSU Corporation, formerly Capital Acquisitions Company ("Capital
Acquisition"), was incorporated in Florida in 1986. MSU Corporation conducted no
substantive business until October 1994 when all of the outstanding shares of
MSU Public Limited Company, an England and Wales company formed under the
Companies Act of 1985 ("MSU PLC") were exchanged for Capital Acquisition shares
(the "Exchange"). The Exchange was treated for financial reporting purposes as a
reverse acquisition or purchase of Capital Acquisition by MSU PLC. MSU PLC in
turn owns all of the outstanding shares of Web 2 U Limited, formerly called MSU
(UK) Limited, ("Web 2 U Limited"), an England and Wales company formed under the
Companies Act of 1985. MSU Limited was formed in March 1991 and commenced
operations in March 1992. MSU Corporation's business is based in the United
Kingdom and is conducted almost exclusively by MSU Limited, its second tier
subsidiary. In February 1997 MSU US Operations Inc., a North Carolina
corporation and a wholly owned subsidiary of MSU Corporation ("MSU US") was
formed to act as a sales company, in the United States, marketing and selling
products developed by MSU Corporation; however it has remained dormant since its
incorporation.

         Unless the context otherwise requires, references in this Annual Report
on Form 10-K to the "Company" refer to MSU Corporation, MSU PLC, Web 2 U Limited
and MSU US. Unless otherwise stated, the information contained in this Annual
Report on Form 10-K is as of September 1999.

Exchange Rates

         MSU PLC and Web 2 U Limited conduct a significant amount of their
operations in pounds sterling. References to $ in this Annual Report on Form
10-K are to US dollars and in many instances represent translations of pounds
sterling into dollars at specified rates. These translations should not be
construed as representations that the pound sterling amounts actually represent
such dollar amounts. Unless otherwise stated, the translations of pounds
sterling into dollars have been made at the average rate for the year indicated.
The following table sets forth, for the periods indicated, certain information
concerning the rates of pounds sterling per dollar:

Fiscal year ended         At end of        Average
    June 30                period          Rate(1)        High(2)      Low(2)
-----------------------------------------------------------------------------
 1995                       .63             .63            .65          .61
 1996                       .65             .65            .64          .61
 1997                       .60             .62            .64          .59
 1998                       .60             .60            .62          .60
 1999                       .63             .61            .63          .60

(1) Represents the average of the rates on the last day of each month during the
    relevant period.
(2) represents the highest and lowest rates used in the average rate
    calculation.
<PAGE>

General Overview

         The Company designs and develops computer chips and chipsets
principally for use in high volume consumer electronics products. Most of the
Company's chips can perform multiple functions, thereby eliminating the need for
multiple chips and permitting a more efficient printed circuit board design and
a diminished risk of malfunction and error at a lower cost.

         The Company also develops prototype electronic products with particular
emphasis on prototype consumer electronic products. The prototype electronic
products developed by the Company are almost exclusively based on the Company's
proprietary chips and chipsets. These prototype products are used for
demonstration and marketing purposes in connection with presentations before
consumer electronic manufacturers and others with an interest in the Company's
chip technology and products.

         To date, the Company has developed numerous consumer electronic
products on its own behalf and as a result of development contracts or
arrangements with manufacturers based in China, Taiwan, Germany, the United
States, Hong Kong and the United Kingdom. These contracts have typically
provided for the payment of development and/or license fees to the Company and
royalties on sales of products utilizing the Company's chips or chipsets.

         During the year ending June 30, 1997 sales of Internet Access Devices
by one of the Company's joint venture partners, Mitac, Inc., a Taiwanese
corporation ("Mitac") commenced and further sales were made in the year ended
June 30, 1998, but to date only about 15,000 devices have been shipped. In the
year ending June 30, 1999 no sales, other than a few samples, were made as the
Company concentrated its efforts on further software developments of its
proprietary Internet Access Device.

         On May 6, 1998 the Company entered into a licensing agreement with
American Interactive Media Inc. ("AIM") whereby the Company granted to AIM a
world-wide non-exclusive license in respect of the MSU proprietary intellectual
property relating to the Internet Access Device. The consideration for the
license was $1,150,000 in cash and 560,000 restricted shares of common stock in
AIM of which 60,000 shares were issued directly to Capital Bay Securities and
Daybreak Fund LLC in settlement of the short term funding received of $314,985,
together with accrued interest and other fees owing.

         Other than in the very limited circumstances as described more fully
herein no products developed pursuant to development arrangements have been sold
and no royalties have been received. In most instances, the Company has no
control over a third party's manufacturing, marketing or purchasing decisions,
and accordingly there can be no assurance that any developed products will be
manufactured, marketed or sold. In fiscal 1998, the Company's revenues were
derived almost entirely from license fees. In fiscal 1999, apart from a very
small amount of income mostly derived from sample sales, the Company had no
income.


                                      -2-
<PAGE>

          In October 1993, MSU Limited entered into several agreements with IBM
pertaining to the development of software and hardware for consumer multimedia
units using the Slipstream ASIC Chip - version 4.5. See "BUSINESS- Chip
Technology." In April 1995, after all development projects contemplated by the
agreements had been completed IBM advised the Company that it had determined not
to pursue, at that time, the consumer multimedia product market and that it
would not announce prior to July 1995 a product using the intellectual property
developed by the Company in conjunction with and licensed to IBM. IBM retains a
non-exclusive licence to use such intellectual property. Additionally any major
enhancements to and replacement of such intellectual property as well as other
technology developed by the Company must be offered first to IBM in writing. The
Company has offered its prototype Internet Access Device and related ISP Chip
technology to IBM and IBM has advised the Company of its rejection of such
offer. The Company has not yet offered the Envoy Chip or the Wynpeg Chipset to
IBM.

Chip Technology

         Slipstream Application Specified Integrated Circuit ("Slipstream ASIC
Chip"). The Slipstream ASIC Chip is a multi-function chip which provides
graphics capability and high quality sound for multimedia systems. The
Slipstream ASIC Chip incorporates (i) a video generator, that generates the
video signal from digital information; (ii) a graphics accelerator, that
controls memory and access to digital information allowing the manipulation and
control of images; and (iii) digital signal processors, that allow the
compression and decompression of data from CDs permitting the storage of massive
amounts of data necessary for the storage and retrieval of images. These
functions are typically achieved through the use of a group of chips in series.

         Computer image creation begins with the creation of pixels. Pixels are
individual picture elements that make up a video display such as a computer or
television screen. Each pixel contains information that is defined by the signal
or program, such as a movie or video game, that it is displaying. The more
information that may be held in each unit, the sharper and the more defined the
image. As computer hardware is able to process the information in a signal or
program with greater speed, the information projected in each pixel may be
changed more quickly, creating an improved illusion of motion, animation and
shading of images on the computer screen. The Slipstream ASIC Chip generates and
processes the pixel information necessary for image creation and movement.
Because conventional computer discs and storage devices are unable to store
efficiently the additional amount of data necessary in each pixel and within
each time frame to generate images adequately, the Company's Slipstream ASIC
Chip makes use of CD technology and uses a CD interface and a graphics
accelerator for enhanced retrieval. The Slipstream ASIC Chip further enhances
retrieval from the CD using a digital signal processor that interfaces to a
digital-to-analog converter and makes use of the advanced CD compression
techniques. The signals are compressed to allow for more effective and efficient
storage. The Slipstream ASIC Chip also includes algorithms which eliminate
unimportant or redundant data so that storage space is not wasted.


                                      -3-


<PAGE>

         The Slipstream ASIC Chip-version 4.5 is available in silicon. The
Company's prototype generic (Video) CD Player is based upon the Slipstream ASIC
Chip. See "BUSINESS- Prototype Products."

         Internet Services Processor ("ISP Chip"). The ISP Chip is a version of
the Slipstream ASIC Chip designed for use in Internet products such as the
Company's Internet Access Device, Web2u. See "BUSINESS-Products". Prior
prototype Consumer Internet Access Devices used the Slipstream ASIC Chip. The
ISP Chip provides more Internet related features (at a lower cost) than the
Slipstream ASIC Chip. The ISP Chip is a graphics and sound processor which also
provides interfacing and logic for the CPU and system memory. The ISP3 Chip is
available in Silicon. The Company is in the early specification stages of
development of an ISP4.

         For the ISP4, the Company plans to license an MPEG 11 core which will
provide a low cost solution to multi-media set top application focused on the
fast converging broadcast and telecommunications markets. In addition, the
Company currently anticipates that ISP4 will incorporate an advance Reduced
Instruction Set Processor ("RISP") which will not only improve product
performance dramatically but will remove the Company's reliance on third party
microprocessor suppliers, such as Intel and AMD, to further reduce the cost.

         CD Services Chip ("Envoy Chip"). The Envoy Chip reduces the complexity
in compact disc drive systems and the cost of interfacing to compact disc drives
in both PC's and consumer CD products. The Envoy Chip replaces six chips
typically used within a CD mechanism. The three principal electronic components
of a compact disc player are the servo processor, signal processor and micro
controller. The Envoy Chip provides the servo, signal and control functions. The
Envoy Chip is also suitable for CD ROM applications as it can replace principal
components along the data path. The Envoy Chip is available in silicon.

         M-Peg Chipsets ("Wynpeg Chipsets"). The Wynpeg Chipset incorporates the
Slipstream ASIC Chip and another non-proprietary chip that implements the
decoding standards of the Motion Picture Experts Group ("M-PEG"). M-PEG is an
international standards body that defined a world-wide standard for the
compression of video data called Philips White Book Video M-PEG Standard. The
Company's Wynpeg chipset is capable of decompressing video signals in accordance
with such standard. The Company intends to develop a version 2 of the Wynpeg
Chipset as part of the ISP program and the MPEG11 decoder to reduce the costs of
the set top box and enable development of cable ready boxes.






                                      -4-
<PAGE>

Products

         Generic (Video) CD Player. The prototype Generic CD Player, based on
the Slipstream ASIC Chip, is a multi media product capable of use as a video CD
player, audio CD player, and for a photo CD and Karaoke. This CD based multi
media product consists of a conventional CD player equipped with an internal
audio amplifier; a karaoke function which has the ability to run stereo sound
track and produce graphics on the screen with overlaying text for lyrics; and a
photo CD compatible with standard photo CDs and capable of supporting Kodak
multi session- photo CDs. The prototype Generic CD Player operates with a
standard television set.

         The Company has utilised the prototype Generic CD Player for
demonstration purposes only. Specific products were designed and developed in
connection with development contracts with two manufacturers in Taiwan and
China, respectively. To date, no products have been manufactured for sale.

         Internet Access Device. The Company's Internet Access Device, Web2u is
a low cost, easy to use, small set top device which provides access to the
Internet and on-line services via a telephone connection, standard television
set and a hand held remote control unit. A keyboard is available at an
additional cost to the consumer. Access to the Internet and on-line services is
conventionally via PCs, which represent both a cost and technology barrier to
many consumers. The most recent Internet Access Device is based on the ISP
Chip-version 2. It is anticipated that future generations of the Internet Access
Device will be based on the ISP Chip-version 3 or future generations and
derivations.

         The Company has developed and is continuing to modify the software
contained in its Internet Access Device. The software is stored on memory chips
and hard coded in the prototype Internet Access Device. The software enables
users to interact with the Internet via its e-mail and browser functions. During
the year ended June 30, 1999 significant software modifications to the Internet
Access Device were completed. It is possible for software updates to Internet
Access Devices sold and in use to be accomplished by downloading software via
the Internet or from a licensed on-line or Internet service provider. Although
steps will be taken by the company to protect its software from unauthorised
modifications, there can be no assurance that unauthorised modifications will
not occur.

         The Company's ISP Chip Internet Access Device has been demonstrated
internationally to manufacturers and others. The Company has experienced
significant interest in this Internet Access Device and related technology. The
Company has entered into contracts with American Interactive Media, Inc. a US
corporation ("AIM"), Mitac and Shanghai Thakral Electronic Industries Corp.
("Thakral") for the development, manufacture and sale of customised Internet
Access Devices. During fiscal 1997 and 1998 approximately 15,000 devices were
manufactured and sold by Mitac, either to commercial customers or were purchased
from Mitac by the Company and sold as production samples to other potential
customers.

         In 1999, 500 devices incorporating the latest software release were
manufactured by Thakral, many of which are currently being used as production
samples by a number of potential customers. A production order for a further
5,000 devices was placed by the Company with Thakral in August 1999.

         No production samples have been approved by customers; however, the
Company has received no indication of any material problems with such samples.
There can be no assurance that the final production samples will be approved by
either of these two companies or any other third parties, that orders once
placed by a third party will not be cancelled, or that any products will be
manufactured or sold to any third party.



                                      -5-

<PAGE>

         The Company had an agreement with Mitac which granted a non-exclusive
license to Mitac to manufacture and sell the Company's Internet Access Device,
including the ISP Chipset and software. The agreement also provided for a
royalty payment by Mitac in addition to sharing the profits from product sales.
The agreement was mutually rescinded during fiscal 1999, and the Company no
longer licenses to Mitac.

         The agreement dated May 6, 1998 with AIM, which supersedes all previous
agreements with AIM, grants AIM a non-exclusive world wide license to make, use,
modify, have made, sell, market and distribute the software embedded or used by
the Company in the development or manufacture of its proprietary Internet Access
Device. The agreement also grants the Company, a non-exclusive world-wide
license from AIM to make, have made, copy, sell and market AIM's Frames software
for incorporation into internet access browsers including the Frames software
and to sub license others to do so.

         The agreement with Thakral grants a non-exclusive license to Thakral to
manufacture and sell the Company's Internet access device using the ISP Chip
set, the related software and all related intellectual property. The agreement
provides for the sale by Thakral of the finished and packaged Internet access
devices to MSU and/or its OEM. MSU is to make payment for the supply of the
Internet access devices to it or its OEM customers by irrevocable letter of
credit in favor of Thakral price in the amount of each purchase order. MSU
agrees to supply Thakral with ISP Chip Sets at a fixed price per set during the
term of the agreement.

         Consumer PC. The Consumer PC is a CD based consumer product compatible
with most PC software and providing Internet connection capability but operating
via a standard television set. The Consumer PC resembles a VCR or CD player in
both appearance and operation but serves in many capacities including as a video
CD player and a PC CD ROM software disc player. The Consumer PC is not currently
based on chip technology, but is based on system software designed by the
Company. The Company plans to design a custom chip to incorporate the key
features of the Consumer PC in the near future. The Company has participated in
a Consumer PC product development arrangement with a German manufacturer.
Development of the product has been completed, however, to date, no products
have been manufactured for sale.

                                      -6-
<PAGE>

Strategy

         The Company's strategy can be segmented into three specific areas:
people, processes, and products. The Company anticipates that this three-fold
focus will enable it to attack the Internet related products market
aggressively.

People

         The early focus of the Company was driven more by product design than
by organizational structure. The Company has begun to reshape its organization
to make it function more in line with successful technology based companies. By
adding key members to its existing management team, intends to strengthen three
areas: overall management of the Company, product development and market
understanding and product positioning.

Process

         Secondly, the Company is instituting critical processes around
management controls and product development. The Company believes that
management controls will enable it to clearly define its financial and
technology development targets. The Company also believes that formalized
product development processes will allow the Company to routinize its existing
product development process, leading to increased utilization of its innovation
resources.

Product

         Finally, the Company has decided to focus its products around Internet
based communication devices. The strategy here is two-fold: firstly, to launch
the Company's next generation television set top Internet Access Device, and
secondly, to drive down the existing price level. The Company believes it has an
advantage in that it develops proprietary integrated chipsets which allow it to
reduce the number of standard chips, thereby, driving down the overall product
cost.

         In order to support this strategy, the Company anticipates that if
revenues from trading operations are not generated in the coming months, it
will, at least in the short term, have to continue to fund a significant portion
of its operations through private sales of equity securities to and/or borrowing
from third parties, to the extent such sources of capital are available to the
Company. These sources of capital may not be available to the Company, which
would hamper the Company's progress and have a material adverse effect on its
financial condition.


                                      -7-

<PAGE>

         The markets for the Company's products have only recently begun to
develop, are rapidly evolving and are highly competitive, with substantially all
competitors having significantly greater resources than the Company. The Company
and its prospects must be considered in light of the substantial risks, expenses
and difficulties facing the Company. The Company may not be successful in
addressing any of the foregoing risks or in implementing its strategy. The
Company also may not achieve profitability or be able to continue as a going
concern. See Report of Independent Auditors and Company's financial statements
appearing elsewhere in this document.

Support Services

         The Company has provided and will continue to provide consulting and
other development services pursuant to contracts entered into with consumer
electronic manufacturers and others. Company employees assist in, among other
matters, identifying trends in consumer preference and generating new product
ideas. The Company is involved in the development of software compatible with
certain of its products and intends to offer technical support to consumers of
its products and hardware and software engineers; however, such activities may
not result in profits to the Company.

Supply and Manufacturing

          It is anticipated that United Micro Corporation, a Taiwanese chip
manufacturer, will manufacture the majority of the ISP Chip-version 2 to be used
in the customised Internet Access Device proposed to be manufactured by Thakral
and the Envoy chip. The Company has no written agreement with United Micro
Corporation. See "BUSINESS Products-Consumer Internet Access Device". To date
the Company has not experienced any significant problems obtaining the requisite
number of chips for its operations although its demands have been relatively
small. The Company has commenced discussions with additional manufacturers for
the production of additional chips and chipsets should the need arise. Should
demand for the Company's chips and chipsets increase significantly, the Company
may not able to meet such demand, which could have a material adverse effect on
the Company. Arrangements with new manufacturers could result in substantial
delays, engineering charges and additional expense.

         The Company has set up manufacturing with Thakral in China. Should this
not proceed, the Company would be adversely affected in the short term, although
there are other companies which can manufacture the Internet Access Device.
Thakral is a major Asian consumer company, and sales in China are only possible
with local manufacturing facilities.

Research and Development

         Since 1992, the Company has been engaged in developing its own chips
and prototype products. It has done so independently and pursuant to research
and development arrangements. Research is conducted at the Company's facilities
located in Milton Keynes and Newmarket, England through engineers and
programmers employed by it as well as independent contractors. During the fiscal
years ended June 30, 1997, 1998 and 1999, the Company expended approximately
$1.4 million, $1.4 million and $1.6 million, respectively, on unreimbursed
research and development (which exclude all overhead costs other than employee,
independent contractor, development tool and prototyping cost), all of which has
been expensed.



                                      -8-
<PAGE>

         The multimedia, consumer electronics, computer and hardware and
software industries are characterised by rapidly changing technology, evolving
industry standards and frequent introductions of new products. The broad array
of competing and incompatible emerging technologies may lead consumers to
postpone buying decisions until one or more such technologies gain widespread
acceptance. The Company's success will depend upon its ability to anticipate
such technological changes, adapt its products, introduce competitive products
with features that meet changing customer requirements, and remain competitive
in terms of price and product performance. The Company may not be able to meet
any of these demands. Any material failure of the Company to meet any of these
demands would adversely affect the use and acceptance of the Company's chips and
chipsets and the introduction and sale of products using the Company's chips or
chipsets, and would increase the likelihood that competitive products would
become broadly accepted. There can be no assurance that the Company will
successfully anticipate technological changes or that products developed by
others will not render obsolete or commercially unviable the Company's chips and
chipsets and the products using such chips and chipsets.

Intellectual Property and Proprietary Rights

         The Company's ability to compete successfully depends, in part, on its
ability to protect its intellectual property and proprietary technology in the
United Kingdom, the United States and other countries. The Company has no issued
patents, other than its pending patent with respect to its Envoy CD Controller
(see below), but relies on a combination of trade secret protection,
confidentiality agreements and licensing agreements with strategic partners,
employees, consultants, vendors and licensees. The Company believes that the two
dimensional design representation prepared for each of its chips is protected
under the UK Copyright, Designs and Patent Act of 1988, which requires no
registration with respect to such technology, and that the three dimensional
aspects of each of its chips, including the electronic routes in the silicon,
are protected under the UK Topography Rights. The Company believes that its chip
technology is entitled to comparable protection under the US Copyright Act of
1976 and the Semiconductor Chip Protection Act of 1984. Although the
Semiconductor Chip Protection Act does not require registration, the failure to
register results in the loss of benefits after the passage of two years from the
first commercial sale of a chip. The Company has not registered any of its chips
under such Act; however it intends to do so within the prescribed period. It is
the Company's belief that patents for ASIC Chip technology are rarely granted
because of rapid technology changes and the relative ease of designing around
such patents. Despite this, the Company filed patent applications in the United
Kingdom and the United States directed to the Slipstream ASIC Chip technology.
The Company elected not to continue with the prosecution of these applications,
due in large part to a lack of working capital, and the applications have been
abandoned.

         A UK Patent application ( No.9706198.0 ) in respect of the Envoy CD
Controller was filed on March 25, 1997. It is the Company's intention to
complete the filing of the necessary information to support this application.

                                      -9-
<PAGE>

         No assurance can be given that any patent will issue from any
application that may be filed, or that if a patent does issue, the claims will
be sufficiently broad to provide effective legal protection or monopoly. In
addition, any patent issued to the Company may be challenged, invalidated or
avoided by design-around efforts. The rights granted under any such patent may
not provide the desired competitive advantages to the Company. The Company's
competitors may independently develop or patent technologies that are
substantially equivalent or superior to the Company's technologies, or the
Company's patents may be subservient to other dominant patents. Accordingly, the
Company may be unable to protect certain technology relating to its chips.

         The Company's license agreements prohibit unauthorised disclosures of
the Company's technology to third parties. In cases where the Company has
contracted with third parties in foreign countries, these provisions may be
difficult to enforce in such foreign countries despite the existence of any
applicable international treaties or conventions designed to protect rights to
technology. The Company is aware that third parties may attempt to reverse
engineer the Company's technology. There can be no assurance that the Company's
confidentiality agreements will not be breached, or that the Company would have
adequate remedies for any such breach. There can be no assurance that the
Company's technology may not otherwise become known or be independently
discovered by competitors. Under United Kingdom law, copyrights and mask rights
related to technology designed and developed by independent contractors, while
commissioned by the Company for such purpose, remain the property of the
Company, unlike in the United States where an assignment of such rights from the
independent contractor would be necessary to attain ownership of all such
rights.

         The Company has registered and/or applied for trademarks for the names:

         (i) Wynpeg in the United Kingdom (Reg. No. 1572811, effective May 21
1994), Hong Kong (Reg. No. 06937/96, effective December 20, 1994), Taiwan (Reg.
No. 00708445, effective April 1 1996) and the United States (Reg No. 74/718836,
effective March 25, 1997).

         (ii) Slipstream in the United Kingdom (Reg No. 2114009).

         (iii) Web 2U (applications) in the United Kingdom (App. No. GB219254),
dated March 23, 1999, China (App. No. CN99000 4550), dated April 29, 1999,
European Union (App. No. EM1138221), dated April 10, 1999, Hong Kong (App. No.
HK99/04522, dated April 13, 1999, Japan (App. No. JP44644/99, dated May 24,
1999, Singapore (App. No. T99/038960), dated April 21, 1999, Taiwan (App. No.
TW88023575), dated May 18, 1999 and the United States (App. No. US75/694832),
dated April 30, 1999.

         In addition, applications have been filed for the registration of the
Envoy trademark in the United Kingdom (Application No.217809 which the Company
is informed by its Patent Attorneys is proceeding to acceptance), China
(Application No. 970055064) and Hong Kong (Application No. 97/07465).
Applications have also recently been filed to register the Envoy trademark in
the European Community (Application No. 586107), the United States of America
(Application No. 75/304,571), Japan (Application No. 124075/97), Taiwan
(Application No. 86027777) and Singapore (Application No. s/6442/97).

         There can be no assurance that these trademark registrations will be
accepted or, if accepted, will not later be cancelled or invalidated or that the
Company's rights will not be subject to rights of prior users. The Company
relies heavily on trademark protection under common law. Such common law rights
may be limited or invalidated by third parties.




                                      -10-

<PAGE>

Employees

         The Company has 20 employees, including four executive officers, two
business development personnel, twelve technical personnel and two
administrators. The Company uses independent contractors for certain research
and development matters.

         The Company is highly dependent on the experience of certain key
personnel including certain of its executive officers and computer programmers,
designers and engineers who contribute to the development and production of the
Company's chips, chipsets and other products. If the Company were to lose the
services of one or more of these key employees, before a qualified replacement
could be obtained, its business could be materially adversely affected. The
Company has entered into employment contracts with Messrs. Holloway, Snowdon and
Phillips which restricts certain of their activities for one year after
departure from the Company. See "EXECUTIVE COMPENSATION - Employment
Agreements".. The Company has no current plans to obtain key-man insurance on
its key personnel. The multimedia, consumer electronics and computer industries
are characterised by a high level of employee mobility and aggressive recruiting
of skilled personnel. There can be no assurance that the Company's current
employees will continue to work for the Company or that the Company will be able
to obtain the services of additional personnel, whether for replacement purposes
or for new positions, necessary for the Company's growth and success.

Marketing

         The Company markets its chips and prototype electronic products through
exhibitions at trade shows and direct selling to OEMs and potential licensees of
its technologies. The Company targets corporations in the consumer electronic,
multimedia, computer hardware and software industries.

         No Significant Sales of Products that Employ the Company's Chips;
Dependence on Third Parties; Inadequacy of Insurance Coverage. Products that
incorporate the Company's chips or chipsets have only been manufactured in
relatively small quantities pursuant to development contracts and arrangements.
There can be no assurance that significant numbers of these products will ever
be manufactured, marketed and sold to the public. In connection with the
manufacture and sale of such products, the Company is and will continue to be
dependent upon the manufacturing, marketing, financial, technological and other
abilities of third parties with which it has established, or is attempting to
establish commercial relations to develop, manufacture and market products using
the Company's chips or chipsets. If the Company is unable to establish the
requisite third party commercial relations, products using its chips or chipsets
may never be successfully manufactured, marketed or sold. If any such third
party fails to commit sufficient resources to complete the proper development,
manufacturing or marketing of such products, the Company's reputation, business
relationships, and product acceptance could be adversely affected. In addition,
the Company will have little, if any, control over the timing or methods
employed in the manufacture marketing or sale of such products. Accordingly, if
any products using the Company's chips or chipsets, perform poorly, are inferior



                                      -11-
<PAGE>

in quality or do not achieve market success, poor performance may be associated
with the Company's chips and chipsets. The Company continues to review the
adequacy of its insurance coverage. Presently, the Company believes that its
insurance coverage may be inadequate in light of current and prospective trading
agreements. However it continues to endeavour to obtain adequate coverage,
although no assurance can be given that adequate insurance will be obtained.

Service Provider

         The Company has no binding agreement with an Internet or on-line
service provider. If customised Internet Access Devices using the Company's ISP
Chip are ultimately manufactured and sold to consumers, arrangements with
service providers will be required to ensure that a direct connection between a
customised Internet Access Device and the Internet can be effected. Such
arrangements will be between the service provider and either the Company, the
manufacturer or purchasers of the Internet Access Device. There can be no
assurance that satisfactory arrangements will be entered into with one or more
service providers or that the Company will enter into any agreement directly
with a service provider, which the Company believes would be preferable. A
service provider may agree to use the Company's developed software, as is, or
with minimal modifications; jointly to develop new software with the Company, or
to develop its own software. It is possible that a service provider could elect
to use the Company's software and retain the services of the Company for
software, technical and development support. It is also possible that a service
provider will purchase the Internet Access Device from the Company, the
manufacturer or other party, develop and incorporate its own software and sell
the Internet Access Device to consumers at a significantly lower price. Large
service providers will likely prefer to have less dependence on the Company and
others. There can be no assurance that a service provider will agree to use the
Company's software and retain the Company's services for support which would
likely result in greater potential revenues to the Company.

Competition.

         The market for multimedia, consumer electronics, computer and Internet
products is highly competitive. Numerous competitors have commercialised, are
developing or are expected to introduce hardware, software and other products
that are or may be directly competitive with the Company's products. Many of the
Company's current and potential competitors have substantially greater
financial, technical, manufacturing, marketing, distribution and other resources
than the Company as well as substantially larger research and development staffs
and facilities. These companies also have greater name recognition and market
presence, longer operating histories, lower cost structures and larger customer
bases than the Company. The Company also believes that Motorola, Inc., Sony
Corp. and Cirrus Logic Inc., may be developing chips competitive with the
Company's chips. Additionally numerous companies such as Web TV, ViewCall,
Oracle, Sun Mircosystems, Microsoft and IBM are involved in the development,
sale and/or provision of Internet access devices or alternative means of



                                      -12-

<PAGE>

permitting access to the Internet, all of which do or could compete with the
Company's Internet Access Device. Competitive factors could result in price
reductions or increased spending on product development, marketing and sales
that would adversely affect the Company's ability to compete and to be
profitable. Accordingly, the Company may not be able to compete successfully
against its present competitors or potential competitors and such competition
may have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, to the extent that any of the
Company's competitors are able to develop products similar to the Company's
products which become the industry standard, such competitors will have a
competitive advantage over the Company.

Significant Customers

         The Company has no customers, to date, that frequently and
systematically purchase its products. The Company's revenue for the fiscal year
ended June 30, 1997 was largely attributable to 4 companies, and for the year
ended June 30, 1998 it was virtually all attributable to a licensing arrangement
with one customer; American Interactive Media Inc. Unless the products developed
or to be developed in conjunction with customers are manufactured, marketed and
sold, no future revenues are likely to be received from existing arrangements.
The Company could be materially adversely affected if no products developed in
conjunction with the companies with which it has arrangements are ultimately
manufactured, marketed and sold.

         The agreement with Zilog provides for license fees and royalty payments
to the Company by Zilog in exchange for the grant of a world-wide, non-exclusive
license to manufacture, market and sell the ISP Chipset revision 2 and future
plug-in replacements for use in the Company's Netbox designs. The agreement also
provides for support and development services by the Company to Zilog and its
customers. The agreement may be terminated by either party in the event of a
bankruptcy, breach, inability to perform, assignment or change in control of the
other party. Following a change in control of Zilog, the Company has given
notice of its intention to terminate the contract and discussions are currently
taking place which are likely to result in a new agreement being concluded.

Variability of Operating Results

         If the Company is able to generate significant revenues, the Company
expects that its operating results will fluctuate as a result of changes in
composition of its revenues, the occurrence and timing of new product
introductions, if any, by third parties that it develops products with, and the
Company's expenditures on research and development. Should the Company derive
revenue from sales of its chips and chipsets to and/or royalties or licence fees
from third parties, based on the sale of products utilizing the Company's chips
and chipsets, the Company's revenue will vary with demand for such products. Any
revenue may be affected by the seasonal nature of the market for consumer
electronics, multimedia and computer products. Such demand may increase or
decrease as a result of a number of factors that cannot be predicted and which
are not within the Company's control, such as consumer preferences and product
announcements by competitors.




                                      -13-
<PAGE>

         Modification of Auditors' Opinion; Going Concern. The Company's
independent accountants have included an explanatory paragraph in their report
on the Company's financial statements as of June 30, 1999, 1998, and 1997, which
states 'the Company has suffered, and continues to suffer, significant losses
from its operations, has an accumulated deficit, continues to have negative cash
flows from operations and currently has a very limited customer base. These
factors, among others, raise substantial doubt about its ability to continue as
a going concern.' See 'FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT
ACCOUNTANTS'

         International Operations and Changes in Exchange Rates. The Company has
entered into contracts with manufacturers located in the United States, Taiwan,
Hong Kong, Germany and the Peoples Republic of China. The Company's
international operations will subject it to various government regulations,
export controls and the normal risks involved in international operations and
sales. A majority of the Company's revenue to date has been received in US
dollars; however, the Company's main operating subsidiary conducts business in
pounds sterling. Any decline in the value of pounds sterling against the US
dollar will have the effect of decreasing the Company's earnings when stated in
US dollars. The Company currently does not engage in any hedging transactions
that might have the effect of minimizing the consequences of currency
fluctuations and does not intend to do so in the immediate future.

         Peoples Republic of China. The Company's interests may be adversely
affected by the political environment in China. China is a communist country
which since 1949 has been, and is expected to continue to be, controlled by the
Communist Party of China. Changes in the top political leadership of the Chinese
government may have a significant impact on policy and the political and
economic environment in China. Moreover, economic reforms and growth in China
have been more successful in certain provinces than in others, and the
continuation or increase of such disparities could affect political or social
stability. China only recently has permitted greater flexibility in its economic
sector, however the government of China has exercised and continues to exercise
substantial control over virtually every section of the Chinese economy through
regulation and state ownership. Accordingly, government actions in the future,
including any decision not to continue to support the economic reform program
that commenced in the late 1970's and possibly to return to the more
centrally-planned economy that existed prior thereto, could have a significant
effect on economic conditions in China and on the operations of the Company.

         The Company's interests may be adversely affected by the economic
environment in China. The economy of China differs significantly from the
economy of the United States and western Europe in such respects as structure,
level of development, gross national product, growth rate, capital reinvestment,
resource allocation, self sufficiency, rate of inflation and balance of payments
position, among others. Only recently has the Chinese government encouraged
substantial private economic activities.


                                      -14-

<PAGE>

         In recent years, China's economy has registered a high growth rate from
time to time which can bring about an increase in the rate of inflation. In
response, the Chinese government has taken measures to curb the excessive
expansion of the economy. These measures can included devaluations of the
Chinese currency, the Renminbi, restrictions on the availability of
domestic credit and limited recentralization of the approval process for
purchase of some foreign products. There can be no assurance that austerity
measures taken by the Chinese government will succeed in slowing down the
economy's excessive expansion nor control inflation, or that they will not
result in severe dislocations in the Chinese economy in general. This could
drive up costs to manufacture the Company's Internet Access Device in China. To
further combat inflation, the Chinese government may adopt additional measures,
including the establishment of freezes or restraints on certain projects or
markets, which may have an adverse effect on the Company's operations.

         China's legal system is a civil law system which is based on written
statutes and in which decided legal cases have little precedential value. China
does not have a well developed, consolidated body of laws governing enterprises
with foreign investments. as a result, the administration of laws and
regulations by government agencies may be subject to considerable discretion. As
legal systems in China develop, foreign business entities may be adversely
affected by new laws, changes to existing laws (or interpretations thereof) and
pre-emption of provincial or local laws by national laws. In circumstances where
adequate laws exist, it may not be possible to obtain swift and equitable
enforcement thereof.

         Hong Kong. The Company may be materially adversely affected by factors
affecting Hong Kong's political situation and its economy or in its
international political and economic relations. Hong Kong was a British Crown
Colony, but sovereignty over Hong Kong was transferred to China on July 1, 1997
and Hong Kong became a Special Administrative Region ("SAR") of the People's
Republic of China ("PRC"). As provided in the Sino-British joint declaration on
the question of Hong Kong and the Basic Law of the Hong Kong SAR of the PRC
("the 'Basic Law"), the Hong Kong SAR shall have a high degree of autonomy
except in foreign affairs and defense, Under the Basic Law, the Hong Kong SAR is
to have its own legislature, legal and judicial system and economic autonomy for
50 years. Although, based on current political conditions and the Company's
understanding of the Basic Law, the Company does not believe that the transfer
of sovereignty over Hong Kong will have a material adverse effect on the
Company's business, financial condition or results of operations of the Company
in the future, there can be no assurance as to the continued stability of
political, economic or commercial conditions in Hong Kong.

         The Company has been advised that no treaty exists between Hong Kong
and the United States providing for the reciprocal enforcement of foreign
judgements. However, the courts in Hong Kong are generally prepared to accept a
foreign judgement as evidence of a debt due. An action may then be commenced in
Hong Kong for recovery of this debt.







                                      -15-
<PAGE>

Volatility of Stock Prices

         During the year ended June 30, 1998 the Company acquired an interest in
560,000 restricted shares of common stock in AIM of which 60,000 were
transferred to satisfy liabilities amounting to approximately $350,000. At the
date of this report on form 10-K, the Company is still holding 500,000
restricted shares of common stock in AIM. The trading price of this common stock
could be subject to significant fluctuations in response to variations in
operating results and from other factors. AIM has in the past experienced such
volatility. In addition, the stock markets in the United States have, from time
to time, experienced significant price and volume fluctuations that are
unrelated or disproportionate to the operating performance of individual
companies. While the Company sees its investment in AIM as being a long term
investment and has no immediate intentions to dispose of this investment, there
can be no assurance that value of the investment will be maintained. The AIM
stock has been pledged as collateral against $505,000 in promissory notes issued
by the Company in December 1998 and January 1999.



ITEM 2.   PROPERTIES

         The Company presently leases:

         (i) Approximately 2,900 square feet of office space at Elder House,
526-528 Eldergate, Central Milton Keynes, MK9 1LR, England. The lease is for a
five year term expiring March 21, 2001 and provides for an annual rental of
$45,700. The Company is also responsible for taxes, insurance and service
charges which should approximate, in the aggregate, to $36,000 annually.
Management believes that this leased facility is suitable and adequate for its
intended use, although as the Company grows, it intends to seek further
facilities.

         (ii) Approximately 435 square feet of office and laboratory space at 8
Kings Court, Willie Snaith Road, Newmarket, England. The lease is for a three
year term expiring February 9, 2000 and provides for an annual rent of $7,470.
The Company is also responsible for taxes, insurance and services charges which
should approximate, in the aggregate, to $4,150 annually.


ITEM 3    LEGAL PROCEEDINGS

         On December 15, 1997, the Company received a complaint which was filed
in New York State Superior Court, New York County, by Forte Communications Inc.,
alleging damages in the amount of $112,800, for public relations and consulting
services rendered by the plaintiff to the Company. The action was subsequently
settled in January 1999 by the Company agreeing to issue to Forte 55,000 shares
of common stock for those services.

         The Company has no access to a significant portion of its corporate
records, other than drafts and copies of certain documents, for the period from
approximately September 1994 through December 1995, making it difficult to
conclude that certain corporate matters were properly effected. The Company
believes matters were effected properly; however it cannot confirm this with
total certainty. The corporate records are currently in the possession of one of
the Company's former New York law firms which has refused, upon demand, to
release such records until amounts allegedly due such law firm are paid. The
Company disputes the amount allegedly due this firm based on the Company's
belief that it was billed for many matters that were not authorised by the
Company

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

         None



                                      -16-

<PAGE>

                                     PART II

ITEM 5.   MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
          RELATED STOCKHOLDER MATTERS

         Since May 24, 1995, bid and ask quotations of the Company's common
stock have been reported by the OTC Bulletin Board. From November 2, 1994
through May 24, 1995 there was no established public trading market, although
bid quotations were reported sporadically in the pink sheets published by the
National Quotation Bureau and on the OTC Bulletin Board. The Company's Bulletin
Board symbol is MUCP. The following table sets forth the range of high and low
bid quotations without adjustment for retail mark-ups, mark-downs or commissions
and do not necessarily represent actual transactions.

                                                  Range of Bid Information
                                                  -------------------------
                                                    High              Low
                                                    ----              ---
Fiscal Year ended June 30, 1999:
         Quarter ended June 30, 1999               $  7.12           $1.30
         Quarter ended March 31, 1999              $  2.94           $1.00
         Quarter ended December 31, 1998           $  1.56           $0.40
         Quarter ended September 30, 1998          $  1.56           $0.34

Fiscal Year ended June 30, 1998:
         Quarter ended June 30, 1998               $  1.50           $0.65
         Quarter ended March 31, 1998              $  1.60           $0.60
         Quarter ended December 31, 1997           $  3.10           $2.40
         Quarter ended September 30, 1997          $  4.10           $2.40

Fiscal Year ended June 30, 1997:
         Quarter ended June 30, 1997               $  4.19           $1.75
         Quarter ended March 31, 1997              $  6.87           $2.25
         Quarter ended December 31, 1996           $ 10.50           $4.50
         Quarter ended September 30, 1996          $ 11.31           $7.87


         On August 31, 1999, there were approximately 297 stockholders of the
Company's common stock, including holders of record and participants in security
position listings, but excluding those shares of common stock held in street
name.

         The Company has never paid cash dividends on its common stock and does
not anticipate it will do so in the foreseeable future. The Company currently
intends to retain future earnings, if any, to fund the development and growth of
its business. The payment of future cash dividends by the Company on its common
stock will be at the discretion of the Board of Directors and will depend on the
Company's earnings (if any), financial condition, cash flows, capital
requirements, and contractual prohibitions with respect to the payment of
dividends and other considerations as the Board of Directors may consider
relevant.




                                      -17-

<PAGE>

ITEM 6    SELECTED CONSOLIDATED FINANCIAL DATA

         The following selected financial data has been derived from the
financial statements of the Company. The financial statements for each of the
fiscal years in the five-year period ended June 30, 1999 have been audited by
Moore Stephens Lovelace, P.A., independent certified public accountants. The
following selected financial data should be read in conjunction with and are
qualified in their entirety by the MSU Corporation consolidated financial
statements and the notes thereto included elsewhere in this Report on Form 10-K.

<TABLE>
<CAPTION>
                                                                   Fiscal Years Ended June 30
                                              1999            1998            1997           1996             1995
                                            ------------------------------------------------------------------------
                                                         (in thousands of dollars, except per share data)
<S>                                          <C>             <C>             <C>             <C>             <C>
Income Statement Data

Total Revenue                              $     32         $ 4,179         $ 1,480         $   393         $ 1,596

Profit (Loss) from operations                (3,496)            286          (2,113)         (1,402)           (882)


Net Profit (Loss)                            (9,685)            292          (2,107)         (1,397)           (878)


Basic profit (loss) per share                 (0.47)           0.02           (0.13)          (0.10)          (0.07)


Fully diluted profit(loss) per share          (0.47)           0.02           (0.13)          (0.10)          (0.07)


Balance Sheet data (at year end):

Working Capital                               1,521          (4,401)         (1,556)         (1,856)         (2,662)


Total assets                                  3,341           2,573           2,086             164             363


Long term debt                                  505            --             1,830            --              --

Shareholders' equity (deficit)                1,542          (2,074)         (2,421)         (1,816)         (2,620)
</TABLE>




                                      -18-

<PAGE>

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

         This report on Form 10-K contains forward looking statements that
involve risks and uncertainties. The statements contained in this report on Form
10-K that are not purely historical are forward-looking statements within the
meaning of Section 27A of the Securities Act and 21E of the Exchange Act,
including without limitation statements regarding the Company's expectations,
beliefs, intentions or strategies regarding the future. All forward-looking
statements included in this report on Form 10-K are based on information
available to the Company at the date of this report on Form 10-K, and the
Company assumes no obligation to update any such forward-looking statements. The
Company's actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including the
Company's inability to market its products, infeasibility of developing new
products, the Company's inability to obtain adequate financing for its continued
operations and other factors discussed elsewhere in this report on Form 10-K.
The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto appearing elsewhere in this report on
Form 10-K

Overview

         The Company operates primarily through Web 2 U Limited (formerly, MSU
(UK) Limited) which is principally engaged in the design and development of
computer chips and chipsets mainly for use in high volume consumer electronic
products.

         The consolidated financial statements include the accounts of MSU
Corporation, MSU PLC, Web 2 U Limited and MSU US Operations Inc. (collectively
the 'Company"). All significant intercompany accounts have been eliminated in
the consolidated financial statements.

Significant Risks

         The Company's consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. During the year
ended June 30, 1999 the Company incurred a net loss of approximately $9,685,000;
during the year ended June 30, 1998 a net profit of approximately $292,000 was
made and during the year ended June 30, 1997 a net loss of approximately
$2,107,000 was incurred. At June 30, 1999 there was an accumulated deficit of
approximately $16,526,000. Additionally, the Company has had recurring
negative cash flows from operations.

         Through December 1998 and January 1999 the Company issued new
convertible promissory notes which are collateralized by 500,000 shares of
common stock in AIM. $505,000 of these promissory notes are convertible at any
time at a conversion price of $3.00 for each $3.00 of promissory notes held.
Conversion is to take place on or before December 2001. To the extent that the
loans are not converted they will be repayable at par in December 2001. Interest
is due on these notes at between 6% an 8% per annum and




                                      -19-
<PAGE>

has been paid up to December 2001 through the issuance of shares of common stock
at a price of between $0.72 and $0.75 per share. In the event of the Noteholders
not electing to convert their promissory notes into shares of common stock,
there can be no guarantee that the Company will have sufficient funds available
to repay the promissory notes.

         The Company expects that it is likely to incur net losses at least
through the end of the second quarter of fiscal 2000 as it attempts to further
develop, upgrade and market its products and to develop its infrastructure and
organization to support anticipated operations, including anticipated product
demand. The foregoing statement is a forward looking statement that involves
risks and uncertainties. The reader should be aware that the Company is likely
to incur net losses in fiscal 2000 if anticipated revenues from licensing fees
and royalties in respect of sales of the proprietary Internet Access Device,
development fees and royalties in respect of sales of the Envoy chip, or
royalties and conditional and forecasted purchase orders of customised Internet
Access Devices, are not realized. Such conditional and forecasted purchase
orders in respect of the Internet Access Devices assume, without limitation,
approval of final production samples by potential purchasers; acceptance by and
demand for the customised Internet Access Devices by consumers; satisfactory
product performance, including chip and software performance; modem approval
from the local or national telephone company, and the ability of the products to
compete successfully in an extremely competitive marketplace. The Company
believes such assumptions are reasonable. However, should any one of such
assumptions prove to be unfounded, the Company could incur net losses beyond
fiscal 2000 and/or be unable to continue as a going concern. The foregoing
factors raise substantial doubt about the Company's ability to continue as a
going concern without sufficient funds to meet its cash requirements. There can
be no assurance that the Company will be able to obtain sufficient funds to
enable it to continue as a going concern.

         During the year ended June 30, 1999, significant software modifications
to the television set top Internet Access Device were completed, and the Company
announced the commencement of production samples of the latest 4 megabyte
version of the proprietary television set top box Internet Access Device
(recently named Web2u). The Company is continuing to develop the main component
of the television set top Internet Access Device, the ISP Chip, which will
provide enhanced internet features. In addition, the development of the
Company's Envoy chip is continuing, and the Company considers that commercial
sales could commence in fiscal 2000

         The Company's strategy can be segmented into three specific areas:
people, processes and products. The Company anticipates that this three-fold
focus will enable it to attack aggressively the Internet related products
market.



                                      -20-

<PAGE>

         In order to support this strategy, the Company anticipates that if
revenues from trading operations are not generated in the coming months, it
will, at least in the short term, have to continue to fund a significant portion
of its operations through private sales of equity securities to and/or
borrowings from third parties, to the extent such sources of capital are
available to the Company.

         The markets for the Company's products have only recently begun to
develop, are rapidly evolving and are highly competitive, with substantially all
competitors having significantly greater resources than the Company. The Company
and its prospects must be considered in light of the substantial risks, expenses
and difficulties facing the Company. The Company may be unsuccessful in
addressing any of the foregoing risks or in implementing its strategy. The
Company may not achieve profitability or be able to continue as a going concern.
See Report of Independent Auditors and Company's financial statements appearing
elsewhere in this Annual Report on Form 10-K.

RESULTS OF OPERATIONS

Revenues

         The Company has no customers to date that frequently and systematically
purchase its products or retain its services. Revenues during the years ended
June 30, 1999, 1998 and 1997 were approximately $32,000, $4,179,000 and
$1,480,000, respectively. Comparison of revenues during the year ended June 30,
1999 with previous years is not meaningful as in fiscal 1999, apart from the
sales of a small number of samples, there was no revenue generated as the
Company continued to concentrate its efforts on further software and hardware
developments of its television set top Internet Access Device and the Envoy
chip. In fiscal 1998, the revenues derived almost entirely from the license fees
received from AIM. In fiscal 1997, the revenues derived principally from chip
sales, license and development fees, and royalty fees paid in connection with
the sale of customised Internet Access Devices. Typically the Company's
development arrangements also provide for royalties and/or license fees to be
paid to the Company if the customer sells products developed in conjunction with
the Company and/or incorporating the Company's proprietary technology. To date,
apart from the license fees and royalties receivable in 1998 from AIM, and in
1997 in connection with the sale of the Internet Access Devices, none of these
development arrangements has resulted in royalty or continuing license revenue
to the Company. The Company would be materially adversely effected if its
customers failed to manufacture, market or sell products developed in
conjunction with the Company.

         During the years ended June 30, 1999, 1998 and 1997, the Company's
revenues were principally derived from none, one and four customers
respectively. Because of the concentration of its revenues in such a small
number of customers, the loss of one customer could have a material adverse
effect on the Company's business.

         The Company's revenues by geographic region during the years ended June
30, 1999, 1998 and 1997 were approximately as follows:

Location                 1999($)          1998($)            1997($)
--------------------------------------------------------------------
Europe                    2,000             8,000              --

Far East                 17,000              --             730,000

North America            13,000         4,171,000           750,000




                                      -21-



<PAGE>

         Revenues in 1998 increased by approximately 182% compared to 1997, but
because the 1998 revenues were derived principally from one source, comparison
between the years is not meaningful. Other revenues were not generated in 1999
and 1998 as the Company concentrated its efforts on further software
developments of its proprietary Internet Access Device and the Envoy chip.

Cost of Revenues

         The cost of revenues for the years ended June 30, 1999, 1998 and 1997
were approximately $53,000, $8,000 and $651,000, respectively. Cost of sales in
the year ended June 30, 1999 mostly related to the direct production cost of
samples which have been expensed to the extent that the Company considers such
cost is not recoverable. As a percentage of revenues, cost of revenues were
approximately 168% in 1999, 0.2% in 1998 and 44% in 1997. The cost of revenue
fluctuations are due to variations in gross margins as between license fees,
chip sales, support services and development services. The gross margin on
license fees is 100%. The gross margin on development and support services is
usually approximately 90% to 95% while the gross margin on chip sales until 1997
was usually approximately 48% to 54% depending on the number and type of chips
purchased. However, in fiscal 1997 most of the chip sales were to Mitac and were
sold at cost (approximately $600,000).

Research and Development Expenses

         Research and development expenses generally consist of expenditure
relating to the Company's independent development of its chips and prototype
products, such as the ISP Chip, the Envoy Chip, the television set top Internet
Access Device and specific research and development performed pursuant to
development arrangements with third parties. For the years ended June 30, 1999,
1998 and 1997, research and development costs (which exclude all overhead costs
other than employee, independent contractor, development tool and prototyping
costs, all of which have been expensed), were approximately $1,556,000,
$1,409,000 and $1,386,000, respectively. As a percentage of revenues, research
and development expenses were approximately 490% in 1999, 34% in 1998 and 94%
in 1997. The fluctuations from year to year reflect the varying demands for
research and development which are dictated by technological changes and the
need for the Company's products to remain competitive and commercially viable,
and the requirements of the Company's customers. In order to remain competitive
in its business, the Company anticipates that research and development
expenditures in the foreseeable future will be a minimum of $1,700,000 per year.

Selling General and Administrative Expenses

         Selling, general and administrative expenses were approximately
$1,686,000, $1,211,000 and $1,486,000 for the years ended June 30, 1999, 1998
and 1997, respectively. Selling general and administrative expenses consist of
the cost of employees (other than those dedicated to research and development),
advertising and promotion costs which are charged to operations as
incurred, communication, rent and occupancy costs; and professional fees. The
39% increase in such expenses in 1999 is primarily due to the non-recurring
costs of an external review of the Company's objectives and strategy and to the
consequent management re-organization of approximately $250,000. The 18%
decrease in such expenses in 1998 compared to 1997 is primarily due to a
reduction in personnel, marketing and promotional costs in that year during
which the Company was concentrating on the development of its products.

Non-Operating Income (Expense)

         In 1999, the Company recorded an impairment loss on its investment of
approximately $2,500,000 in shares of AIM common stock, which declined in market
value, as the Company believes the decline in market value to be permanent.
Additionally, during 1999, the Company capitalized and immediately charged to
expense approximately $3,670,000 of discount associated with convertible note
issuances during fiscal 1999.

                                      -22-

<PAGE>

Depreciation Expense

         Depreciation expense was approximately $74,000, $50,000 and $44,000 for
the fiscal years ended June 30, 1999, 1998 and 1997, respectively. Depreciation
is calculated using the straight line method over the estimated useful lives of
the Company's depreciable assets which consist principally of electronic
equipment used in the design and testing of the Company's products.

Interest Expense

         Interest expense was approximately $158,000, $298,000 and $26,000 for
the fiscal years ended June 30, 1999, 1998 and 1997, respectively. The interest
expense in 1999 is mainly attributable to interest on the $2.3 million 10%
convertible promissory notes issued in 1997 which were either converted or
repaid in fiscal 1999, together with interest on the 6% and 8% convertible
promissory notes issued in December 1998 and January 1999. The interest expense
in 1998 was principally due to an interest cost of approximately $230,000 in
respect of the 10% convertible promissory notes and $67,000 in respect of short
term loan financing received during the year. The interest expense in 1997 was
principally due to the interest of $17,600 paid in respect of certain bridge
financing.

Loan Cost Amortization and Registration Costs

         In 1999, the Company received a late invoice for approximately $33,000
in printing costs incurred in respect of a Registration Statement which was
filed in 1997 and then withdrawn in 1998. The Company believes that a retention
for registration expenses which was made in June 1997 by the attorneys acting
for the 10% noteholders, together with other amounts held back in an Escrow
Account should be sufficient to cover this liability. However, as the Company
has not yet been able to satisfactorily ascertain the amount of funds still held
in the escrow account, as a matter of prudence, provision has been made for this
amount in the financial statements as part of selling, general and
administrative expenses.

         Amortization of deferred financing costs approximated $918,000 for the
year ended June 30, 1998. These costs were incurred in connection with the sale
of the 10% convertible promissory notes between June and September 1997 and
include the costs associated with the preparation, filing and subsequent
withdrawal of a Registration Statement on Form S-1 in connection with the shares
underlying the notes. All such costs have now been fully expensed.






                                      -23-


<PAGE>

Liquidity and Capital Resources

         The Company has financed its current operations primarily through
private sales of unregistered equity and debt securities.

         For the year ending June 30, 1999, cash used in operating activities of
approximately $2,512,000 was primarily attributed to the Company's net loss for
the year of approximately $9,685,000. Cash flows from financing activities of
approximately $4,996,000 were mainly attributable to (i) the sale of new
convertible promissory notes of $3,670,000 in May 1999; which were converted
into common shares at $2.00 per share in June 1999; (ii) the sale of common
stock during the year for approximately $1,014,000; and (iii) the proceeds from
the sale of 6% and 8% secured convertible promissory notes for $505,000.

         Capital expenditures were approximately $100,000 for fiscal 1999 which
mainly relates to the acquisition of electronic equipment. The Company currently
estimates that its capital expenditures for fiscal 2000 will be approximately
$1,000,000. The Company has no material commitments, other than two operating
leases for premises and three employment agreements.

         As at June 30, 1999, the Company's principal source of liquidity was
approximately $2,600,000 in cash.

         The Company believes that the cash flows expected to be generated by
operations through the remainder of fiscal 2000, together with its cash balances
at June 30, 1999, will be sufficient to meet a significant portion of its cash
needs for working capital and capital expenditures for the remainder of fiscal
2000. The preceding statement is a forward looking statement which assumes the
realization of revenue from conditional and forecasted purchase orders. Such
forward looking statement is subject to certain risks and uncertainties,
including but not limited to approval of final production samples of the Envoy
chip and customized Internet Access Devices by potential customers; acceptance
by and demand for such product by consumers; satisfactory product performance;
and the ability of such products to successfully compete in an extremely
competitive market place. To satisfy the balance of the Company's liquidity
requirements, the Company will attempt to sell additional equity or debt
securities and/or obtain additional credit facilities to the extent the Company
is able to do so, for which there can be no assurance. The sale of additional
equity or convertible debt securities will result in additional dilution to the
Company's stockholders. There can be no assurance that the Company's liquidity
requirements will be met or that the Company will be able to continue as a going
concern.

Year 2000 Compliance Issues

         The year 2000 computer problem is a result of computer programs being
written using two digits rather than four to define the applicable year.
Management of the Company does not anticipate that any significant modification
or replacement of the Company's software will be necessary for its computer
systems to properly utilize dates beyond December 31, 1999 or that the Company
will incur significant operating expenses to make any such computer system
improvements. Also none of the products designed by the Company, which are
currently in manufacture, utilize date sensitive chips. The Company is not able
to determine, however, whether any of its suppliers, lenders, customers or
service providers will need to make any such modifications or replacements or
whether the failure to make such software corrections will have a material
adverse effect on the Company's operations or financial condition. Although it
is management's belief that the failure by such entities to make the required
software corrections could have a material adverse effect on the Company's
operations or financial condition, management is not able to estimate the amount
of such adverse effects, if any. The Company is continuing to assess the status
of these entities' year 2000 compliance.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The financial statements and supplementary data are set forth in this
Annual Report on Form 10-K commencing on page F-1

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

                  None

                                      -24-



<PAGE>

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors and Executive Officers

         The directors and executive officers of the Company (and their
respective positions within MSU PLC, Web 2 U Limited and MSU US Operations Inc.)
and their respective ages are as follows:

<TABLE>
<CAPTION>
Name                                Age         Position
----------------------------------------------------------------------------------------
<S>                                 <C>         <C>
Wynford Peter Holloway              50          President, Chairman, Chief Executive
                                                Officer and Director of the Company,
                                                Chairman of MSU PLC and Web 2 U Limited,
                                                and President of MSU US Operations Inc.


Jeremy Miles Simpson                65          Deputy Chairman and non-executive
                                                Director of the Company

William Derek Snowdon               45          Secretary and Director of the Company,
                                                Secretary of MSU PLC and Web 2 U
                                                Limited, and a Director and Secretary of
                                                MSU US Operations Inc.

Richard Horby Phillips              53          Principal Financial Officer and
                                                Director of the Company, Director of
                                                MSU PLC and Web 2 U Limited and a Director
                                                and Treasurer of MSU US Operations Inc.

Fred Kashkooli                      58          Director of the Company
</TABLE>

Wynford Peter Holloway has served as Chief Executive Officer and a director of
the Company since October 1994, and as Chairman of MSU PLC and Web 2 U Limited
since June 1994 and March 1991 respectively. He has been president of MSU US
Operations Inc. since its incorporation in February 1997. Mr. Holloway is the
founder of Web 2 U Limited. From 1991 through 1992, Mr. Holloway was a
self-employed design consultant providing professional design services to
clients in the computer peripherals business.

Jeremy Miles Simpson MA (Cantab) was appointed a director and Deputy Chairman of
the Company with effect from July 1, 1997. Mr. Simpson, who is a freeman of the
City of London, was executive chairman of Gordon Russell Plc., a UK publicly
quoted company, from 1986 to 1989, prior to the company being sold. Since that
date Mr. Simpson has held a number of non-executive directorships with smaller
growing and developing companies in the UK and Europe.




                                      -25-


<PAGE>

William Derek Snowdon LLB has served as secretary and a director of the Company
since October 1994 and as secretary of MSU PLC and Web 2 U Limited since June
1994 and March 1991 respectively. He was appointed a director and secretary of
MSU US Operations Inc. on its incorporation in February 1997. Mr. Snowdon is a
solicitor and was a partner with the firm of Phoenix Walters for 15 years before
moving to, and becoming a partner in, Hugh James Ford Simey, solicitors, in
1999. Mr. Snowdon's practice focuses on commercial contracts and intellectual
property law. In addition Mr. Snowdon is a non-executive director of two
Regional Enterprise Agencies in the United Kingdom

Richard Horby Phillips FCA has served as principal financial officer and a
director of the Company since January 2, 1997 and also as a director of MSU PLC
and Web 2 U Limited since that date. He was appointed Treasurer and a director
of MSU US Operations Inc. on its incorporation in February 1997. Mr. Phillips is
a chartered accountant who was with Coopers & Lybrand for 25 years. Mr. Phillips
was a partner in their London office from April 1983, providing advisory and
audit services to both public and private companies until August 1994 when he
formed his own firm to continue providing financial advice to emerging growth
companies in the US and UK. Mr. Phillips also currently serves on the Board of
six other UK companies.

Fred Kashkooli has served as a director of the Company since August 1997 and
since November 1997 has been chief executive officer of Telegen Inc. Mr.
Kashkooli has been an independent management consultant since 1991 and has over
twenty nine years of experience in the areas of microprocessors, memory, logic,
analog design, manufacturing, CAD design packaging, testing and marketing. From
1984 to 1991, Mr. Kashkooli was Senior Vice President of Research and
Development at GE Intersil, responsible for design, manufacturing and strategic
marketing for analog and digital products. Additionally Mr. Kashkooli was
managing design centres in Singapore, New Jersey, North Carolina and Florida.
from 1980 to 1984, Mr. Kashkooli was a director of the microprocessor and memory
division of GE Intersil prior to this he worked ten years at Sygenetics, a
corporation engaged in the manufacture of semi-conductor chips. Mr. Kashkooli
hold a BS in Electrical Engineering from California State University.

         Each director serves for a term of one year from election. Each officer
serves for a term as set forth in their respective employment agreements.







                                      -26-






<PAGE>

ITEM 11.  EXECUTIVE COMPENSATION

Summary Compensation Table

         The following table sets forth certain information concerning the
compensation earned during the Company's last three fiscal years by the
Company's Chief Executive Officer and the Company's other executive officers
receiving in excess of $100,000 in total annual salary and bonus (collectively
the 'named executive officers"):

Summary Compensation Table

Annual compensation

<TABLE>
<CAPTION>
                                                                              Other
                                                                              Annual
Name and Principal            Fiscal        Salary            Bonus           Compensation
Position                      Year          ($)(1)            ($)             ($)(2)
<S>                           <C>            <C>              <C>             <C>
Wynford Peter
Holloway                      1999           195,300(3)         --             38,604
                              1998           199,200            --             35,778
                              1997           112,000            --             29,000

*Keith Edward Peirson         1999           305,075(4)         --             28,376
                              1998           138,660            --             25,715
</TABLE>

* Part of the year; to or from date of resignation/appointment

(1)  All salaries and other annual compensation were paid by Web 2 U Limited.

(2)  Represents personal benefits in addition to salary. Of Mr. Holloway's
     personal benefits; the 1997 amount is in respect of a car allowance; the
     1998 amount represents $29,520 in respect of a car allowance and $6,258 in
     respect of contributions to a personal retirement plan; and the 1999 amount
     represents $29,295 in respect of a car allowance and $9,309 in respect of
     contributions to a personal retirement plan. Mr. Peirson's benefits in 1998
     were $18,040 in respect of a car allowance and $7,675 in respect of
     contributions to a personal retirement plan. His benefits in 1999 were
     $17,903 in respect of a car allowance and $10,473 in respect of
     contributions to a personal retirement plan

(3)  At the date of this report $158,000 of the salary due to W P Holloway for
     the years ended June 30, 1998 and June 30, 1999 had not been paid.

(4)  Mr. Peirson resigned with effect from May 31, 1999 and his salary in the
     above table includes $161,855 paid to him during the year ended June 30,
     1999 as compensation for the cancellation of employment contract.




                                      -27-

<PAGE>

Long Term Compensation

         Other than in respect of the stock options, details of which are set
out elsewhere in this Form 10-K, there were no long term compensation awards or
payouts in any of the years ended June 30, 1999, 1998 or 1997.

Employment Agreements

         In 1994, the Company entered into employment agreements with each of
Wynford Peter Holloway and William Snowdon providing for annual base salaries
(subject to annual increases within the discretion of the Board) of $189,600 and
$31,600, respectively. The employment agreements are rolling term agreements and
automatically renew for a further three year term at the expiration of each
year. The Company renegotiated the contract with Mr. Holloway in each of the
years ended June 30, 1997, 1996 and 1995 which resulted in a reduction in his
annual minimum base salary of approximately $79,000 for each of the years ended
June 30, 1997, 1996 and 1995, respectively. The renegotiations were due to lower
than expected operating performance and cash flows. In the years ended June 30,
1998 and June 30, 1999 the full salary has been expensed for Mr. Holloway
although as at the date of this report on Form 10-K, $158,000 has not yet been
paid to him. On July 1, 1999 Mr. Snowdon's annual salary was increased to
$41,000 to recognize the additional time which Mr. Snowdon was having to devote
to the Company's affairs.

         Effective January 2, 1997, MSU Limited entered into an employment
agreement with Richard Horby Phillips to serve as the Company's Chief Financial
Officer in consideration for an annual base salary of approximately $108,000,
subject to annual increases within the discretion of the Board. As part of the
employment contract Mr. Phillips also received stock options to purchase 100,000
shares of the Company's common stock at a price equal to the market value of the
stock at the date of the grant. During an initial period, Mr. Phillips was to
receive a lower base salary at the annual rate of $83,000 until he was able to
devote all of his time to the Company's affairs. From March 1, 1998 the Board
and Mr. Phillips mutually agreed to reduce his time commitment to the Company,
until such time as activity levels increase, and he is currently devoting
approximately one day a week to the Company's affairs and, during this period,
receiving a salary at the annual rate of $30,000. On July 1, 1999, to recognize
the additional time which Mr. Phillips was having to devote to the Company's
affairs, this was increased $38,000 per annum.


                                      -28-



<PAGE>

         All of the above agreements with Messrs. Holloway, Snowdon and
Phillips, also provide for a car allowance or use of an automobile, including
reimbursement of any automobile expenses, and participation in bonus plans when
and if formulated by MSU PLC or Web 2 U Limited. The Company is also obligated
to provide private medical coverage and life insurance. For one year after
termination, the executives are restricted from holding a material interest in
any competitor, seeking or receiving orders for any products or services
produced or marketed by MSU PLC or Web 2 U Limited six months prior to
termination of the executive.

         The agreements with Messrs. Holloway, Snowdon and Phillips each provide
for automatic termination once the employee reaches 65 years of age. The Company
has the right under each agreement to terminate the agreement immediately for
cause and then has the option to pay the employee his base salary for the
remainder of the term. Each agreement contains a non-competition clause,
restricting the employee from soliciting the Company's customers and employees
and from holding an interest in a competing firm.

Compensation of Directors

         Directors are reimbursed for all reasonable expenses in attending each
Board Meeting.

Stock Option Grant Table

         The following table sets forth certain information concerning options
granted to the named executive officers during the company's fiscal year ended
June 30 1999

                                   Options granted in Last Fiscal year


<TABLE>
<CAPTION>
         Number of           Percent of                                               Potential Realisable Value
         Securities Options  Total                                                    at Assumed Annual Rate of
         Underlying          Granted to                         Market                Stock Price Appreciation
         Options             Employees        Exercise or       Price on              for Option Term
         Granted             in fiscal        Base Price        date of   Expiration  --------------------------------
Name                         Year             ($ per share)     Grant     Date         0%($)     5%($)      10%($)
<S>      <C>                 <C>              <C>               <C>       <C>         <C>        <C>        <C>
Wynford  1,000,000 (note 1)  52.3%            $0.50             $0.50     10/24/03     --        $638,141   $ 805,255
Peter       300,000          15,7%            $0.65             $0.65     7/29/03      --        $248,875   $ 314,049
Holloway

Willam    125,000 (note 1)    6.5%             $0.50             $0.50    10/24/03     --        $ 79,768   $ 100,657
Derek     150,000             7.8%             $0.65             $0.65    7/29/03      --        $124,437   $ 157,025
Snowdon

Richard    50,000             2.6%             $0.65             $0.65    7/29/03      --        $ 41,479   $  52,342
Horby
Phillips

Jeremy    105,857             5.5%             $0.35             $0.35    9/24/03      --        $ 47,286   $ 59,669
Miles
Simpson   (note 3)
</TABLE>

(1)  The stock options granted to Mr. Holloway and Mr. Snowdon on October 24,
     1998 are compensation for the grant of a pledge of respectively 2,000,000
     and 250,000 of their shares of common stock in the Company as part of the
     security given to collateralize convertible promissory notes issued by
     the Company during the year ended June 30, 1999.

(2)  Of the stock options granted to Mr. Holloway, Mr. Snowdon and Mr. Phillips
     on 29 July 1998, half were exercisable on the date of the grant and half
     became exercisable on July 29, 1999 provided that they were still in the
     employment of the company at that date.

(3)  The stock options granted to Mr. Simpson were in consideration of his
     making a loan of $33,200 to the Company in September 1998. In accordance
     with the agreement with Mr. Simpson the loan was subsequently converted
     into 95,857 shares of common stock of the Company.

(4)  As required by the rules of the Securities and Exchange Commission,
     potential values stated are based on the assumption that the Company's
     common stock will appreciate in value from the date of the grant to the end
     of the option term (five years from the date of the grant) at annualised
     rates of 5% and 10% (total appreciation of approximately 28% and 61%),
     respectively, and therefore are not intended to forecast possible future
     appreciation, if any, in the price of the common stock.

                                      -29-
<PAGE>

Stock Option Exercises and Holdings Table

         The following table provides information concerning the values of
unexercised options held by the named executive officers at June 30, 1999. No
options were exercised by such officers during the Company's fiscal year ended
June 30, 1999

Fiscal Year-End Option Values

<TABLE>
<CAPTION>
                          Number of Unexercised                   Value of Unexercised
                                 Options                          In-the-Money Options
Name                       at Fiscal Year End (#)               at Fiscal Year End ($)(1)
--------------------------------------------------------------------------------------------
                      Exercisable      Unexercisable          Exercisable      Unexercisable
                      ----------------------------------------------------------------------
<S>                   <C>               <C>                   <C>              <C>
Wynford Peter
Holloway              1,570,000(2)             --              4,618,250              --

William Derek
Snowdon                 395,000                --                496,250              --

Richard Horby
Phillips                150,000                --                336,750              --

Jeremy Miles
Simpson                 490,003                --              1,442,437              --

Keith Edward            350,000                --                808,750              --
Peirson
</TABLE>

(1) Values stated are based on the average bid and ask prices of $3.875 per
share of the Company's common stock as reported by Bloomberg Financial Inc. on
June 30, 1999, the last trading day of the fiscal year, and equal the aggregate
amount by which the market value of the option shares exceeds the exercise price
of such options at the end of the fiscal year. No value is attributed to option
shares where the option price is higher than the market value.

(2) The Stock options above attributed to Mr. Holloway include 100,000 granted
during the year ended June 30, 1997 to a Trust in which Mr. Holloway has an
interest.


                                      -30-
<PAGE>

Compensation Committee Interlocks and Insider Participation

         The Company has no compensation committee. During fiscal 1999, all of
the Company's directors and executive officers participated in deliberations of
the Board of Directors concerning executive officer compensation.

         Between October 1994 and March 1999, the law firm of Phoenix Walters
Solicitors regularly rendered legal services as counsel to the Company. W D
Snowdon, a director and executive officer of the Company, was a partner of
Phoenix Walters Solicitors until March 1999. The Company incurred $81,000 in
legal fees to Phoenix Walters during fiscal 1999.

         Since April 1999, the law firm of Hugh James Ford Simey, Solicitors,
has regularly rendered legal services as counsel to the Company. W D Snowdon, a
director and executive officer of the Company, is a partner of Hugh James Ford
Simey Solicitors. The Company incurred $34,000 in legal fees to Hugh James Ford
Simey during fiscal 1999.

         Between September 1994 and March 1995, Mr. Phillips provided
consultancy services to the Company for which he rendered invoices for $16,500.
Payment for these services has not yet been fully effected by the Company and as
of September 1999 approximately $7,300 of the amount remained unpaid.

         TXC Corporation is a principal stockholder of the Company and holds a
non-exclusive licence to use the Wynpeg Chipset technology in connection with
the manufacture of video CD players. Such licence was granted to TXC Corporation
in connection with a development contract entered into in July 1994. Of the
$2,159,910 aggregate capital contribution made to the Company by TXC
Corporation, $1,400,000 was represented by an unsecured interest free loan
payable to TXC Corporation at such time as the Company was reasonably able to do
so without jeopardizing its financial condition, and the balance was an equity
contribution. During the year ended June 30, 1999, 1,400,000 shares of common
stock were issued by the Company to TXC Corporation in full and final settlement
of this liability.

         In June 1996, MSU Limited obtained a $76,000 credit facility from
National Westminster Bank Plc. The credit facility was collateralized by a
floating debenture on all of the Company's assets and the personal guarantees of
each of Messrs. Holloway, Hall and Snowdon. The Guarantees of Messrs. Hall and
Snowdon were collateralized by a pledge of the pledgor's shares of Company
common stock. In consideration of the benefit derived by the Company as a result
of the guarantees provided by these directors, each of the directors concerned
was granted, effective June 7, 1996, an option to acquire 100,000 shares of
Company common stock at an exercise price of $5.00. The options are exercisable
in full commencing on June 7, 1997 and expire on June 6, 2001. The credit
facility expired in August 1996 at which time there were no amounts outstanding
under the facility. The debentures and personal guarantees remain in place with
the Bank to serve as collateral for additional credit facilities requested by
the Company and approved by the Bank. The pledged shares have been released, but
the Bank is likely to require that such shares be pledged again in connection
with any credit facility.




                                      -31-
<PAGE>

         In September 1996, an amount of approximately $160,000 was loaned to
the Company by the Employee Trust. This loan was unsecured, interest free with
no date fixed for repayment. During the year ended June 30, 1999, $18,250 was
repaid, and in September 1998, an additional $40,000 was loaned to the Company
on the same basis as above. In October 1998, the Company issued 322,500 shares
of common stock in consideration for the Trust foregiving $161,250 of the loan.
The conversion price of $0.50 was the market price at the date the agreement to
the conversion was made. An amount of $20,500 remained owing to the Employee
Trust at June 30, 1999.

         In February 1997, the Company sold 12 promissory notes, each in the
amount of $50,000 and each bearing interest at 8.5% per annum, which were due to
mature in February 1998. The Company's shares of its subsidiaries together with
235,000 shares of common stock of the Company owned by the Employee Trust were
pledged as collateral for the borrowings. The promissory notes were repaid in
June 1997 and no amount is now outstanding.

         In consideration of the benefit derived by the Company as a result of
the above interest free loan of $160,000 and the guarantee provided by the
Employee Trust, the Trust was granted an option to acquire 100,000 shares of
the Company's common stock at an exercise price of $2.12; being the market price
of the shares of common stock in the Company at the date of grant. The options
are exercisable in full as of November 11, 1997 and expire on May 11, 2002.

         In September 1996, an amount of $250,000 was received by the Company in
consideration for 50,000 shares of common stock in the Company. This transaction
was subsequently rescinded and the amount of $250,000 became payable. Payment of
this was guaranteed personally by Mr. Holloway as, due to poor liquidity, the
Company was unable to effect repayment on due date. The amount due was finally
paid in July 1997. In consideration of the benefit derived by the Company as a
result of the above guarantee, Mr. Holloway was granted an option to acquire
50,000 shares of the Company's common stock at an exercise price of $2.12, being
the market price of the shares of common stock in the Company at the date of
grant. The options are exercisable in full commencing on November 11, 1997 and
expire on May 11, 2002.

         On June 25, 1997, as part of the Placement Agent Agreement with Capitol
Bay in connection with the issuance of the 10% Convertible Notes, Messrs.
Holloway and Snowdon agreed to restrictions on their rights of selling, or
otherwise disposing of, the Company's shares of common stock registered in their
respective names. In consideration for the benefit derived by the Company for
their agreeing to these restrictions, Messrs. Holloway and Snowdon were each
granted options to acquire 20,000 shares of the Company's common stock at $3.56,
being the market price prevailing on the date of agreement. The options are
exercisable in full commencing on December 25, 1997 and expire on June 24, 2002.

         In December 1998, January 1999 and May 1999 the Company issued
collateralized convertible promissory notes. The collateral security included
pledges of over 2,000,000 shares of common stock in the Company owned by Mr.
Holloway and 250,000 shares owned by Mr. Snowdon. As consideration for the
benefit derived by the Company for the benefit of the provision of this
security, Mr. Holloway and Mr. Snowdon were granted options to acquire 1,000,000
shares and 125,000 shares, respectively, of the Company's common stock at an
exercise price of $0.50; being the market price of the shares of common stock in
the Company at the date of the agreement to provide such security. The options
are exercisable in full commencing on October 25, 1998 and expire on October 24,
2003.

         In September 1998, J M Simpson made a loan to the Company of
approximately $33,200. In December 1998, Mr. Simpson exercised his right under
the loan agreement to convert the loan into 95,857 shares of common stock at the
market price prevailing on the date of the loan (September 25, 1998). In
addition, as further consideration for the loan, Mr. Simpson was granted an
option to subscribe for a further 105,857 shares of common stock at $0.35 per
share at any time up to September 24, 2003.

         The Company believes that the abilities of the foregoing members of the
Board of Directors to make fair compensation decisions have not and will not be
compromised by the relationships referred to above.


                                      -32-

<PAGE>

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth certain information concerning the
beneficial ownership of the Company's common stock as of the date of this report
on Form 10-K, by (i) each person known by the Company to be the beneficial owner
of more than 5% of its common stock, (ii) each named executive officer of the
Company, (iii) each director of the Company, and (iv) all directors and
executive officers as a group. Unless otherwise indicated, each of the
stockholders has sole voting and investment power with respect to the shares
beneficially owned.

<TABLE>
<CAPTION>
                                            Shares Beneficially           Percentage of Class
Name of Beneficial Owner                           Owned                     (see note 3)
-------------------------------------------------------------------------------------------------
<S>                                          <C>                               <C>
*Wynford Peter Holloway                      6,692,777(1)(2)(3)(4)(5)           24.9%

*William Derek Snowdon                         792,277(3)(4)(5)                  3.1%

*Jeremy Miles Simpson                        1,598,916(3)(4)                     6.2%

*Richard Horby Phillips                        150,000(3)                        0.6%

*Fred Kashkooli                                       (7)

Peter Brian Weber and
Vivian George Bines as
Trustees for the Employee Trust
48 The Parade, Cardiff CF2 3AB
England                                      3,014,444(2)(3)                    11.9%

Mark McLaughlin and
McLaughlin Group LLC
13750 US 281 North #660
San Antonio Texas 78232                      4,669,547(6)                       17.7%

*All Directors and Executive
Officers as a group (5 persons)              9,233,970                          34.8%
</TABLE>

(1)  Mr. Holloway owns 2,208,333 shares of record. Pursuant to an unwritten
     agreement and understanding, Mr. Holloway shares voting and dispositive
     power with respect to the shares held by the Employee Trust.

(2)  The Employee Trust constituted by a Trust Deed dated May 24, 1994 (of which
     Wynford Peter Holloway was the Settlor), is in favor of all past, present
     and future employees of MSU Limited and MSU PLC and any subsequent
     companies and their spouses and children. No allocations under the Trust
     have been made. Under the Trust Deed, and so long as Mr. Holloway is
     living, his consent, as Settlor, is required for the appointment of
     beneficiaries and the appointment of new trustees. The Trustees also have
     the authority to delegate powers to Mr. Holloway. Pursuant to an unwritten
     agreement and understanding, Mr. Holloway shares voting and dispositive
     powers with respect to the shares held by the Employee Trust.


                                      -33-

<PAGE>

(3)  For the purpose of the above table, a person or group of persons is deemed
     to have 'beneficial ownership' of any shares which such person has the
     right to acquire within 60 days. For purposes of computing the percentage
     of outstanding shares held by each person or group of persons named above,
     any security which such person or group of such persons has the rights to
     acquire within 60 days after such date is deemed to be outstanding for the
     purpose of computing ownership for such person or persons, but is not
     deemed to be outstanding for the purpose of computing the percentage of
     ownership of any other person. Accordingly the above table includes the
     following shares issuable pursuant to options which are now exercisable, or
     are exercisable within 60 days hereof.

     Name                                     No. of Shares
     ------------------------------------------------------
     Wynford Peter Holloway                    1,470,000

     William Derek Snowdon                       395,000

     Jeremy Miles Simpson                        490,003

     Peter Brian Weber and                       100,000
     Vivian George Bines

     Richard Horby Phillips                      150,000

(4)  Excludes the following shares issuable pursuant to options which are not
     currently exercisable (or exercisable within 60 days)

     Name                                     No. of Shares
     ------------------------------------------------------

     None


(5)  See 'Executive Compensation-Compensation Committee Interlocks and Insider
     Participation' regarding a potential pledge arrangement with National
     Westminster Bank Plc. covering shares held by Mr. Holloway and Mr. Snowdon.

(6)  Includes 650,000 shares issuable pursuant to a currently execisable warrant
     to purchase 650,000 shares of Company common stock at $1 each and 376,000
     shares issuable pursuant to a currently exercisable warrant to purchase
     376,000 shares at $0.50 each

(7)  Mr. Kashkooli was the beneficial holder of $24,000 10% Convertible Notes
     which were repaid in the year ended June 30, 1999.








                                      -34-


<PAGE>

ITEM 13.  Certain Relationships And Related Transactions

         In August 1996, Direct International Limited, a Taiwanese company,
loaned $300,000 to the Employee Trust. Such loan is collateralized by 250,000
shares of the Company's common stock owned by the Employee Trust and was
originally due on October 2, 1996. The loan was then to be repaid in 37,500
shares of Company common stock owned by the Employee Trust no later than
December 31, 1996, with Direct International Limited also receiving on December
31, 1996 10,000 shares of Company common stock owned by The Employee Trust as
consideration for the advance of the loan. On June 4, 1997, it was agreed that
the loan would now be repaid in 88,000 shares of the Company's common stock
owned by the Employee Trust, and this transfer was effected in September 1997.
The $300,000 proceeds received by the Employee Trust were loaned by it to Mr.
Holloway ($140,000) and the Company ($160,000). Such loans are unsecured,
interest free, due and payable on an as yet undetermined date, and are not
evidenced by written agreements. In July 1997, $33,200 of the amount loaned to
the Company was repaid by the Employee Trust. In September 1998, a further loan
advance of $40,000 was made to the Company, and during the year ended June 30,
1999, $18,250 was repaid. In October 1998, the Company issued 322,500 shares of
common stock in consideration for the Trust forgiving $161,250 of the loan. The
conversion price of $0.50 was the market price at the date the agreement to the
conversion was made. An amount of $20,500 remained owing to the Employee Trust
at June 30, 1999.

         Effective January 30, 1996 and February 29, 1996, pursuant to a stock
purchase agreement, McLaughlin Group LLC acquired from the Company in private
transactions 800,000 and 800,000 shares, respectively, of the Company's common
stock for an aggregate purchase price of $1 million. McLaughlin Group LLC was
also granted certain demand and piggyback registration rights. The Company has
agreed to indemnify McLaughlin Group LLC against certain liabilities in
connection with any shares so registered.

         On July 21, 1997, McLaughlin Group LLC was granted a warrant to
purchase 650,000 shares of the Company's common stock at an exercise price of
$1.00 per share, such right to expire on 20 July, 2002. In consideration for the
granting of this warrant McLaughlin Group LLC agreed to waive its rights under
the stock purchase agreement of January 30, 1996 whereby it had been granted (i)
a warrant to purchase such number of shares of Company common stock as equals
3.5% of the outstanding shares of common stock on the date the warrant was
exercised (with such determination to be made on a fully diluted basis). This
original warrant was exercisable, in whole only, at an exercise price of $1.0
million and was due to expire eighteen months after March 1, 1996; and (ii) the
right to acquire additional shares of capital stock upon issuance by the Company
of additional capital stock (except in certain specified cases) in order to
maintain the same proportion of voting power of the Company as is owned prior to
the issuance.




                                      -35-
<PAGE>

         McLaughlin Group LLC has also been granted certain demand and piggyback
registration rights in connection with the shares issuable under the July 21,
1997 warrant. The Company has agreed to indemnify McLaughlin Group LLC against
certain liabilities in connection with any shares so registered.

         Mark McLaughlin, a member of McLaughlin Group LLC, is president and a
principal stockholder of McLaughlin International, Inc. McLaughlin
International, Inc. serves as a consultant to the Company pursuant to an
agreement dated February 10, 1999 which terminated August 9, 1999.

         Effective May 7, 1997, June 4, 1997 and September 5, 1997, Jeremy Miles
Simpson acquired from the Company, in private transactions, 79,126, 48,042 and
26,900 shares, respectively, of the Company's common stock. Consideration for
the common stock was, respectively, $163,000, $114,100 and $79,000 in cash. The
price paid for the shares of common stock in each case was the market price
prevailing on the respective dates. In addition, Mr. Simpson was granted options
to acquire 50,000 shares of common stock at a price of $2.12 per share in
respect of the May 7, 1997 transaction and 12,500 shares of common stock at a
price of $2.37 per share in respect of the June 4, 1997 transaction. In both
cases the options are exercisable at any time after six months from the date of
the respective grants. The end of the option term in each case is five years
from the date of the grant.

         Effective October 26, 1997 and February 23, 1998, Jeremy Miles Simpson
acquired from the Company, in private transactions, 67,800 and 253,846 shares
respectively of the Company's common stock. Consideration for the common stock
was, respectively, $169,000, and $165,000 in cash. The price paid for the shares
of common stock in each case was the market price prevailing on the respective
dates. In addition, Mr. Simpson was granted options to acquire 67,800 shares of
common stock at a price of $1.75 per share in respect of the October 27, 1997
transaction and 253,846 shares of common stock at a price of $0.65 per share in
respect of the February 23, 1998 transaction. In both cases the options are
exercisable immediately. The end of the option term in each case is five years
from the date of the grant.

         In November 1998, the Company sold in private transactions, 2,000,000
shares of its common stock for cash of $1,000,000. In addition the acquirors of
the shares were granted warrants entitling them to subscribe for a further
1,000,000 shares of common stock at $0.50 per share at any time up to October
2003. Mr. McLaughlin and parties related to Mr. McLaughlin were parties to the
above transactions as a result of which they acquired 752,000 shares of common
shares in the Company for $376,000 cash and warrants to subscribe for a further
376,000 shares of common stock at $0.50 per share.

         In January 1999, McLaughlin Group LLC, who had purchased $330,560 of
the 10% convertible promissory notes from the original subscribers, exercised
their right of conversion in respect of these notes into 440,747 shares of
common stock in the Company at the conversion price of $0.75 per share.

         See Item 11. EXECUTIVE COMPENSATION-Compensation Committee Interlocks
and Insider Participation for additional relationships and related transactions.

         The Company believes that all transactions with officers, directors or
affiliates to date are on terms no less favorable than those available from
unaffiliated third parties. It is the Company's policy that all future
transactions with officers, directors, or affiliates will be approved by members
of the Company's Board of Directors not having an interest in the transaction
and will be on terms no less favorable than could be obtained from unaffiliated
third parties.



                                      -36-
<PAGE>

                                     PART IV

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

(a) The following documents are filed as part of this report

Financial Statements
--------------------

Independent Auditors' report
Consolidated balance Sheets at June 30, 1998 and 1999
Consolidated Statements of Operations for the years ended June 30, 1997,
   June 30, 1998 and June 30, 1999
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the
   years ended June 30, 1997. June 30, 1998 and June 30, 1999.
Consolidated Statements of Cash Flows for the years ended June 30, 1997 June 30,
   1998 and June 30, 1999
Notes to Consolidated Financial Statements.

Financial Statement Schedules
-----------------------------

None

Exhibits
--------
2      Exchange Agreement among Capital Acquisition Company and the
       shareholders of MSU PLC(3)
3.1    Articles of Incorporation(1)
3.2    Amendment to Articles of Incorporation(4)
3.3    Bylaws(1)
3.4    Amendment to Bylaws(2)
4.1    Common Stock Purchase Agreement with McLaughlin Group LLC(4)
4.2    Amendment to Common Stock Purchase Agreement with McLaughlin Group LLC(4)
4.3    Warrant issued to McLaughlin Group LLC(4)
10.1   Service Agreement with Wynford Peter Holloway(4)
10.2   Service Agreement with Keith Charles Hall(4)
10.3   Service Agreement with William Derek Snowdon(4)
10.4   Placement Agreement with Millport Limited as amended and confirmed(4)
10.5   Employee Trust(4)
10.6   Office Lease Agreement with Brixton Estates Plc.(4)
10.7   Manufacturing, Distribution and Joint Venture Agreement with American
       Interactive Media, Inc. Confidential treatment has been requested for
       specific portions of the Manufacturing, Distribution and Joint Venture
       Agreement(4)
10.8   Engagement letter, dated November 8, 1995 as amended with McLaughlin
       International, Inc.(4)
10.9   Engagement letter, dated May 17, 1996 with McLaughlin International,
       Inc.(4)
10.10  Form of Director Option granted to each Director in consideration of the
       Guarantee to National Westminster Bank Plc. credit facility(4)
10.11  Development and licensing Agreement with TXC Corporation. Confidential
       treatment has been requested for specific portions of the License
       Agreement(4)
10.12  Agreement with Mitac, Inc. Confidential treatment has been requested for
       specific portions of the Agreement(4)
10.13  Letter of Agreement dated February 15, 1997 with Forte Communications
       Inc., as public relations consultants to the Company, together with
       letter amending such letter Agreement(5)
10.14  License Agreement, dated January 29, 1997, with Zilog Inc., a
       California corporation. Confidential treatment has been requested for
       specific portions of the License Agreement(5)
10.15  License Agreement, dated August 18, 1997 with C-Cube Microsystems Inc.,
       a Delaware corporation. Confidential treatment has been requested for
       specific portions of the License Agreement(5)
10.16  Service Agreement with Keith Edward Peirson(5)
10.17  Service Agreement with Richard Horby Phillips(5)
10.18  Service Agreement with Gerald J Capaci(5)
10.19  Advisory and Investment Banking Agreement, dated January 27, 1999 with
       May Davis Group, Inc. (terminated)


                                      -37-


<PAGE>

10.20  Agreement with Barry Jordan
10.21  Agreement with Thakral Electronics Industrial Corp. Limited
10.22  Consulting Agreement with McLaughlin Group (expired)
10.23  Agreement with HSBC
10.24  Form of 6% Convertible Secured Promissory Note
10.25  Form of 8% Convertible Secures Promissory Note
10.26  Form of 10% Convertible Promissory Note
16     Letter re change in certifying accountant from Coopers & Lybrand(4)
17     Subsidiaries of Registrant(5)
24     Power of attorney. Reference is made to the signature page of this report
27     Financial data schedule

(1)  Contained in exhibits to the Registration Statement on Form S-18 (File No.
     33-07861-A), declared effective by the Securities and Exchange Commission
     on November 6, 1986.

(2)  Contained in exhibits to the Annual Report on Form 10-K for the fiscal year
     endFebruary 28, 1990, filed with the Securities and Exchange Commission in
     May 1990.

(3)  Contained in exhibits to the Report on Form 8-K filed with the Securities
     and Exchange Commission in October 1994

(4)  Contained in exhibits to the Annual Report on Form 10-K for the fiscal year
     ended June 30, 1995, filed with the Securities and Exchange Commission on
     November, 29 1996.

(5)  Contained in exhibits to the Annual Report on Form 10-K for the fiscal year
     ended June 30, 1997, filed with the Securities and Exchange Commission on
     September 25 1997.

(6) Filed herewith

(b) Reports on Forms 8-K

    None




                                      -38-
<PAGE>

                                   SIGNATURES

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

                                       MSU CORPORATION

                                       By /s/ Richard Horby Phillips
                                         -------------------------------
                                              Richard Horby Phillips
                                                            Director

                                            Date October 13, 1999


Each person whose signature appears below authorises Richard Horby Phillips or
William Derek Snowdon or either of them, each who may act without joinder of the
other, to execute in the name of such person who is an officer or director of
the Registrant and to file any amendments to this annual report on Form 10-K
necessary or advisable to enable the Registrant to comply with the Securities
Exchange Act of 1934, as amended, and any rules, regulations and requirements of
the Securities and Exchange Commission in respect thereof, which amendments may
make such changes in such report as such attorney-in-fact may deem appropriate.

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed by the following persons in the capacities and on
the dates indicated.

<TABLE>
<CAPTION>
         Signature               Title                              Date
<S>                              <C>                                <C>
/s/ Wynford Peter Holloway       Chief Executive Officer            October 13, 1999
--------------------------       and Director (Principal
WYNFORD PETER HOLLOWAY           Executive Officer

/s/ William Derek Snowdon        Secretary and Director             October 13, 1999
--------------------------
WILLIAM DEREK SNOWDON

/s/ Richard Horby Phillips       Director (Principal                October 13, 1999
--------------------------       Financial and Accounting
RICHARD HORBY PHILLIPS           Officer


/s/ Jeremy Miles Simpson         Director                           October 13, 1999
-------------------------
JEREMY MILES SIMPSON

                                 Director                           ___________, 1999
-------------------------
FRED KASHKOOLI

</TABLE>








                                      -39-
<PAGE>
























                        MSU CORPORATION AND SUBSIDIARIES



                        CONSOLIDATED FINANCIAL STATEMENTS


                    Years Ended June 30, 1999, 1998 and 1997
<PAGE>

                                 C O N T E N T S

                                    --------

                                                                          Page
                                                                         Number
                                                                         ------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS                        F-1


FINANCIAL STATEMENTS

   Consolidated Balance Sheets                                            F-2

   Consolidated Statements of Operations                                  F-3

   Consolidated Statements of Changes in Shareholders' Equity (Deficit)   F-4

   Consolidated Statements of Cash Flows                                  F-5

   Notes to Consolidated Financial Statements                             F-6

<PAGE>



               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



Board of Directors
MSU Corporation
Central Milton Keynes, England


We have audited the accompanying consolidated balance sheets of MSU Corporation
and subsidiaries as of June 30, 1999 and 1998, and the related consolidated
statements of operations, changes in shareholders' equity (deficit) and cash
flows for each of the three years in the period ended June 30, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MSU Corporation and
subsidiaries as of June 30, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1999 in conformity with generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered, and continues to
suffer, significant losses from its operations, has an accumulated deficit,
continues to have negative cash flow from operations and currently has a very
limited client base. These factors, among others, raise substantial doubt about
its ability to continue as a going concern. Management's plans with regard to
these matters are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.




Certified Public Accountants


Orlando, Florida
September 30, 1999


                                      F-1


<PAGE>

                        MSU CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                             June 30, 1999 and 1998
                                     ASSETS

<TABLE>
<CAPTION>
                                                                                           1999               1998
                                                                                       ------------       ------------
<S>                                                                                    <C>                <C>
CURRENT ASSETS
Cash and cash equivalents                                                              $  2,604,504       $    166,040
Accounts receivable                                                                             566               --
Inventory                                                                                    39,500               --
Prepaid expenses and other                                                                  170,457             79,411
                                                                                       ------------       ------------
                                                            TOTAL CURRENT ASSETS          2,815,027            245,451

EQUIPMENT, net of accumulated depreciation of $152,279
and $84,544 in 1999 and 1998, respectively                                                  134,959            108,647
INVESTMENTS                                                                                 390,625          2,218,500
                                                                                       ------------       ------------
                                                                    TOTAL ASSETS       $  3,340,611       $  2,572,598
                                                                                       ============       ============

                 LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Current portion of debt                                                                $     75,000       $  2,299,750
Shareholder advance payable                                                                    --            1,400,000
Accounts payable and accrued liabilities                                                  1,032,947            767,711
Related-party notes, advances and payables                                                  185,811            178,661
                                                                                       ------------       ------------
                                                       TOTAL CURRENT LIABILITIES          1,293,758          4,646,122


LONG-TERM DEBT                                                                              505,000               --
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock, $0.01 par value; 50,000,000 shares authorized; 25,364,262 and
 16,590,237 shares issued and outstanding at
June 30, 1999 and 1998, respectively                                                        253,642            165,902
Additional paid-in capital                                                               17,854,174          5,287,790
Stock subscription receivable                                                              (148,750)              --
Accumulated other comprehensive income (loss)                                               108,820           (686,454)
Accumulated deficit                                                                     (16,526,033)        (6,840,762)

                                             TOTAL SHAREHOLDERS' EQUITY (DEFICIT)         1,541,853         (2,073,524)
                                                                                       ------------       ------------
                                                           TOTAL LIABILITIES AND
                                                   SHAREHOLDERS' EQUITY (DEFICIT)      $  3,340,611       $  2,572,598
                                                                                       ============       ============
</TABLE>
         The accompanying notes are an integral part of the consolidated
financial statements.

                                      F-2

<PAGE>
                        MSU CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                          June 30, 1999, 1998 and 1997

<TABLE>
<CAPTION>
                                                                            1999               1998              1997
                                                                        ------------       ------------      ------------
<S>                                                                     <C>                <C>               <C>
REVENUES                                                                $     31,746       $  4,179,203      $  1,479,911
EXPENSES
Cost of revenues                                                              53,374              7,796           650,790
Selling, general and administrative                                        1,686,286          1,211,334         1,485,577
Depreciation                                                                  74,082             49,556            43,709
Amortization of deferred financing and
registration costs                                                              --              917,891              --
Interest expense                                                             157,675            297,706            26,380
Research and development                                                   1,555,918          1,408,664         1,386,340
                                                                        ------------       ------------      ------------
                                                   TOTAL EXPENSES          3,527,335          3,892,947         3,592,796
                                                                        ------------       ------------      ------------
                                           OPERATING INCOME (LOSS)        (3,495,589)           286,256        (2,112,885)

NON-OPERATING INCOME (EXPENSE)
Interest income                                                                4,693              5,488             6,176
Amortization of discount on convertible notes                             (3,670,000)              --                --
Impairment loss on carrying value of investments                          (2,524,375)              --                --
                                                                        ------------       ------------      ------------
                              TOTAL NON-OPERATING INCOME (EXPENSE)        (6,189,682)             5,488             6,176
                                                                        ------------       ------------      ------------
                                                 NET INCOME (LOSS)      $ (9,685,271)      $    291,744      $ (2,106,709)
                                                                        ============       ============      ============
BASIC AND DILUTED INCOME (LOSS)
PER COMMON SHARE                                                        $      (0.47)      $       0.02      $      (0.13)
                                                                        ============       ============      ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING                                                 20,550,000         16,245,000        15,700,000
                                                                        ============       ============      ============
</TABLE>
         The accompanying notes are an integral part of the consolidated
financial statements.



                                      F-3
<PAGE>
                        MSU CORPORATION AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF CHANGES
                        IN SHAREHOLDERS' EQUITY (DEFICIT)
                    Years Ended June 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
                                                                                                                       Accumulated
                                                        Common Stock                                                      Other
                                   Comprehensive       $0.01 Par Value      Additional       Stock                    Comprehensive
                                      Income        ---------------------     Paid-In     Subscription   Accumulated      Income
                                      (Loss)          Shares      Amount      Capital      Receivable      Deficit        (Loss)
                                   -----------      ----------   --------   -----------    ---------   ------------     --------
<S>                                <C>              <C>          <C>        <C>            <C>         <C>              <C>
Balance - June 30, 1996            $       --       15,534,722   $155,347   $ 2,984,081    $    --     $ (5,025,797)    $ 70,651
Issuance of Common Shares                  --          452,169      4,522     1,472,479         --             --           --
Translation Adjustments                 24,050           --         --            --            --             --         24,050
Net Loss                            (2,106,709)          --         --            --            --       (2,106,709)        --
                                   -----------      ----------   --------   -----------    ---------   ------------     --------
Comprehensive Loss                 $(2,082,659)          --         --            --            --             --           --
                                   ===========      ==========   ========   ===========    =========   ============     ========
Balance - June 30, 1997            $       --       15,986,891    159,869     4,456,560         --       (7,132,506)      94,701
Issuance of Common Shares                  --          603,346      6,033       769,384         --             --           --
Issuance of Options to Purchase
903,846 Shares of Common Stock             --             --         --          61,846         --             --           --
Translation Adjustments                (84,655)           --         --            --           --             --        (84,655)
Change In Market Value of
Investments Available for Sale        (696,500)           --         --            --           --             --       (696,500)
Net Income                             291,744            --         --            --           --          291,744         --
                                   -----------      ----------   --------   -----------    ---------   ------------     --------
Comprehensive Loss                 $  (489,411)           --         --            --           --             --           --
                                   ===========      ==========   ========   ===========    =========   ============     ========
Balance - June 30, 1998            $       --       16,590,237    165,902     5,287,790         --       (6,840,762)    (686,454)
Issuance of Common Shares                  --        8,774,025     87,740     8,797,946     (148,750)          --           --
Issuance of Options to Purchase
112,500 Shares of Common Stock             --             --         --          98,438         --             --           --
Translation Adjustments                 98,774            --         --            --           --             --         98,774
Reclassification of Change in
Market Value of Investments
Available for Sale to Account for
Permanent Impairment                   696,500            --         --            --           --             --        696,500
Charge for Discount on
Convertible Notes Issued                   --             --         --       3,670,000         --             --           --
Net Loss                            (9,685,271)           --         --            --           --       (9,685,271)        --
                                   -----------      ----------   --------   -----------    ---------   ------------     --------
Comprehensive Loss                 $(8,889,997)           --         --            --           --             --           --
                                   ===========      ==========   ========   ===========    =========   ============     ========
Balance - June 30, 1999                    --       25,364,262   $253,642   $17,854,174    $(148,750)  $(16,526,033)    $108,820
</TABLE>
                          [RESTUBBED FROM ABOVE TABLE]
<TABLE>
<CAPTION>
                                       Total
                                    Shareholders'
                                       Equity
                                      (Deficit)
                                    -----------
<S>                                 <C>
Balance - June 30, 1996             $(1,815,718)
Issuance of Common Shares             1,477,001
Translation Adjustments                  24,050
Net Loss                             (2,106,709)
Comprehensive Loss                         --
                                    -----------
Balance - June 30, 1997              (2,421,376)
Issuance of Common Shares               775,417
Issuance of Options to Purchase
903,846 Shares of Common Stock           61,846
Translation Adjustments                 (84,655)
Change In Market Value of
Investments Available for Sale         (696,500)
Net Income                              291,744
Comprehensive Loss                         --
                                    -----------
Balance - June 30, 1998              (2,073,524)
Issuance of Common Shares             8,736,936
Issuance of Options to Purchase
112,500 Shares of Common Stock           98,438
Translation Adjustments                  98,774
Reclassification of Change in
Market Value of Investments
Available for Sale to Account for
Permanent Impairment                    696,500
Charge for Discount on
Convertible Notes Issued              3,670,000
Net Loss                             (9,685,271)
                                    -----------
Comprehensive Loss                         --
                                    -----------
Balance - June 30, 1999             $ 1,541,853
                                    ===========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
                                      F-4
<PAGE>

                        MSU CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                          June 30, 1999, 1998 and 1997

<TABLE>
<CAPTION>
                                                                                     1999              1998               1997
                                                                                  -----------       -----------       -----------
<S>                                                                               <C>               <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)                                                                 $(9,685,271)      $   291,744       $(2,106,709)
Adjustments to reconcile net income (loss) to net
 cash used in operating activities
Depreciation                                                                           74,082            49,556            43,709
Amortization of deferred costs                                                           --             917,891              --
Amortization of discount on convertible notes                                       3,670,000              --                --
Impairment loss on carrying value of investments                                    2,524,375              --                --
Non-cash expense related to issuance of
stock purchase options                                                                 98,438            61,846              --
Issuance of stock for debt forgiveness, services
and settlements                                                                       172,213              --                --
Issuance of stock for relief of interest                                              153,049              --                --
Conversion loss on issuance of common stock under market                              142,546              --                --
Non-cash revenue related to sale of license                                              --          (2,915,000)             --
(Increase) decrease in accounts receivable, net                                          (566)          105,842           (93,495)
(Increase) decrease in inventories                                                    (40,749)           12,325           (12,325)
(Increase) decrease in prepaid expenses and other                                     (87,737)           35,332          (970,478)
Increase in accounts payable and accrued liabilities                                  304,852            54,249           216,329
Increase (decrease) in related-party advances payable                                 163,000           (12,558)           12,013
                                                                                  -----------       -----------       -----------
                                                  TOTAL ADJUSTMENTS                 7,173,503        (1,690,517)         (804,247)
                                                                                  -----------       -----------       -----------
                              NET CASH USED IN OPERATING ACTIVITIES                (2,511,768)       (1,398,773)       (2,910,956)
                                                                                  ===========       ===========       ===========
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of equipment, net                                                       (106,628)          (81,900)          (77,299)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (repayments of) borrowings under
short-term credit facilities, net                                                        --            (131,595)          131,595
Proceeds from issuance of convertible promissory notes                              4,175,000           470,008         1,829,742
Repayment of convertible promissory notes                                            (326,939)             --                --
Proceeds from issuance of note payable                                                 75,000              --             250,000
Repayment of note payable                                                                --            (250,000)             --
Proceeds from issuance of note to related party                                        77,200            41,500           162,680
Repayment of note to related party                                                    (18,250)          (33,200)             --
Issuance of common stock                                                            1,013,650           775,417         1,477,001
                                                                                  -----------       -----------       -----------
                          NET CASH PROVIDED BY FINANCING ACTIVITIES                 4,995,661           872,130         3,851,018
EFFECT OF EXCHANGE RATE CHANGES                                                        61,199           (84,655)          (58,330)
                                                                                  -----------       -----------       -----------
                                             NET INCREASE (DECREASE) IN CASH
                                                        AND CASH EQUIVALENTS        2,438,464          (693,198)          804,433
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                        166,040           859,238            54,805
                                                                                  -----------       -----------       -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR                                          $ 2,604,504       $   166,040       $   859,238
                                                                                  ===========       ===========       ===========
</TABLE>
         The accompanying notes are an integral part of the consolidated
financial statements.

                                      F-5
<PAGE>

                        MSU CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                    Years Ended June 30, 1999, 1998 and 1997



NOTE  1 -     ORGANIZATION, BASIS OF PRESENTATION AND SIGNIFICANT RISKS

              Organization and Basis of Presentation

              In October 1994, MSU Corporation, formerly Capital Acquisition
              Company, acquired, through the issuance of 9,422,222 shares of its
              common stock, the outstanding capital stock of MSU Public Limited
              Company (MSU Plc.), a private company organized and based in the
              United Kingdom, which owns all of the capital stock of Web 2 U
              Limited, formerly MSU UK Limited.

              MSU Corporation operates primarily through Web 2 U Limited, which
              is principally engaged in the design and development of computer
              chips and chipsets for use in consumer electronic products. In
              February 1997, MSU US Operations, Inc. was incorporated in North
              Carolina to act as a sales company marketing and selling products
              developed by MSU. The activity of MSU US Operations has not been
              significant since its inception. All of the outstanding common
              stock of this company is owned by MSU Corporation.

              The consolidated financial statements include the accounts of MSU
              Corporation, MSU Plc., Web 2 U Limited and MSU US Operations, Inc.
              (collectively, the Company). All significant intercompany accounts
              have been eliminated in the consolidated financial statements.

              Significant Risks

              The Company's consolidated financial statements have been prepared
              assuming that the Company will continue as a going concern. During
              the years ended June 30, 1999, 1998 and 1997, the Company
              generated net income (losses) of approximately $(9,685,000),
              $292,000 and $(2,107,000), respectively. At June 30, 1999, the
              Company had an accumulated deficit of approximately $16,526,000.
              Additionally, the Company has had recurring negative cash flows
              from operations and currently has a very limited client base (see
              Note 10). These factors raise substantial doubt about the
              Company's ability to continue as a going concern.

              Management's plans with regard to these matters include increased
              cash flows from operations through further development, upgrade
              and marketing of its chips and products, the issuance of
              additional shares of the Company's common stock or debt securities
              in exchange for proceeds, which may be used to provide the working
              capital needed to commercially exploit the Company's core
              technologies. The Company will have to expend significant amounts
              of cash on research and development in order to potentially
              produce revenues in the future, and it anticipates the initial
              source of such funds to be derived from the issuance of additional
              debt and/or equity securities. The issuance of any additional
              securities would further dilute the current ownership structure.
              The Company also intends to develop its infrastructure and
              organization to support its enhanced operations as funds become
              available. However, there can be no assurance that management will
              be successful in the implementation of its plans. The accompanying
              consolidated financial statements do not include any adjustments
              that might result from the outcome of this uncertainty.

                                      F-6
<PAGE>

NOTE  2 -     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

              Cash Equivalents

              Cash equivalents include all highly liquid investments convertible
              into known amounts of cash with an original maturity, when
              purchased, of three months or less.

              Investments

              Investments consist of publicly traded stock of a U.S.-based
              company. This stock was conveyed to the Company in partial payment
              of fees due under a licensing agreement dated May 6, 1998 (see
              Note 3). In accordance with FASB Statement No. 115, "Accounting
              for Certain Investments in Debt and Equity Securities," these
              investments are accounted for as available for sale securities.
              Consequently, the unrealized holding loss on these securities is
              reported as a separate component of shareholders' equity, unless a
              determination is made that the holding loss is other than
              temporary. Upon the sale of the underlying securities, the
              unrealized loss included in equity will be recognized in the
              statements of operations. If the holding loss is determined to be
              permanent, the loss is recognized in the year such a determination
              is made.

              Equipment

              Equipment is stated at cost. Depreciation is provided using the
              straight-line method over the estimated useful lives of the
              equipment, generally four years.

              Inventory

              Inventory is stated at the lower of cost or market. Cost is
              determined using the first-in, first-out method. Inventory is
              generally comprised of Internet Access Devices, which are
              available for sale as production samples.

              Income Taxes

              The Company recognizes deferred tax assets and liabilities for the
              expected future tax consequences of events that have been included
              in the financial statements or tax returns. Deferred tax assets
              and liabilities are determined based on the difference between the
              financial statement and tax bases of assets and liabilities using
              enacted tax rates in effect for the year in which the differences
              are expected to reverse (see Note 5).

              Revenue Recognition

              The Company enters into development arrangements with certain
              customers to design computer chips and chipsets using existing and
              enhanced technology, which are suitable for use in the customer's
              application. The Company's development arrangements are generally
              performed under contractual arrangements which stipulate the
              Company's fee as certain performance criteria are met. The Company
              recognizes these development fees when its customers acknowledge
              that the fee has been earned by accepting the Company's work
              product. Development fees and related support services fees
              revenue recognized by the Company amounted to approximately
              $544,000 for the year ended June 30, 1998. None of the
              arrangements resulted in development fees or related support
              service fees, in the years ended June 30, 1999 and 1997.



                                      F-7
<PAGE>

NOTE  2 -     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

              Revenue Recognition (Continued)

              Certain arrangements provide for the customer to pay a royalty or
              licensing fee. Royalty fees are to be paid to the Company if the
              customer uses the Company's work product in commercial
              applications. Royalty and licensing fees earned by the Company in
              the year ended June 30, 1998, amounted to approximately
              $4,170,000. In the years ended June 30, 1999 and 1997, none of the
              arrangements resulted in royalty or licensing revenue to the
              Company.

              Revenue from the sale of chipset products to customers is
              recognized at the time the products are shipped.

              Deferred Financing Costs

              The costs attributable to the issuance of certain convertible
              promissory notes were deferred and amortized over the term of the
              notes. The 10% convertible notes matured on July 1, 1998 (see Note
              9), therefore, all deferred financing costs related to that
              issuance had been amortized as of June 30, 1998.

              Deferred Registration Costs

              Legal, accounting and other costs related to the Company's
              proposed registration of shares (see Note 11) were capitalized as
              deferred registration costs. These costs were expensed in fiscal
              1998 when the Company chose to forgo the registration of the
              stock.

              Research and Development Costs

              Research and development costs consist of expenditures incurred
              during the course of planned search and investigation aimed at
              discovery of new knowledge, which will be useful in developing new
              products or processes, or significantly enhancing existing
              products, and the implementation of such through design, building
              and testing of prototypes. The Company expenses all research and
              development costs as they are incurred.

              Net Income (Loss) Per Share

              During the fiscal year ended June 30, 1998, the Company adopted
              "Statement of Financial Accounting Standards No. 128 - Earnings
              Per Share" (SFAS 128), which requires presentation of both basic
              and diluted earnings per share. Basic earnings per share is based
              on the weighted average number of common shares outstanding during
              each year. Diluted earnings per share is based on the sum of the
              weighted average number of common shares outstanding plus common
              stock equivalents arising out of stock options and convertible
              debt. Earnings per share information for all periods have been
              restated to conform to the requirements of SFAS 128.

              Common share equivalents were not considered in the earnings per
              share calculation for 1999 and 1997 because their effect would
              have been anti-dilutive. As a result, both basic and diluted
              earnings per share for 1999 and 1997 were calculated based on
              20,550,000 and 15,700,000 weighted average common shares
              outstanding during the years, respectively.


                                      F-8
<PAGE>

NOTE  2 -     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

              Net Income (Loss) Per Share (Continued)

              The following table is a reconciliation of the numerators and
              denominators of the basic and diluted earnings per share
              computations for the fiscal year ended June 30, 1998:

<TABLE>
<CAPTION>
                                                              For the Fiscal Year Ended June 30, 1998
                                                    ------------------------------------------------------------
                                                         Income              Shares             Per-Share
                                                       (Numerator)       (Denominator)            Amount
                                                    ------------------------------------------------------------
<S>                                                 <C>                  <C>                    <C>
              Basic EPS
                 Net income                             $  291,744           16,245,000           $  0.02
                                                    ==================                     =====================

              Effect of Dilutive Securities
                 Common stock options                                            47,000
                                                                       -------------------

              Diluted EPS
                 Net income plus assumed
                     conversions                        $  291,744           16,292,000           $  0.02
                                                    ================== =================== =====================
</TABLE>

              Options to purchase 1,562,500 shares of common stock were
              outstanding during the fiscal year ended June 30, 1998, but were
              not included in the computation of diluted EPS because the
              options' exercise price was greater than the average market price
              of the common shares.

              Translation of Foreign Currency

              The financial position and results of operations of the Company's
              foreign subsidiaries are measured using local currency as the
              functional currency. Assets and liabilities of these subsidiaries
              are translated at the exchange rate in effect at each year end.
              Income statement accounts are translated at the average rate of
              exchange prevailing during the year. Translation adjustments
              arising from differences in exchange rates from period to period
              are included in the cumulative translation adjustments account in
              shareholders' equity.

              Comprehensive Income (Loss)

              Statement of Financial Accounting Standards No. 130, "Reporting
              Comprehensive Income," requires companies to report an additional
              measure of income (loss) on the statements of operations or to
              create a new financial statement that shows the new measure of
              income (loss). Other comprehensive income (loss) includes foreign
              currency translation gains and losses and unrealized gains and
              losses on equity securities that are excluded from net income.
              Comprehensive income (loss) includes net income (loss) and other
              comprehensive income (loss).

              Concentrations of Credit Risk and Fair Value of Financial
              Instruments

              Financial instruments which potentially subject the Company to
              concentrations of credit risk consist principally of cash
              deposited in a financial institution and investments in publicly
              traded equity securities. The Company primarily maintains its cash
              in bank deposit accounts in the United Kingdom, which are not
              insured. The Company has not experienced any losses in such bank
              deposit accounts and believes that it is not exposed to any
              significant credit risk on cash and cash equivalents. The


                                      F-9
<PAGE>

NOTE  2 -     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

              Concentrations of Credit Risk and Fair Value of Financial
              Instruments (Continued)

              Company's equity security holdings consists of an investment in
              one company (see Note 3). As a result, the Company has a
              significant credit risk related to its investment and is subject
              to the concentrated market risk related to not having a
              diversified portfolio. Volatility in the investment's stock price
              or low trading volume may have an adverse impact on the Company's
              financial position.

              Financial instruments reflected in the Company's balance sheets at
              June 30, 1999 and 1998 include cash and cash equivalents,
              subscription receivable, notes payable, and other borrowings. The
              carrying amount of cash and cash equivalents, subscription
              receivable, notes payable and other short-term borrowings
              approximates fair value because of the short maturity of those
              instruments. Because of the circumstances and the nature of the
              Company's relationship with its creditors, it was not practical to
              estimate the fair value of the $1,400,000 shareholder advance
              payable (see Note 4) and other borrowings.

              Estimates

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

              Reclassifications

              Certain amounts in the June 30, 1998 financial statements have
              been reclassified to conform to the June 30, 1999 presentation.

NOTE  3 -     LICENSING AGREEMENT

              On May 6, 1998, the Company entered into a licensing agreement
              with American Interactive Media, Inc. (AIM), whereby the Company
              granted to AIM a worldwide, non-exclusive license in respect of
              the MSU proprietary intellectual property relating to the Internet
              Access Device. The consideration for the license was $1,150,000 in
              cash and 560,000 restricted shares of common stock in AIM, of
              which 60,000 shares were issued directly to Capital Bay Securities
              and Daybreak Fund LLC in settlement of certain short-term funding
              received by the Company of $314,985, together with accrued
              interest and other fees owing to Capital Bay Securities and
              Daybreak Fund LLC. In fiscal 1999, the trading value of the
              Company's investment in AIM declined significantly. The Company
              determined the loss to be permanent and, accordingly, recognized
              an impairment loss on carrying value of investments of
              approximately $2,500,000 in the accompanying financial statements.

              At June 30, 1999, the Company's investment serves as collateral
              on certain borrowings (see Note 9).


NOTE  4 -     RELATED-PARTY TRANSACTIONS

              Prior to June 30, 1994, the Company was advanced a total of
              $2,159,910 from a previously unrelated third party, of which
              $759,910 was contributed to capital when the Company agreed to
              accept this amount as consideration for the issuance of 2,208,333
              shares of its common stock pursuant to a March 1994 agreement. As
              of June 30, 1998, the $1,400,000 remaining balance of the advance
              remained unpaid. The advance was repaid by the Company in December
              1998 through the issuance of 1,400,000 shares of restricted common
              stock of the Company.

              The Company has received services from law firms in which a
              director of the Company was employed. Amounts charged to
              operations for these legal services during the years ended June
              30, 1999, 1998 and 1997, approximated $115,000, $122,000 and
              $117,000, respectively.


                                      F-10
<PAGE>
              The Company has also entered into a marketing agreement with an
              individual who is a director of a principal shareholder of the
              Company. The agreement provides, among other things, for the
              individual to receive compensation based upon revenue attained by
              the Company, as a result of transactions attributable to the
              individual's efforts. Compensation under the agreement is to
              consist of from 5% to 10% of such revenue plus warrants to acquire
              75,000 shares of the Company's common stock for each $1 million of
              revenue attained, with an exercise price of 50% of market value at
              the time the warrants are issued, up to a maximum of 300,000
              shares. No expense has been incurred under this agreement through
              June 30, 1999.

              In September 1996, a trust in which a director has an interest
              (the Employee Trust) loaned the Company approximately $163,000.
              The loan is unsecured, bears no interest, and has no defined terms
              for repayment. As consideration for this, the Company has granted
              to the trustees an option over a five-year period to subscribe for
              100,000 shares of the Company's common stock with an exercise
              price of $2.12, being the market value of the Company's common
              stock at the date of grant of the options. During the fiscal year
              ended June 30, 1999, a further $40,000 was advanced on similar
              terms, and approximately $18,000 was repaid in cash. In October
              1998, approximately $161,000 of this note was repaid through the
              issuance of 322,500 shares of restricted common stock of the
              Company.

              In September 1998, a director loaned the Company approximately
              $33,000. The loan was unsecured, bore no interest, and had no
              defined terms for repayment. As consideration for this, the
              Company granted to the director an option over a five-year period
              to subscribe for approximately 106,000 shares of the Company's
              common stock with an exercise price of $0.35, being the market
              value of the Company's common stock at the date of grant of the
              options. During December 1998, this note was repaid through the
              issuance of approximately 96,000 shares of restricted common stock
              of the Company.

              Amounts due under related party notes, advances and payables as of
              June 30, 1999 and 1998, amounted to approximately $186,000 and
              $179,000, respectively. The June 30, 1999 and 1998 balances
              consist of primarily approximately $158,000, and $79,000 due to a
              director for unpaid salaries and approximately $21,000 and
              $171,000 due to the Employee Trust, respectively.


NOTE  5 -     INCOME TAXES

              As of June 30, 1999, 1998 and 1997, the Company had a U.S. net
              operating loss carryforward of approximately $2.5 million, $2
              million and $460,000, respectively, available to offset future
              taxable income. The net operating loss carryforward expires
              through the year 2019. Under U.S. federal tax laws, certain
              changes in ownership of a company may cause a limitation on future
              utilization of these loss carryforwards.

              As of June 30, 1999, 1998 and 1997, the Company's subsidiaries had
              a United Kingdom net operating loss carryforward of approximately
              $7.2 million, $4.2 million and $6.0 million, respectively. Under
              United Kingdom tax laws, operating losses carry forward
              indefinitely.

              Deferred tax assets resulting from the Company's United Kingdom
              income tax loss carryforwards were approximately $2.1 million,
              $1.3 million and $1.8 million at June 30, 1999, 1998 and 1997,
              respectively. The Company has established a valuation allowance to
              fully offset all deferred tax assets and carryforwards, as their
              future realization is uncertain.


NOTE  6 -     STOCKHOLDERS' DEFICIT

              During the year ended June 30, 1997, the Company issued, in
              private transactions, an aggregate of 452,169 shares of common
              stock in exchange for net consideration of approximately
              $1,477,000. Gross proceeds of approximately $1,527,000 were offset
              by $50,000 of legal fees relating to the stock issuances. Of this
              amount, approximately $1,027,000 was received in cash at the time
              of the transactions, approximately $50,000 was received in the
              form of consulting services, and $450,000 of stock was issued to
              the placement agent as partial compensation for the issuance of
              the 10% convertible notes (see Note 9).

              During the year ended June 30, 1998, the Company issued, in
              private transactions, an aggregate of 603,346 shares of
              unregistered common stock in exchange for net consideration of
              approximately $451,000 cash at the time of the transactions, and
              approximately $324,000 as forgiveness of interest on certain notes
              payable.

                                      F-11
<PAGE>


              During the year ended June 30, 1999, the Company issued, in
              private transactions, an aggregate of 8,774,025 shares of
              unregistered common stock in exchange for net consideration of
              approximately $8,737,000. Approximately $1,021,000 was received in
              cash for the issuance of 2,027,500 shares of common stock at the
              time of the transactions. Stock subscriptions receivable in the
              amount of approximately $149,000 relate to the issuance of 150,000
              shares of common stock. Common stock representing 1,923,607 shares
              was issued to various parties for settlement of approximately
              $1,782,000 of certain advances, notes and settlements payable.
              Accrued interest payable approximating $153,000 was relieved
              through the issuance of 207,500 shares of common stock.
              Convertible notes payable in the amount of approximately
              $5,638,000 were converted into 4,465,418 shares of common stock
              during the year ended June 30, 1999. Conversion cost of securities
              issued below market during the fiscal year ended June 30, 1999
              approximated $143,000, of which approximately $40,000 was as a
              result of related-party transactions, and was recorded as
              additional paid-in capital in the accompanying statements of
              changes in shareholders' equity (deficit) (see Note 4).


NOTE  7 -     STOCK OPTIONS AND WARRANTS

              In connection with the private placement of 1,600,000 shares of
              its common stock in 1996, the Company issued a warrant, which was
              exercisable through September 1, 1997, to purchase 3.5% of the
              then outstanding shares (calculated on a fully diluted basis) of
              the Company's common stock for consideration of $1,000,000. The
              warrant was subject to certain anti-dilution provisions. In July
              1997, in consideration for the cancellation of the warrant and
              anti-dilutive provisions relating to the private placement of
              1,600,000 shares of the Company's common stock, the Company issued
              a new warrant to purchase 650,000 shares of the Company's common
              stock for $650,000. This warrant is exercisable through July 2002.

              In February 1997, the Company entered into a "Placement Agent
              Agreement and a Bridging Loan Agreement," which provided for the
              issuance to the Company of a bridge loan of $600,000 in advance of
              the offering of approximately $2,000,000 of convertible notes (see
              Note 9). In accordance with these agreements, the Company has
              issued warrants to the placement agent for 10,000 shares of the
              Company's common stock, exercisable from May 1997 to May 2000 at a
              price of $3.00 per share and to the bridge loan noteholders for
              60,000 shares of the Company's common stock exercisable at $3.00
              per share through January 2000.

              In May 1997, the Company issued to a consultant a warrant to
              purchase up to 150,000 shares of the Company's restricted common
              stock at an exercise price of $2.00 per share. No compensation
              expense was recorded for these options, as management believes the
              restrictions associated with any shares received by the option
              grantees on exercise will subject those shares to a discount from
              unrestricted market value.

              In July 1997, the Company granted options to nine of its employees
              to acquire an aggregate of 50,000 shares of the Company's common
              stock at an exercise price of $3.56 per share. The option terms
              are as follows: options relating to 25,000 shares were exercisable
              on June 30, 1998; options relating to 25,000 shares were
              exercisable on June 30, 1999. During the year ended June 30, 1998,
              10,000 of these options were canceled. The remaining options
              expire in June 2002.

              Pursuant to an employment agreement, in August 1997 and May 1998,
              the Company granted options to a director to acquire an aggregate
              of 600,000 shares of the Company's common stock at exercise prices
              as follows: 300,000 options exercisable at $2.25 per share and
              300,000 options exercisable at $0.65 per share. Options relating
              to 250,000 shares of common stock have expired due to the
              director's termination of employment. The remaining options are
              exercisable as follows: options relating to 200,000 shares are
              exercisable in equal amounts in August 1998 and 1999, and options
              relating to the remaining 150,000 shares became exercisable in May
              1998. These options expire three years after their respective
              dates of issuance.

                                      F-12
<PAGE>

              In February 1998, the Company granted options to a director to
              acquire an aggregate of 321,646 shares of the Company's common
              stock at exercise prices ranging from $1.75 to $0.65. These
              options are immediately exercisable and expire in February 2003.

              In July and August 1998, the Company granted options to ten of its
              employees to acquire an aggregate of 88,000 shares of the
              Company's common stock at an exercise price of $0.94 per share.
              These options are exercisable in equal amounts in June 1999 and
              2000. As of June 30, 1999, 11,500 of these options have lapsed due
              to termination of the respective employees.

              In August 1998, options to purchase 145,000 shares of the
              Company's common stock were granted to an investment broker as
              consideration to extend the due date for the payment of interest
              on certain convertible promissory notes (see Note 9). These
              options are exercisable immediately at an exercise price of $1.00.

              In September 1998, the Company granted options to three directors
              to acquire an aggregate of 500,000 shares of the Company's common
              stock at an exercise price of $0.65. These options are exercisable
              in equal amounts in September 1998 and 1999 and expire in
              September 2003.

              In connection with the private placement of 2,000,000 shares of
              its common stock in November and December 1998, the Company issued
              warrants, which are exercisable immediately, to purchase 1,000,000
              shares of the Company's common stock for consideration of
              $500,000.

              As consideration for a loan to the Company in September 1998, a
              director of the Company was granted options to purchase 105,857
              shares of common stock at an exercise price of $0.35 per share.
              These options are immediately exercisable and expire in September
              2003.

              In connection with the issuance of collateralized, convertible
              promissory notes (see Note 9) in the fiscal year ended June 30,
              1999, two directors of the Company offered as security for the
              loan an aggregate of 2,250,000 shares of the Company's common
              stock owned by the directors. As consideration for pledging the
              collateral for the notes, the directors were granted options to
              purchase an aggregate of 1,125,000 shares of common stock at an
              exercise price of $0.50 per share. These options are immediately
              exercisable and expire in November 2003.

              In November 1998, the Company granted options to eight of its
              employees to acquire an aggregate of 65,000 shares of the
              Company's common stock at an exercise price of $0.75 per share.
              These options are immediately exercisable. As of June 30, 1999,
              25,000 of these options have lapsed due to termination of the
              respective employees.

              In January 1999, the Company issued options to a consultant to
              purchase 25,000 shares of the Company's common stock at an
              exercise price of $2.94 per share. These options are immediately
              exercisable and expire in January 2004.


                                      F-13
<PAGE>

NOTE  7 -     STOCK OPTIONS AND WARRANTS (Continued)

              In January 1999, the Company issued options to a consultant to
              purchase 112,500 shsares of the Company's common stock to an
              unrelated Company at an exercise price of $1.50 per share. These
              options are immediately exercisable and expire in January 2004.

              Compensation expense recorded for stock options granted in the
              years ended June 30, 1999, 1998 and 1997, approximated $98,000,
              $230,000, and $-0-, respectively, and is included in selling,
              general and administrative expenses.

              Activity related to the Company's stock options during the years
              ended June 30, 1997, 1998 and 1999, was as follows:

<TABLE>
<CAPTION>
                                                                              Outstanding Options
                                                             -------------------------------------------------------
                                                                                             Weighted Average
                                                                 Number of Shares             Exercise Price
                                                             -------------------------- ----------------------------
<S>                                                               <C>                      <C>
              June 30, 1996                                              380,000                  $4.47
              Grants                                                   1,622,500                  $1.70
              Exercises                                                   -                        -
              Cancellations                                               -                        -
                                                             --------------------------

              June 30, 1997                                            2,002,500                  $2.22
              Grants                                                   1,121,646                  $1.39
              Exercises                                                  (37,000)                 $1.00
              Cancellations                                             (320,000)                 $2.18
                                                             --------------------------

              June 30, 1998                                            2,767,146                  $1.86
              Grants                                                   3,166,357                  $0.61
              Exercises                                                 (172,500)                 $0.96
              Cancellations                                             (316,500)                 $1.54
                                                             --------------------------

              June 30, 1999                                            5,444,503                  $1.18
                                                             ==========================

              Options exercisable at June 30, 1999                     5,031,253                  $1.20
                                                             ========================== ============================
</TABLE>

              The range of exercise prices for options outstanding at June 30,
              1999 was $0.35 to $5.00. The following table summarizes
              information about options outstanding at June 30, 1999:

<TABLE>
<CAPTION>
                                                                        Outstanding Options
                                               ----------------------------------------------------------------------
                                                                              Weighted
                                                       Number                 Average
                                                         of                 Contractual          Weighted Average
              Range of Exercise Prices                 Shares             Life (in years)         Exercise Price
              -------------------------------  ----------------------- ---------------------- -----------------------
<S>           <C>                                     <C>                       <C>                    <C>
              $0.35 to $2.50                          5,079,503                 3.7                    $0.93
              $3.00 to $5.00                            365,000                 2.2                    $4.71
                                               -----------------------
                                                      5,444,503                 3.6                    $1.18
                                               =======================
<CAPTION>
                                                                        Exercisable Options
                                               ----------------------------------------------------------------------
                                                                                                 Weighted Average
              Range of Exercise Prices                                   Number of Shares         Exercise Price
              -------------------------------                          ---------------------- -----------------------
<S>                                                                       <C>                     <C>
              $0.35 to $2.50                                                   4,666,253               $0.93
              $3.00 to $5.00                                                     365,000               $4.71
                                                                       ----------------------
                                                                               5,031,253               $1.20
                                                                       ======================
</TABLE>

                                      F-14
<PAGE>

NOTE  7 -     STOCK OPTIONS AND WARRANTS (Continued)

              SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS 123)
              establishes financial accounting and reporting standards for
              stock-based employee compensation plans. It encourages, but does
              not require, companies to recognize compensation expense for
              grants of stock, stock options and other equity instruments to
              employees based on new fair value accounting rules. Companies that
              choose not to adopt the new fair value accounting rules are
              required to disclose net income and earnings per share under the
              new method on a pro forma basis. The Company accounts for its
              options and warrants according to APB No. 25 and follows the
              disclosure provisions of SFAS 123. Accordingly, if options or
              warrants are granted to employees or others for services and other
              consideration with an exercise price below the fair market value
              on the date of the grant, the difference between the exercise
              price and the fair market value is charged to operations. The fair
              value of the options granted during the fiscal years ended June
              30, 1999, 1998 and 1997 reported below, has been estimated at the
              dates of grant using the Black-Scholes option-pricing model with
              the following assumptions:

<TABLE>
<CAPTION>
                                                             1999                1998                 1997
                                                       -----------------    ----------------    -----------------
<S>                                                        <C>                  <C>                 <C>
                 Expected life (in years)                     5                    5                   5
                 Risk-free interest rate                     7.5%                6.5%                 6.0%
                 Volatility                                  131%                130%                 135%
                 Dividend yield                              0.0%                0.0%                 0.0%
</TABLE>

              The Black-Scholes option valuation model was developed for use in
              estimating the fair value of traded options that have no vesting
              restrictions and are fully transferable. In addition, option
              valuation models require the input of highly subjective
              assumptions, including the expected stock price volatility.
              Because the Company's options have characteristics significantly
              different from those of traded options, and because changes in the
              subjective input assumptions can materially affect the fair value
              estimate, in the opinion of management, the existing models do not
              necessarily provide a reliable single measure of the fair value of
              its options.

              For purposes of pro forma disclosures, the estimated fair value of
              the options is amortized to expense over the options' vesting
              period. The Company's pro forma information is approximately as
              follows:

<TABLE>
<CAPTION>
                                                           1999                  1998                 1997
                                                     ------------------    -----------------    -----------------
<S>                                                  <C>                   <C>                  <C>
                Pro forma net loss                   $  (11,259,000)      $    (1,310,000)     $    (3,430,000)
                Pro forma loss per share                  $(0.55)                $(0.08)              $(0.22)
</TABLE>

              The effects on pro forma disclosures of applying SFAS 123 are not
              necessarily indicative of the effects on pro forma disclosures of
              future years.

NOTE  8 -     SHORT-TERM BORROWINGS

              The Company has borrowed funds from time to time for working
              capital under various credit facilities with its principal bank.
              These borrowings have generally provided for interest on
              outstanding amounts at a rate of 3% above the financial
              institution's prime rate. All such borrowings, including bank
              overdrafts, are subject to the bank's discretion and are
              collateralized by a floating debenture on substantially all of the
              assets of the Company and are payable on demand. At June 30, 1999
              and 1998, there were no borrowings outstanding under this
              arrangement.

                                      F-15
<PAGE>

NOTE  9 -     LONG-TERM DEBT

              During the year ended June 30, 1997, the Company issued
              approximately $1,830,000 of 10% convertible promissory notes (the
              old 10% Notes). Interest was payable quarterly and the old 10%
              Notes matured July 1, 1998. The old 10% Notes were collateralized
              by the assets of the Company and were originally convertible into
              shares of the Company's common stock at a rate of one share of
              common stock for each $3.00 of old 10% Notes principal converted.
              Proceeds received by the Company, net of offering costs,
              approximated $1,524,000. During the year ended June 30, 1998, the
              Company issued an additional $470,000 of the old 10% Notes. The
              Company used approximately $600,000 of the proceeds to repay
              certain bridge financing that it incurred during the year ended
              June 30, 1997 (see Note 7).

              Capital Bay Securities, as agent for the noteholders, issued a
              Notice of Default on the Company, as interest had not been paid on
              the promissory notes on the due dates. On May 6, 1998, the
              noteholders agreed that in consideration for the issuance of
              168,000 shares of common stock, representing interest through July
              31, 1998, the notes would not be declared in default at any time
              prior to July 31, 1998 for any reason whatso-ever. In August 1998,
              the noteholders agreed that in consideration for a reduction of
              the conversion price to $0.75, they would release all of their
              collateral security over the assets of the Company, except for the
              security of the 500,000 shares of common stock of AIM, and extend
              the period over which they would not declare the notes to be in
              default to September 30, 1998, which was subsequently extended
              through December 15, 1998. As of June 30, 1999, all of the 10%
              convertible notes were paid or converted to shares of the
              Company's common stock.

              In December 1998, the Company issued $175,000 of 8% convertible
              promissory notes (the 8% Notes). Interest was prepaid on the 8%
              Notes through December 2001, with an issuance of approximately
              58,000 shares of the Company's common stock. The 8% Notes are
              collateralized by certain assets of the Company and two directors
              (see Note 7), mature in December 2001, and are convertible into
              shares of the Company's common stock at a rate of one share of
              common stock for each $3.00 of the 8% Notes principal converted.
              Proceeds received by the Company, net of offering costs,
              approximated $156,000. In the event of the noteholders not
              electing to convert their promissory notes into shares of common
              stock, there can be no guarantee that the Company will have
              sufficient funds available to repay the promissory notes.

              In January 1999, the Company issued $330,000 of 6% convertible
              promissory notes (the 6% Notes). Interest was prepaid on the 6%
              Notes through December 2001, with an issuance of approximately
              80,000 shares of the Company's common stock. The 6% Notes are
              collateralized by certain assets of the Company and two directors
              (see Note 7), mature in December 2001, and are convertible into
              shares of the Company's common stock at a rate of one share of
              common stock for each $3.00 of the 6% Notes principal converted.
              Proceeds received by the Company, net of offering costs,
              approximated $307,000. In the event of the noteholders not
              electing to convert their promissory notes into shares of common
              stock, there can be no guarantee that the Company will have
              sufficient funds available to repay the promissory notes.

              In May 1999, the Company issued $3,670,000 of new 10% convertible
              promissory notes (the new 10% Notes). Interest was payable on
              these Notes quarterly. The new 10% Notes were collateralized by
              certain assets of the Company and two directors (see Note 7) and,
              in June 1999, were converted into shares of the Company's common
              stock at a rate of one share of common stock for each $2.00 of the
              new 10% Notes principal converted. Proceeds received by the
              Company from the issuance of the new 10% Notes, net of offering
              costs, approximated $3,376,000 in cash and $160,000 in forgiveness
              of non-convertible promissory notes. Since the conversion price of
              these notes was below the market price of the Company's stock at
              the date of issuance, a discount relating to this beneficial
              conversion feature in the amount of $3,670,000 was recorded in the
              year ended June 30, 1999. Due to the conversion of the new 10%
              Notes, this discount was fully amortized as of June 30, 1999 and
              appears in the accompanying statements of operations.

                                      F-16
<PAGE>

              The Company signed notes payable with three individuals in March
              1999 for consideration of $235,000. Two of these notes were
              subsequently paid by the issuance of $160,000 of new 10%
              convertible notes to the respective noteholders. The note related
              to the remaining $75,000 of principal outstanding at June 30,
              1999, is unsecured and was due at June 30, 1999.

              In 1999 and 1998, the Company received loans in the amount of
              approximately $40,000 and $8,000, respectively, from its employee
              trust (see Note 10). The loans are unsecured, bear no interest,
              and have no defined terms for repayment.

              Long-term debt consists of the following at June 30, 1999 and
              1998:
<TABLE>
<CAPTION>
                                                                                     1999                 1998
                                                                                ----------------    -----------------
<S>                                                                             <C>                  <C>
             Convertible 10% promissory notes, interest payable quarterly,
             maturing July 1, 1998, collateralized by assets of the Company,
             convertible into shares of the Company's common stock at a rate of
             one share for each $0.75 of note principal converted               $            -      $     2,299,750

             Convertible 8% promissory notes, interest payable quarterly,
             maturing December 2001, collateralized by assets of the Company,
             convertible into shares of the Company's common stock at a rate of
             one share for each $3.00 of note principal converted                       175,000                  -

             Convertible 6% promissory notes, interest payable quarterly,
             maturing December 2001, collateralized by assets of the Company,
             convertible into shares of the Company's common stock at a rate of
             one share for each $3.00 of note principal converted                       330,000                  -

             Unsecured,  noninterest-bearing  notes payable,  no specified
             date for repayment                                                          75,000                  -
                                                                                ----------------    -----------------
                                                                                        580,000           2,299,750
             Less current portion                                                       (75,000)         (2,299,750)
                                                                                ----------------    -----------------

                     Total long-term debt                                       $       505,000     $            -
                                                                                ================    =================
</TABLE>

              Maturities on long-term debt obligations are as follows:

                              Year Ending
                                June 30,                       Principal
                           -------------------              -----------------

                                  2000                        $    75,000
                                  2001                        $        -
                                  2002                        $   505,000

              Cash paid for interest was approximately $-0-, $230,000 and
              $26,000 for the fiscal years ended June 30, 1999, 1998 and 1997,
              respectively.


                                      F-17
<PAGE>

NOTE 10 -     COMMITMENTS AND CONTINGENCIES

              Leases

              The Company leases office space under operating leases entered
              into during 1997 and 1998, which expire through March 2001. Future
              minimum rental payments and service charges required under the
              leases at June 30, 1999, are approximately as follows:

                              Year Ending
                                June 30,                        Amount
                           -------------------              ---------------

                                  2000                         $  88,000
                                  2001                         $  61,000

              For the years ended June 30, 1999, 1998 and 1997, rent expense
              totaled approximately $115,000, $68,000 and $54,000, respectively.

              Pension Plan

              The Company has a defined contribution pension plan for the
              benefit of its employees. The plan requires an employee
              contribution of 2.5% of the employee's salary to participate and
              fixes the employer contribution at 6.5% of the salary for all
              participating employees. For each of the years ended June 30,
              1999, 1998 and 1997, the Company made contributions of
              approximately $54,000, $36,000 and $37,000 to the plan,
              respectively.

              Employment Agreements

              The Company currently has employment agreements with four of its
              executive officers requiring the payment of aggregate minimum
              annual salaries of approximately $279,000, along with certain
              other benefits.

              Concentrations

              The Company has no customers to date that frequently and
              systematically purchase its products or retain its services.

              Revenues for the years ended June 30, 1999, 1998 and 1997 were
              generated from a small number of customers, the loss of any one of
              which could have a material adverse affect on the Company's
              business. In fiscal 1998, substantially all of its revenues were
              derived from one transaction with one customer (see Note 3).

              The Company presently has only one supplier manufacturing
              customized Internet Access Devices using its chips and software.
              Should the supplier cease production, the Company could be
              adversely affected.

              The Company's revenue, by geographical region, during the years
              ended June 30, were approximately as follows:
<TABLE>
<CAPTION>
                     Location                   1999                   1998                   1997
              -----------------------     -----------------      -----------------      -----------------
<S>           <C>                          <C>                    <C>                    <C>
              Europe                         $     2,000           $      8,000           $         -
              Far East                            17,000                 -                     730,000
              North America                       13,000              4,171,000                750,000
                                          -----------------      -----------------      -----------------

                                             $    32,000           $  4,179,000           $  1,480,000
                                          =================      =================      =================
</TABLE>

              Contested Liability

              In November 1994, the Company received a written demand from a
              third party for $75,000, plus additional unspecified amounts based
              upon an alleged breach of contract. The Company has advised the
              third party that it does not believe that it has any liability
              since the third party failed to perform in accordance with the
              contract and that the contract was of no further effect. The
              ultimate outcome of this matter and the amount of damages, if any,
              that may ultimately be incurred cannot presently be determined,
              and no provision for liability has been made in the accompanying
              consolidated financial statements.

                                      F-18
<PAGE>

              Employee Trust

              As of June 30, 1999 and 1998, 2,914,444 and 2,591,944 shares of
              the Company's common stock were held by an employee trust (the
              Trust), whose beneficiaries are substantially all of the employees
              of the Company. Contributions to the Trust are at the discretion
              of the Company's Board of Directors. During the years ended June
              30, 1999 and 1998, the Company made no contributions to the Trust.

              Other

              The Company does not have access to certain of its corporate
              records, other than drafts and copies of certain documents, for
              the period from approximately September 1994 through December
              1995, making it difficult for the Company to conclude that certain
              corporate matters were properly effected. Current management
              believes that all matters during this period were effected
              properly, including approval of the reverse acquisition of Capital
              Acquisition Corporation by MSU, Plc. (see Note 1). The corporate
              records for the aforementioned period are in the possession of one
              of the Company's former law firms, which has refused to release
              such records until amounts allegedly due such firm are paid. The
              Company is contesting the amount allegedly due that firm based on
              the Company's belief that it was billed for services that were not
              authorized by the Company. The ultimate outcome of these matters
              and the amount of damages, if any, that may ultimately be incurred
              cannot presently be determined. The accompanying financial
              statements contain no provision or adjustments related to the
              ultimate outcome of these uncertainties.

              In December 1997, the Company received a complaint demanding
              approximately $113,000 for unpaid public relations and consulting
              services. The Company filed an answer to the lawsuit stating that
              the Plaintiff failed to fulfill its contractual obligations and,
              accordingly, the Company believed it was not liable for the
              claimed damages. In January 1999, this matter was settled by the
              Company agreeing to issue to the complainant 55,000 shares of the
              Company's common stock, resulting in settlement expense of
              approximately $96,000.

              The Company continues to review the adequacy of its insurance
              coverage. Presently, the Company believes that its insurance
              coverage may be inadequate in light of current and/or prospective
              agreements. However, management continues to endeavor to obtain
              adequate coverage, although no assurance can be given that
              adequate insurance will be obtained.

              Year 2000 Issues (Unaudited)

              Because many computerized systems use only two digits to record
              the year in date fields (for example, the year 1998 is recorded as
              "98"), such systems may not be able to process dates accurately in
              the year 2000 and after.

              The Company's management has made efforts to determine the
              possible effects of Year 2000 issues on its operations and is
              implementing remedial actions. Management will also attempt to
              determine if its significant customers, vendors and other third
              parties upon which it relies have addressed or will be able to
              address any affected systems on a timely basis. Management does
              not expect the potential disruption from Year 2000 issues to have
              a material effect on the Company's business operations, but the
              outcome remains uncertain. The accompanying financial statements
              contain no provision or adjustments related to the ultimate
              outcome of this uncertainty.

NOTE 11 -     REGISTRATION OF SHARES

              The Company intended to file a Registration Statement on Form S-1
              under the Securities Act of 1933, as amended, for the purpose of
              registering shares of common stock that are issuable upon the
              conversion of the Company's 10% convertible promissory notes (see
              Note 9) and to register 218,000 shares of common stock to be sold
              by certain selling shareholders. In 1998, the Company chose to
              withdraw the Registration Statement.



                                      F-19