##### 









SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-K/A



|  |                                                                                        
|- | ---------------------------------------------------------------------------------------
|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE 
	 SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended: December 31, 2000

OR



|  |                                                                                          
|- | -----------------------------------------------------------------------------------------
|o | 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: 0-29625



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HIGH SPEED NET SOLUTIONS, INC.

(Exact name of registrant as specified in its
charter)


|                         |  |                                     
|------------------------ |  | ------------------------------------
|                        
|                        
|                        
|                        
|Florida                  |  | 65-0185306                          
|(State of incorporation) |  | (I.R.S. Employer Identification No.)

434 Fayetteville Street Mall, Suite 600

Raleigh, North Carolina 27601


(919) 807-5600




















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

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

Common Stock, par value $.001 per share



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(Title of Class)

Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or 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   o
No.  x

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 definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
o No delinquent filers.

The aggregate market value of the shares of common stock held by
non-affiliates of the registrant was approximately
$          as
of August 31, 2001 based on the average of the bid and
asked price of the stock reported for such date. For the purpose
of the foregoing calculation, the shares of common stock held by
each officer and director and by each person who owns 5% or more
of the outstanding common stock have been excluded in that such
persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination
for other purposes.

The number of shares outstanding of the registrants common
stock as of August 31, 2001 was 35,735,789.

DOCUMENTS INCORPORATED BY REFERENCE

|     |  |          |  |                      
|---- |  | -------- |  | ---------------------
|     |  |          |  | Part of Form 10-K    
|     |  |          |  | in which the Document
|     |  | Document |  | is incorporated      
|     |  |          |  |                      
|N/ A |  |          |  | None                 









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##### 



HIGH SPEED NET SOLUTIONS, INC.

FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000


TABLE OF CONTENTS




|         |  |                                                                                        |  |      |    | 
|-------- |  | -------------------------------------------------------------------------------------- |  | ---- | -- | 
|         |  |                                                                                        |  | Page
|         |  |                                                                                        |  |     
|PART I  
|        
|        
|        
|        
|Item 1.  |  | Business                                                                               |  |      | 2  | 
|        
|        
|        
|        
|Item 2.  |  | Properties                                                                             |  |      | 28 | 
|        
|        
|        
|        
|Item 3.  |  | Legal Proceedings                                                                      |  |      | 28 | 
|        
|        
|        
|        
|Item 4.  |  | Submission of Matters to a Vote of Security
	Holders                                   |  |      | 29 | 
|PART II 
|        
|        
|        
|        
|Item 5.  |  | Market for Registrants Common Stock and
	Related Shareholder Matters                  |  |      | 30 | 
|        
|        
|        
|        
|Item 6.  |  | Selected Financial Data                                                                |  |      | 42 | 
|        
|        
|        
|        
|Item 7.  |  | Managements Discussion and Analysis of
	Financial Condition and Results of Operations |  |      | 45 | 
|        
|        
|        
|        
|Item 7A. |  | Quantitative and Qualitative Disclosures about
	Market Risk                            |  |      | 58 | 
|        
|        
|        
|        
|Item 8.  |  | Financial Statements and Supplementary Data                                            |  |      | 58 | 
|        
|        
|        
|        
|Item 9.  |  | Changes in and Disagreements with Accountants on
	Accounting and Financial Disclosure  |  |      | 58 | 
|PART III
|        
|        
|        
|        
|Item 10. |  | Directors and Executive Officers of the Registrant                                     |  |      | 59 | 
|        
|        
|        
|        
|Item 11. |  | Executive Compensation                                                                 |  |      | 63 | 
|        
|        
|        
|        
|Item 12. |  | Security Ownership of Certain Beneficial Owners
	and Management                        |  |      | 69 | 
|        
|        
|        
|        
|Item 13. |  | Certain Relationships and Related Transactions                                         |  |      | 71 | 
|        
|        
|        
|        
|Item 14. |  | Exhibits, Financial Statement Schedules, and
	Reports on Form 8-K                      |  |      | 74 | 






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##### 



EXPLANATORY REFERENCE




On February 16, 2001, High Speed Net Solutions, Inc. d/b/a
Summus (HSNS or the Company) acquired
all the assets and operations of Summus, Ltd. under the terms of
an asset purchase agreement, dated October 30, 2000, as
amended. In legal form, the transaction was effected by HSNS
issuing shares of its common and Series B preferred stock,
and other equity interests, in exchange for the net assets of
Summus, Ltd.







We initially accounted for the transaction as a business
combination and a reverse acquisition under the
guidance of Accounting Principles Board Opinion No. 16
Business Combinations. Because the transaction was
accounted for as a reverse acquisition, Summus, Ltd. was
considered the accounting acquirer in the transaction; HSNS, the
acquired company. As explained in Item 2. Financial
Information  Managements Discussion and
Analysis, we have since determined that it is more
appropriate to account for the transaction as a capital
transaction, accompanied by a recapitalization. By accounting
for the transaction in this manner, the transaction is viewed as
the issuance of stock by Summus, Ltd. in exchange for the net
monetary assets of HSNS, accompanied by a recapitalization of
Summus, Ltd. The accounting is quite similar to that resulting
from a reverse acquisition, except that no goodwill or other
intangible assets are recorded.







As a result of the transaction, the historical financial
statements of Summus, Ltd. are, for accounting purposes, deemed
to be those of the Company. However, in view of the significance
of Summus, Ltd.s equity interest in HSNS prior to the
transaction, HSNSs audited financial statements for the
three years ending December 31, 2000 are included in this
annual report on Form 10-K.




FORWARD-LOOKING STATEMENTS; RISKS AND UNCERTAINTIES




This annual report on Form 10-K for the year ended
December 31, 2000, contains forward-looking statements.
These statements relate to, among other things, future events or
the Companys future financial performance, operating
results, planned product introductions and cash requirements.
The Company has attempted to identify forward-looking statements
by terminology such as will likely result,
expect, should, will
continue, anticipate, estimate,
intend, plan, project,
outlook or similar expressions. These statements are
only predictions and are not guarantees of future performance.
They are subject to certain risks, uncertainties and other
factors, some of which are beyond our control, are difficult to
predict and could cause actual results, levels of activity,
performance or achievements to differ materially from those
expressed in the forward-looking statements.




Although the Company believes that the expectations reflected in
the forward-looking statements are reasonable, we cannot
guarantee future results, levels of activity, performance or
achievements. The Company is not obligated to update these
statements or publicly release the results of any revisions to
them to reflect events or circumstances occurring after the date
of this annual report on Form 10-K for the year ended
December 31, 2000 or to reflect the occurrence of
unanticipated events.

Certain risk factors that could cause actual results to differ
from expectations are set forth in this annual report on
Form 10-K for the year ended December 31, 2000. The
Company cannot assure you that its results of operations will
not be adversely affected by one or more of these factors.

1



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##### 



PART I

Item 1.  Business.

Overview




High Speed Net Solutions, Inc. d/b/a Summus (HSNS or
the Company), following the February 2001
acquisition of all of the assets and operations of Summus, Ltd.
(Summus, Ltd.), is engaged in research and
development contract work for government agencies in the areas
of complex imaging and object recognition. Such contract work
represented 60% and 76% of Summus, Ltd.s revenues in the
years ended December 31, 2000 and 1999, respectively.




Over the past ten years, Summus, Ltd.s focus has been on
providing its expertise in the fields of mathematics, including
wavelets, non-linear partial differential equations and
dynamical systems, and graph theory and topology, for purposes
of developing complex imaging and object recognition
technologies that have been applied by its government agency
clients to:



| |   |                                                                                   
| | - | ----------------------------------------------------------------------------------
| |  | mine detection (both land and sea);                                               
|
| |  | automatic target recognition, de-noising and image compression
	and decompression;
|
| |  | side scan sonar 3D imaging;                                                       
|
| |  | missile imaging software (smart bomb technology); and                             
|
| |  | 3D (simulation and mapping).                                                      

Our government contract work will continue to focus on solving
specific technical and scientific problems in the government
sector. The government contract work has led to the development
of software development kits that allow software developers to
create new software products that are compatible with and
complementary to our software and technology, and revenue
generation through licensing and sales of that technology.
Currently we are undertaking two major research projects:



| |     |                                                                                                                                                            
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | automatic identification and reconstruction of distinctive
	geological and topographic information of the seafloor bottom
	from side scan sonar images; and
|
| | (2) | development of a computer model for the generation of synthetic
	side scan sonar images.                                                                   

In conjunction with our government work, we are currently
exploring applications of our complex imaging and object
recognition technologies in the medical sector. Our current
focus is on computerized medical diagnosis solutions for the
anatomical pathological (AP) market.




We are in the process of developing proprietary
compression software and technology to enable the
creation, transmission, playing and management of multimedia
content (e.g., still images, graphics, video) over wireless
networks. This data compression technology, the foundation for
our current and anticipated future products and services, is
designed to address the maximum data rate (referred to as
bandwidth) constraints of the existing wireless
network infrastructure, and is expected to remain of value even
after the anticipated widespread buildout and deployment of the
third generation (3G) wireless network
infrastructure, to enable mobile, high-speed access to a wide
range of telecommunications services supported by fixed
telecommunications networks and other services specific to
mobile users. There are widely varying estimates as to when 3G
buildout and deployment will occur, ranging between 2003 to
2007. See The Mobile and Wireless Market below.




We are targeting our software and technology toward certain
segments of the mobile and wireless markets, including:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | manufacturers of mobile and wireless devices such as
	Internet-enabled cell phones (so-called smart phones
	that include a microbrowser to allow the viewing of specifically
	formatted Internet information), wireless personal digital
	assistants (PDAs), two-way pagers and other handheld or portable
	devices (e.g., a laptop with a cable connection to a cell phone
	operating as a modem);

2



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##### 





| |   |                                                                                          
| | - | -----------------------------------------------------------------------------------------
| |  | content providers or portals; and                                                      
|
| |  | service providers such as mobile network operators and mobile
	virtual network operators.

Historical Operating Results/ Financial Condition




The Company has incurred net losses throughout the periods
covered by the financial statements included in this annual
report on Form 10-K. For the years ended December 31,
2000 and 1999, the Company had net losses of $11,451,281 and
$8,846,980, respectively. As of December 31, 2000, the
Company had an accumulated deficit of $23,414,113 and a working
capital deficit of $3,727,660. With the foregoing in mind, the
Companys auditors have included in their report on the
Companys financial statements an explanatory paragraph
which expresses substantial doubt about the Companys
ability to continue as a going concern.




The Company expects to continue to incur net losses for an
extended period of time. To date, we have generated limited
revenue from our operations and have been dependent upon
issuances of our equity to raise the necessary operating capital
to sustain our operations. Subject to our liquidity constraints,
we intend to continue to expend significant financial and
management resources on the development of our proposed products
and services, and other aspects of our business.

Our History

HSNS was incorporated in 1984 under the name of EMN Enterprises,
Inc. and remained a non-operating shell company until
August 1998. In August 1998, EMN Enterprises acquired
all the assets and assumed the liabilities of Marketers World,
Inc., a private company that intended to engage in leasing
computer systems. Ormond Trust, an entity established by
Bradford Richdale, received shares of stock representing a
controlling interest in EMN Enterprises following Marketers
Worlds distribution of the shares received in the
transaction. HSNS subsequently changed its name to Zzap.net.inc.

In September 1998, Zzap.net.inc. acquired all the issued
and outstanding shares of capital stock of Brad Richdale Direct,
Inc. At the time of the acquisition, Brad Richdale Direct was
not an operating entity and its only significant asset was its
marketing and licensing rights to technology proprietary to
Summus, Ltd. By year-end 1998, Zzap.net.inc. discontinued the
business operations of Marketers World and Brad Richdale Direct
and changed its name to the current name  High Speed
Net Solutions, Inc.

The HSNS  Summus,
Ltd. Business Relationship

In February 1999, HSNS entered into a Marketing License
Agreement (MLA) with Summus, Ltd. under which HSNS
obtained:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the exclusive right (other than with respect to government
	agencies and government contractors, and the original equipment
	manufacturer (OEM) market, for which Summus, Ltd. retained all
	rights) to resell and sublicense a streaming product to be used
	to demonstrate Summus, Ltd.s video compression 
	decompression technology in a streaming video application over
	networked and low bandwidth communication channels (e.g., the
	incremental delivery and playing of video clips over the
	Internet); and
|
| |  | the non-exclusive right to resell and sublicense three other
	software products, including software to compress still images
	into wavelet form and a video e-mail-like product to be used for
	recording, compressing and e-mailing personal video clips
	recorded from a personal computer (PC) video camera.                                                                                                                                                                                                         

Each of the four products specified under the MLA was completed
and ready for resale at the time HSNS entered into the MLA. Due
to HSNSs very limited financial resources and marketing
personnel at the time, HSNSs initial sales and marketing
efforts were made principally from its web site and HSNS did not
realize any revenues from these products.

In August 1999, Summus, Ltd. acquired a majority of the
then outstanding shares of common stock of HSNS. Summus, Ltd.
subsequently sold a portion of its shares of HSNSs common
stock to third parties such

3



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##### 





The change in HSNSs focus resulted in its commencement of
negotiations with Summus, Ltd. to modify the companies
business relationship. These negotiations led to HSNS entering
into a series of agreements with Summus, Ltd. in
mid-February 2000. Under these agreements, Summus, Ltd.
granted to HSNS a non-exclusive license to use a suite of
software products referred to as MaxxSystem. The
MaxxSystem product suite, version 1.0, to be delivered by
Summus, Ltd. over a period of six months, was to, among other
things:



| |   |                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | enable end-users to import, create and compress multimedia
	content, bundle it with a video codec
	(compression-decompression) player, and then send an e-mail
	message including that content to distribution lists;                                                             
|
| |  | provide a completely integrated media presentation, designed to
	be launched from a web site, encapsulating rich media (images,
	video, slide shows and text) with electronic commerce
	capabilities, web site referrals and e-commerce sales
	effectiveness measurement collection;
|
| |  | collect and process measurement information, handle opt-in and
	opt-outs, integrate with existing online advertising tools and
	process e-commerce transactions and links to web sites; and                                                                                         
|
| |  | allow content creators to combine images, video, slide shows and
	text into a compelling advertisement utilizing the benefits of
	the Summus, Ltd. wavelet-based technology.                                                                                                        

The consideration to be received by Summus, Ltd. for the grant
of the license of the MaxxSystem suite of software products was
to consist of (i) a one-time license fee of $1 million
(against which HSNS received a credit of $1 million in
recognition of payments made by HSNS under the MLA), and
(ii) a revenue-based fee equal to the greater of 10% of the
gross revenues generated by HSNS with MaxxSystem, or $.03
multiplied by the number of rich media messages delivered to
recipients (against, which HSNS also received a credit of
$1 million in recognition of payments made under the MLA).

The software license agreement envisioned a close working
relationship between the two companies, with HSNS acting as a
beta-version user of Summus, Ltd.s software and providing
prospective licensees and references for and demonstrations of
such software. In return, Summus, Ltd. agreed to pay HSNS a
percentage of all revenue received by Summus, Ltd. in connection
with the licensing of MaxxSystem products.

Toward the end of the first quarter of 2000, a combination of
market conditions and potential government regulatory actions
caused HSNS to modify its short- and longer-term plans for
revenue generation as an application service provider of
multimedia content over the Internet. Market resistance
developed to the delivery of Internet services via
.exe file types following certain software
vendors delivery of such files with viruses. This prompted
many companies to configure firewalls to block all files with an
 .exe extension. This limited the market for e-mail distribution
using the MaxxNote (i.e., the video e-mail) module of
MaxxSystem. At about the same time, the Federal Trade Commission
initiated an investigation into the use of information gathered
by permission-based marketing through e-mails and banner ads. In
addition, feedback from HSNSs early distribution and
campaign management service offerings made evident that HSNS
needed to add to its service offerings video streaming (together
with the computer hardware, network and support facilities to
enable use of video streaming) to be a viable player in the
marketplace.

Because HSNS viewed Summus, Ltd.s compression technology
as key to differentiating its rich media direct service delivery
from the service offerings of other companies in this market,
HSNS entered into discussions with Summus, Ltd. that led to the
two companies entering into an asset purchase agreement at the
end of October 2000. That agreement was subsequently
amended on December 30, 2000 and again on January 31,
2001.

4



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##### 



From Summus, Ltd.s perspective, the primary business
purpose of entering into the transaction with HSNS was to
provide a vehicle for raising capital. Summus, Ltd. was at a
stage in its development where it required additional financing
or needed to combine with another entity in order to finance its
business and realize its other objectives.




On February 16, 2001, HSNS and Summus, Ltd. consummated the
transactions contemplated by the asset purchase agreement, at
which time HSNS acquired all of Summus, Ltd.s assets and
operations, including its intellectual property in encoding,
manipulating, compressing, managing and distributing digital
multimedia content, and assumed approximately $2.8 million
of Summus, Ltd.s liabilities. The terms of the asset
purchase agreement contemplate that Summus, Ltd. will liquidate
following the winding up of its business activities.




Acquisition of Douglas May
& Co., Inc.




On July 10, 2000, HSNS, as part of its strategy to focus on
its rich media direct service offering, acquired all of the
issued and outstanding capital stock of Douglas May & Co.,
Inc., a marketing and advertising company that provides design
assistance and commercial content development, including audio,
video, images and animation, as well as web site design and
construction. The acquisition of Douglas May & Co. was
expected to create synergies with HSNSs planned rich media
direct service offering.




Divestiture of Rich Media
Direct Business




Upon the consummation of the Summus, Ltd. asset acquisition on
February 16, 2001, the Company determined to focus
primarily on Summus, Ltd.s business plan because
management perceived it had the potential to create greater
shareholder value compared to HSNSs business operations.
In addition, the Company did not expect to have the fundraising
capacity to continue to fund the business plans of both Summus,
Ltd. and HSNS, as previously envisioned. In connection with the
Companys change in business plan, the Companys
management began a review to determine the appropriate course of
action for its rich media direct business (including the
operations of Douglas May & Co.) in light of the
existing and anticipated funding constraints.




On September 19, 2001, the Company and Douglas May entered
into a stock purchase agreement under which the Company sold and
transferred to Mr. May all of the Companys equity
interest in Douglas May & Co. In connection with the
sale of the Companys entire equity interest in Douglas
May & Co., the Company transferred certain technology
to Douglas May & Co., including specific applications
of the Companys MaxxSystem suite of software products.

The Company also entered into a technology license agreement
(and a related source code escrow agreement) with a newly formed
corporation and wholly-owned subsidiary of Douglas May
& Co. Under the technology license agreement, the
Company has granted to the licensee a perpetual, non-exclusive,
non- transferable license with respect to some of the
Companys core software technology for image, video
compression and video streaming.

The Mobile and Wireless Market

The Internet has grown rapidly in recent years, becoming a
global medium for communication, commerce and entertainment.
Initially, the Internet was used primarily to deliver text-based
content through applications such as e-mail and file sharing.
Continued improvements in the processing power of PCs, the
increasing availability of broadband access technologies such as
cable modems and digital subscriber lines (DSL), and advances in
streaming media and compression technologies have facilitated
the delivery of content enhanced with video, audio, animation
and other multimedia. As a result, the Internet has become a
media-rich environment, capable of delivering audiovisual and
interactive programming and services to users.

Many users have become accustomed to the Internet providing them
with access to a wide variety of multimedia content. However, to
access this multimedia content, most users today are limited to
using PCs that connect to the Internet through wired
connections. As personal and business lives become increasingly

5



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The increased need for mobility has coincided with and is
reinforced by the reported rapid growth in worldwide use of
wireless and mobile technologies. Given the projections of key
industry analysts such as The Yankee Group, the Gartner
Groups Dataquest unit and the Strategic Group, the
Companys management believes convergence of wireless
communications and mobile Internet access appears inevitable.




From the perspective of the wireless service providers,
competition is increasing as a result of deregulation,
privatization, industry consolidation and the continued
deployment of multiple competing wireless networks within the
same geography. Although many wireless service providers have
experienced strong subscriber growth, efforts to attract and
retain these subscribers have resulted in significant
price-based competition. Furthermore, increased competition has
resulted in higher customer acquisition costs, lower average
revenue per subscriber and a greater likelihood that subscribers
will switch from one wireless service provider to another, a
phenomenon known as customer churn. In response to
these trends, wireless service providers are seeking ways to
differentiate their services to generate additional revenue,
attract new subscribers and promote subscriber loyalty. Many
wireless service providers have already made significant
investments to migrate from analog networks to more robust
digital networks in an effort to improve the efficiency,
capacity and bandwidth of their wireless networks and are now
developing and testing next-generation, higher bandwidth
networks to support the delivery of more bandwidth-intensive
applications and services. Mobile data services are expected to
be the cornerstone of wireless carriers efforts to reduce
customer churn, increase average revenue per use, and generate
the revenues to cover the considerable network infrastructure
investments being made.

The emergence of the Internet as a distribution channel for
multimedia content has increased competition among programming
providers, as well. Programming providers include traditional
media companies, such as newspapers and television networks, as
well as new digital content providers. Traditional media
companies are seeking to adapt their existing content, as well
as develop new content, for deployment over the Internet, while
new digital content providers are designing content specifically
for delivery over the Internet. Consequently, programming
providers are designing and deploying streaming interactive
video, audio, animation and other multimedia content in an
effort to enrich their web sites and attract users. These trends
have led to a significant increase in content available on the
Internet, creating an intensely competitive environment among
programming providers to maintain and broaden their potential
audience. As a result, programming providers are seeking new
platforms other than PCs for their multimedia content, including
PDAs, smart phones and other mobile information devices.

For wireless to deliver on its anticipated potential, wireless
devices must be supported by an overall value
proposition  a combination of device, wireless
network, content and services, together with product and service
pricing models  satisfactory to the end user. The
differing characteristics of wireless device use in different
geographic markets suggest that what will prove satisfactory to
end-users in those markets may differ. U.S. users and service
providers have built up expectations that wireless Internet will
provide a user experience similar to wireline Internet. This
Internet orientation is attributable to the well-developed fixed
infrastructure with ample broadband access potential (via cable
or DSL) that exists in the U.S., together with the flat-rate
pricing structure for local calls and cable access which lends
itself to high-volume usage. Given the high expectations for a
wireless Internet that will emulate the wireline Internet
experience, the constraints of todays wireless technology
may lead to much disappointment among users as they pay for
apparently inferior access to content (as a function of lower
speeds with higher latency, and the risk of a lost connection at
any moment). In contrast, in Europe (where industry analysts
estimate that 70% of adults have mobile phones) and in Japan,
the mobile phone has become an inherent part of life. To date,
the data needs of Europeans have

6



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##### 





Regardless of how participants in the wireless industry seek to
deliver the Internet to subscribers, a number of major issues
and challenges exist, including:

Required Investment in
Network Infrastructure

It has been reported that cellular carriers, such as AT&T
Wireless, Sprint PCS and Nextel, have collectively made
investments of more than $60 billion in the past three
years to upgrade their networks from analog to digital. The
transition from analog to digital networks represents the
progression from first to second generation technology. In
digital transmissions, conversations are converted into ones and
zeros. Unlike analog transmissions, which are sent as a
continuous electrical signal, digital transmissions are a
combination of on and off pulses of electricity. The move from
analog to digital has meant that networks can accommodate more
calls, and calls are clearer because there is less interference
noise. But todays digital networks are designed primarily
for voice traffic, not data. Voice traffic has far different
requirements than data traffic. The data transmission rates for
wireless Internet are presently quite slow, approximately
one-fifth the speed of an average desktop dial-up Internet
service.




Third generation wireless systems, the standards for which have
been defined by the International Telecommunications Union
(ITU), offer the promise of:






| |   |                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a high degree of commonality of design worldwide;                                                                                                                                                                           
|
| |  | compatibility of services within the 3G standards, with fixed
	networks;                                                                                                                                                    
|
| |  | capability to support circuit and packet data at high bit rates
	(144 kb/second or higher in high mobility (vehicular)
	traffic; 384 kb/second or higher for pedestrian traffic;
	2 Mb/second or higher for indoor traffic);
|
| |  | high quality;                                                                                                                                                                                                               
|
| |  | use of small-pocket terminals with worldwide roaming capability;                                                                                                                                                            
|
| |  | capability for multimedia applications, and a wide range of
	services (e.g., paging, voice telephony, digital data, audio and
	visual communications) through bandwidth on demand;
	and                                   
|
| |  | common billing/user profiles (through the sharing of usage/rate
	information between service providers and standardized call
	detail recording).                                                                            

A key objective of 3G is to enable users of personal terminals
to go anywhere in the world and, in a variety of situations
(indoor/outdoor and in a range of geographic environments), to
have access to a minimum set of services. However, upgrading
todays networks to meet the 3G standards will require huge
investments by wireless carriers in spectrum, as well as base
stations and other infrastructure equipment, even before
existing investments have proven profitable.

Availability of
Bandwidth

Government studies performed by three U.S. governmental agencies
(i.e., the Federal Communications Commission, the Commerce
Department and the Department of Defense) released in late
March 2001 have cast significant doubt that there will be
frequency bandwidth or spectrum available for all those
interested in obtaining licenses when such licenses are
auctioned (anticipated to occur between 2002 and 2004), licenses
viewed as crucial to the roll-out of the third generation
wireless high speed Internet-enabled handheld technology. The
studies of military, other governmental and commercial users of
the airwaves have concluded, in effect, that the spectrum has
become overcrowded real estate with little room for co-existence
between current license holders and those seeking new licenses,
most notably wireless telephone companies.

7



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##### 



Achieving Acceptable Rates
of Return

If developments in the wireless world follow those of the wired
world, prospects for the wireless carriers are far from clear.
Wireless network operators current business model is
vertically integrated, one-stop shopping. They distribute
handsets, own the networks, sell the services and provide
content. In contrast, in the wired world one might purchase a
handset from one company, rely on two different companies for
local and long-distance phone service, and have a fourth company
as ones Internet Service Provider. European
telecommunications regulators have dictated that wireless
carriers in Britain and France provide their customers with
codes to program their mobile phones to go directly to a content
provider of their choice, bypassing the carriers Internet
portal. Once the operators lose their grip on their customers,
the returns anticipated from Internet-access driven revenues
will be less certain.

Will Demand Meet
Expectations?

Notwithstanding the projections of industry analysts, there
remains some uncertainty as to whether cellular users really
want their phones for other than voice calls. Even with the
less-developed Internet infrastructure in Europe and Asia, which
has contributed to the popularity of wireless, most users still
use their devices for messaging and communications, not Internet
surfing. A June 2000 survey by the Yomiuri Shimbun, a
leading Japanese newspaper, found that 40% of Internet-enabled
mobile phone users are not accessing the Internet. A Nippon
Research Institute study in September 2000 came to a
similar conclusion. A January 2001 survey conducted by Ion
Global found that 26% of the respondents who subscribe to NTT
DoCoMos i-mode service dont use their handsets for
e-mail or online content. The same is true in the U.S., where
only about 5-6 million mobile phones are Internet-enabled.
This may be, in part, because networks require cumbersome data
compression using the so-called Wireless Application Protocol
(WAP) to enable web site slivers to be viewed on tiny cell
phone screens. Currently, web sites have to be specifically
designed for WAP. WAP is based on Wireless Markup Language
(WML). Only about 1% of the web is available in WML.

Sufficiently Valuable
Applications/Services

The promise of mobile data will be realized only if compelling,
revenue-generating applications and information services are
developed, on platforms enabling Internet access on any wireless
network. Service providers will also have to address the
different configurations of content for Internet-enabled mobile
handsets so as to work on an array of such devices and be able
to scale to suit the bandwidth of a variety of mediums.

Our Market Niche

In addition to the issues and challenges identified above, the
delivery of multimedia content over wireless networks requires
overcoming certain technical challenges, including:



| |   |                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------
| |  | the transmission difficulties caused by high error rates and low
        and varying transmission speeds inherent in wireless networks;
|
| |  | delivery of such content without adversely affecting the
        delivery of voice and data services; and                              
|
| |  | the limited processing power and battery life and varying
        display sizes of mobile information devices.                         

We are developing multimedia technology, specifically, our
BlueFuelTM product line (described below under
Our Products  Future Products), designed
to address the bandwidth, error constraints, contention with
voice and data traffic, and power challenges associated with
multimedia content transmission over existing and future
wireless networks. In an increasingly multimedia-oriented
environment, multimedia content consumes bandwidth when
transmitted, as well as storage space at origin and destination.
Multimedia content within text-based communications translates
into increased transmission time, greater storage requirements
and higher communications costs. Even with the increased
bandwidth of third generation network infrastructure, there
should still be a need to make the best possible use of
available bandwidth. Thus, we believe there will be a continuing
need for our multimedia technology aimed at this market into the
indefinite future. However, we can provide no assurance that we
will be able to establish or maintain any

8



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##### 





The technology that is at the core of our existing products is
based on certain key mathematical theories and tools, using
advances and results from the fields of wavelets, non-linear
partial differential equations and dynamical systems, and graph
theory and topology. We use these tools to create highly
efficient algorithms for different types of information
processing with low computational complexity and low memory
usage.

Our approach recognizes that the multimedia and information
access experience requires coordination of low and high level
processing. In low level processing, each element of information
is considered independent of other informational elements,
somewhat like looking at the letters in a sentence to determine
its meaning. Low level processing tends to overwhelm the
resources of most devices as soon as any attempt to capture
higher level relationships is made. In high level processing,
the whole sentence is attached to a meaning at once.
High level processing requires processes to transform the basic
informational elements into meaningful terms. Our wavelet-based
processing provides a rich alphabet for the exchanges between
low and high level processing of multimedia information.
Although wavelets are basically low level processing elements,
they are an effective starting point for more sophisticated
processing in many practical applications, such as compression
and information identification.




The basic ideas of wavelets and wavelet transforms were
developed in the 1980s. A rather imprecise definition of
wavelets is that they are building blocks that can quickly
decorrelate data. Wavelets allow the representation of data in
terms of wavelet coefficients that are more compact
than the original representation. The decorrelation power is
possible because the wavelets already resemble the data to be
represented (i.e., they have the same correlation structure as
the data, both in terms of space and frequency). In addition,
the wavelet representation leads to rapidly converging
approximations to functions that satisfy mild smoothness
assumptions. The wavelet representation of a data set can be
found quickly, so that one can switch between the original
representation of the data and its wavelet representation in a
time proportional to the size of the data. The fast
decorrelation power of wavelets is the key to their usefulness
in compression applications.




Wavelets are useful because they lead to accurate and efficient
prediction (thus enabling fewer bits to describe the
information), but are unable to address fully the requirements
of the high level processes. To solve the more challenging
problems presented by our business focus and the
BlueFuelTM product suite  limited
bandwidth, processing power, memory, input/output (I/ O),
etc.  we have developed representation
tools and techniques that extend beyond the limitations of
wavelets. These tools build on the same fundamental approach: an
integrated and coordinated interaction between low and high
level processing.

Our Strategy

Critical to our success will be successful commercial deployment
of our BlueFuelTM software product suite under
development, and our ability to develop and commercialize new
enhancements to such technology in a timely manner. In that
regard, we hired Barry J. Johnson as Vice President-Products in
mid-June of 2001. Mr. Johnson has served in various product
marketing capacities at Motorola, Inc., Gateway, Zenith Data
Systems, NCR and, most recently, Dial2Go, Inc.
Mr. Johnsons first projects at the Company will be to
prioritize our product development efforts and position our new
product line to maximize revenue generation.

We have a strong reputation within the government market as a
result of our providing research and development work for
numerous Department of Defense organizations such as the Office
of Naval Research, the Army Research Lab, the Night Vision Lab,
Air Force Office of Scientific Research, Sandia Labs and Los
Alamos Labs, and are hopeful our reputation in the government
market will contribute to providing the Company with credibility
in the commercial sector, which may be vital as a new entrant in
our target market. We are currently allocating about 15% of our
resources to government contract work, which has historically
contributed to the funding required to exploit the development
of new dual use technologies.

Our strategy is to continue to work toward commercial release of
our BlueFuel product line currently under development and
to enter into business relationships and alliances with device
manufacturers, content

9



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##### 





In an effort to expand our operations to Europe and Asia, where
the wireless network infrastructure is currently more developed
than it is in North America, the Company has recently entered
into a marketing agent agreement with Dial2Go, Inc., a small
consulting company, under which Dial2Go will act as our
marketing representative in South Korea. In that capacity,
Dial2Go will market our multimedia technology to wireless
subscriber carriers and manufacturers of mobile and wireless
devices located in South Korea, where the Code Division Multiple
Access (CDMA) air interface is predominant. In addition, we have
engaged two individuals, based in Sweden, to act as consultants
and expect to open an office in Sweden within the next few
months for purposes of increasing our business development,
sales and technical resources targeted toward the European
market.

Although we are in the process of building relationships with
wireless and mobile device manufacturers, content providers and
cellular carriers, we have not, as yet, entered into any formal
contractual agreements with these parties, and have not, to
date, executed any product orders for the BlueFuel product
line currently under development. See Our
Products  Future Products below.

We recognize that a concern for our corporate viability and the
related concerns regarding our lack of financial resources and
ability to meet specific applications demands and provide
product support may hamper our efforts to forge such business
relationships and alliances. Nevertheless, management believes
that the attributes of our technology will provide opportunities
to enhance our product awareness and profile through such
relationships and alliances.

To implement our business plan, we anticipate that we will need
approximately $15 million in working capital in the next
twelve months. Subject to our liquidity constraints (including
our need to dedicate cash flow to meet our obligations on a
timely basis), we intend to invest up to approximately 35% of
our working capital to research and development and personnel to
ensure the continued development of our technology and its
compatibility with new generations of hardware and software.
Specifically, we intend to improve our multimedia technology,
including image, graphics and video technology, and build on our
experience gained in developing our information management
technology.

Semiconductor and Device
Designers and Manufacturers

Our relationship with semiconductor and device designers and
manufacturers will revolve around embedding our products for
decoding content in the microprocessors or digital signal
processors (DSPs) in digital cell phones and PDAs.




We are currently working to develop a multimedia platform for
applications such as video and image delivery and playback, as
well as 3D graphics delivery and rendering, that is compatible
with Qualcomms Binary Runtime Environment for Wireless
(BREW) wireless operating system. BREW is an applications
platform for wireless devices using a variety of air interfaces
including, among others, Code Division Multiple Access (CDMA),
which is expected to be the leading standard for third
generation, high speed wireless voice and data communications
(notwithstanding that GSM is currently the de facto standard in
Europe and Asia, with a reported 475 million subscribers
worldwide as of February 2001 versus a reported 80 million
CDMA subscribers worldwide as of December 31, 2000),
because of CDMAs greater network capacity (as a result of
adjusting the transmission rate when there is no voice or data
on the channel), rapid and smooth migration to high speed data
capability (thus, minimizing service interruptions during
technology upgrades), growing international coverage, and
highest transmission speed. The BREW platform provides a
standard programming environment that gives software developers
the tools to create compelling wireless applications and
services that can be offered by wireless carriers to their
customers. Qualcomm has established a multi-tiered membership
program designed to support developers of BREW-compatible
wireless applications, and we have become a core developer under
that program. The Company has not entered into any agreement
with Qualcomm in connection with the Companys efforts to
develop a multimedia platform compatible with




10



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##### 














We recently entered into a master porting agreement with Samsung
Electronics America, a subsidiary of Samsung Electronics Co.
Ltd., a global leader in semiconductors, consumer electronics
and digital convergence technology, that sets forth the basic
terms that would apply to the Companys development of its
technology and solution ports to various Samsung product lines,
including Samsungs digital signal processors (DSPs). The
master porting agreement contemplates that the specific
obligations of the parties with respect to the port
of the Companys technology will be set forth in services
schedules to the agreement. The agreement itself contains
provisions that, among other things, establish that each party
owns their respective technologies and subject the parties to
mutual confidentiality obligations. The agreement expressly
provides that Samsung has no obligation to market, sell,
sublicense or otherwise distribute a deliverable
developed by the Company.




Content Providers

In seeking to build relationships with content providers, our
approach will be to provide products for encoding and efficient
storage of multimedia content for viewing by digital cell phones
or PDAs. Content providers are accustomed to traditional means
of message delivery (i.e., print media and the Internet). The
mobile and wireless media extend the reach of content providers,
thereby offering the potential for increased revenue generation.
We are currently engaged in discussions with various content
providers with whom we may enter into commercial alliances to
deliver, for example, sports and entertainment content using our
BlueFuel suite of products. See Our Products
below.

Cellular Carriers

In seeking to build relationships with cellular carriers, we
will focus on providing technology to facilitate multimedia
content transmission via specific carrier air interface networks
(e.g., GSM, TDMA, CDMA) in conjunction with carrier device
manufacturers. We are in discussions with several carriers as to
how to best utilize our technology in their networks.

Our Products

Existing Products

We develop proprietary commercial software for complex imaging,
information management, object recognition and multimedia
compression with existing applications in the fields of mobile
and wireless communications and information processing. Our
current product portfolio includes:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Wavelet Image Software Developers Kit (SDK) Version
	4.1  This product allows software developers to
	incorporate our wavelet compression technology within their
	applications. Software developers can compress images into
	smaller file sizes to enable faster downloads without
	significantly degrading image quality. Optimizing limited
	storage capabilities and lower bandwidth connections, products
	incorporating the wavelet Image SDK can provide viewers with
	greater viewing enhancement, including image magnification or
	enlargement, the flexibility to control the compression ratio
	which determines speed and quality, and the ability to select
	specific areas or regions of interest for greater levels of
	detail. The Wavelet Image SDK will be updated to include support
	for JPEG2000, an international still image compression standard
	approved in January 2001. The Wavelet Image SDK will be
	updated to support rendering of JPEG2000 images as well as
	advanced features available only through Summus wavelet
	implementations.
|
|
|
| |  | Photo ID Software Developers Kit (SDK) Version
	2.0  This product provides all the standard features
	of the Wavelet Image SDK with the addition of specialized
	compression technology to handle portrait-style images, ideal
	for smartcard, barcoding and identification and security
	applications.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|

11



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##### 



Summus, Ltd. generated revenues from the licensing of these
software development kits of $292,142, $101,682 and $105,112 in
2000, 1999 and 1998, respectively. Our current revenue stream
from these products is primarily attributable to renewal or
supplemental licenses.




The Company recently entered into an agreement with Face
Technologies (Pty) Ltd., a wholly-owned subsidiary of
arivia.kom, the South African information technology company, on
terms for the purchase by Face Technologies of
1,500 licenses of the Companys Photo ID image
decompressor for Windows CE. The licenses will be used to
access photo identification pictures stored in the
Companys format on the South African credit card
format drivers license manufactured by Prodiba (Pty)
Ltd. The purchase follows a decision in 1998 by Face
Technologies, Prodiba and the South African government to
include photo identification images within the two-dimensional
(2D) barcode printed on drivers licenses. The
Photo ID image decompressors will be used in a mobile,
wireless unit developed by SyGade (formerly NATech) for Face
Technologies and the South African Department of Transport, and
will assist law enforcement officials with on-location identity
verification and improved information collection for accident
and traffic violation reports. Although the revenues to be
generated from the agreement are relatively nominal, the Company
believes that its image technology may have other ID card and
security-related applications.




Future Products

We anticipate that our future wireless and mobile device related
products will, among other things, shorten the time by which
multimedia information is broadly available using such devices,
enhance and expand the multimedia experience for the mobile and
wireless device user and establish a foundation for our future
growth. Such products are expected to address features that
participants in this market have identified as key to delivering
on the overall value proposition, including:



| |   |                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | cool processing focused (to address size, display, battery life,
	power dissipation and memory constraints or limitations);                                                                                                                  
|
| |  | form factor and application adaptive (i.e., enabling multimedia
	capability on a broad array of mobile and wireless devices, such
	as PDAs, smart phones and cell phones);                                                                   
|
| |  | technology agnostic and wireless telephony standards sensitive
	(i.e., compatible with a broad variety of mobile and wireless
	software platforms and hardware devices, irrespective of the
	wireless air interface);                        
|
| |  | modular and flexible architecture/framework (i.e., able to
	deliver multiple types of multimedia solutions including video,
	audio, still image, 3D, animation and graphics);                                                                
|
| |  | application-specific end-to-end solutions focused (i.e.,
	providing a full suite of software products from the
	player software for the mobile or wireless device,
	to the server software, to the tools for multimedia content
	creation);
|
| |  | always-on/on-the-fly decision support (i.e., access to content
	and information anywhere, any time, which is expected to be
	possible upon the deployment and implementation of the third
	generation wireless network infrastructure);      
|
| |  | privacy vs. individualization (i.e., solutions that ensure the
	privacy of information and security of transactions, yet enable
	the user to get the content in the time and manner desired);                                                
|
| |  | information sharing networks (i.e., providing multimedia
	messaging capabilities and the ability to share content with
	others); and                                                                                                         
|
| |  | fast, reliable and robust information access (i.e., making full
	use of the capabilities of the greater bandwidth of the third
	generation wireless network).                                                                                

12



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Although the rapid and significant technological change
occurring within the wireless communications industry may
dictate a change in the Companys product development
strategy, the Company anticipates that its future product
portfolio will include the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | THE EFFICIENCY ENGINE  a multimedia operating
	system designed to efficiently route, store and monitor
	multimedia traffic in a network. Our multimedia architecture
	makes it possible to efficiently transmit and view multimedia
	content over current and future wired or wireless networks. We
	anticipate marketing the Efficiency Engine to wireless
	carriers, device manufacturers and content providers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
|
| |  | BLUEFUEL VIDEO  video compression software for
	multimedia applications. The software will enable the delivery
	of multimedia content faster and more efficiently than other
	methods available today. The BlueFuel Video software will
	offer content on existing and next generation devices in smaller
	file sizes and at faster speeds than prevailing technologies.
	Because of its efficiency, mobile handsets will be optimized to
	deliver exceptional video quality  even with
	low-bandwidth connection speeds  while at the same
	time conserving battery power. We have developed a prototype of
	BlueFuelTM Video, which we demonstrated at the CTIA
	wireless information technology and Internet show held in San
	Diego in mid-September 2001. We anticipate marketing
	BlueFuel Video, in conjunction with wireless carriers and
	manufacturers of cell phones and PDAs, primarily to content
	providers.
|
| |  | BLUEFUELTM IMAGE  software enabling image
	applications on mobile phones and other wireless devices. We
	performed a public, over-the-air demonstration of the
	BlueFuelTM Image module, downloading and displaying
	high quality sports images using between four and seven kilobits
	per second of bandwidth on the Verizon CDMA network downloaded
	from our server, in mid-September 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
|
| |  | BLUEFUEL CREATE  a content creation tool
	designed specifically for optimized user experience for specific
	types of devices in both the wired and wireless market. Blue
	Fuel Create will run primarily in a PC environment and
	take advantage of the Efficiency Engines operating
	environment to provide content for devices on both wired and
	wireless networks. In addition, a subset of BlueFuel
	Create may be available in specific devices to take advantage of
	content compression within the device. This creation tool will
	support our proprietary technology as well as industry standard
	formats. We anticipate marketing BlueFuel Create to
	content providers.                                                                                                                                                                                                                                     
|
|
|
| |  | BLUEFUEL SERVER  our multimedia streaming
	server, designed for optimized delivery over wired and wireless
	networks. This server will utilize our Efficiency Engine
	operating environment to serve content to both wired and
	wireless end-user devices. Our server will support our
	BlueFuelTM multimedia architecture as well as
	industry standard formats. We anticipate marketing
	BlueFuel Server to content providers, wireless portals and
	wireless carriers.                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
|
| |  | BLUEFUEL PLAYER  BlueFuel Player software
	will be designed for wireless, PC and handheld devices.
	BlueFuel Player will be optimized to support content
	created and served with BlueFuel Create and BlueFuel
	Server, utilizing the Efficiency Engine framework. In
	addition, BlueFuel Player will support content provided
	from third party servers and support REAL and MPEG4 formats. We
	anticipate marketing BlueFuel Player to manufacturers of
	cell phones and PDAs.                                                                                                                                                                                                                                                                                                                                                                                                                                       




We are presently focusing our product development resources on
adapting or porting BlueFuel to the Qualcomm
BREW platform. Nuances in device manufactures products
make it necessary to adapt our technology to their hardware or
software platforms. The porting process can be as simple as
compiling our software code to run in a specific environment;
other times, it can be more involved. The BREW porting effort is
expected to consume the majority of our technical and business
development resources through the balance of 2001. We anticipate
that the first version of the BlueFuel Efficiency
Engine will be available during the fourth quarter of
2001. We are targeting commercial release of BlueFuel
Video solution (including BlueFuel Player, BlueFuel
Create and BlueFuel Server) in the first quarter of 2002.
In parallel with




13



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TM TM


The Company is currently targeting Symbian OS as the next
wireless operating system or platform to which to adapt or port
BlueFuelTM. Symbian OS is an applications platform,
developed by Ericsson, Nokia, Motorola, Panasonic and Psion PLC,
for wireless devices using the GSM air interface network, which
is predominant in Europe. This will require focused engineering
resources to execute. We are targeting commercial release of
products ported on this platform in the second quarter of 2002.

We expect that the commercial versions of the
BlueFuelTM product suite will be completed and
deployed in the time, and will perform in the manner,
anticipated. However, in the past Summus, Ltd. has experienced
delays in the release dates of certain of its software products
and upgrades of such products, including certain modules that
were to comprise MaxxSystem. As a result, we can provide no
assurances that we will be able to successfully complete the
development of currently planned or future products in a timely
and efficient manner.

We anticipate that the various components of the BlueFuel
product suite will be licensed separately or in combination with
one another, with pricing dependent on the number of components
licensed. Our present revenue model contemplates that wireless
carriers or service providers licensing the BlueFuel
product suite would be assessed a base fee plus a royalty for
each subscriber that signs up to use the service (e.g., by
downloading BlueFuel Player or accessing BlueFuel
Server). A further charge would be assessed if the service
provider requires additional servers. In some cases, we may
effectively subsidize the rollout of the BlueFuel product
suite through a revenue sharing arrangement entered into with a
handset manufacturer, content creator and service provider.




In addition to our mobile and wireless focus, we are also
currently exploring applications of our complex imaging and
object recognition technologies in the medical sector. Our
current focus is on computerized medical diagnosis solutions for
the anatomical pathological (AP) market. In August 2000,
Summus, Ltd. entered into a master consulting agreement with
ADLabs, Inc. As a result of its relationship with ADLabs,
Summus, Ltd. realized that its complex imaging and object
recognition technologies could be adapted to have application in
the AP market. To move ahead with the adaptation of the
Companys existing technology for this market, the Company
will likely seek to enter into a joint venture or other
partnering relationship with a company in this industry. No
prediction can be presently made as to the date by which the
Companys technology will be adapted for commercial
deployment in the AP market.




Sales and Marketing

We intend to market our technology primarily through our direct
sales force, and through leading semiconductor and device
designers and manufacturers, and programming providers. We are
continuing to build a team of application and field engineers to
support our direct sales force in business development and sales
activities.

Our lack of financial resources (which has and will continue to
dictate that most of our energies be dedicated to marketing
efforts in the U.S.) has hampered our ability to fully
capitalize on our marketing strategy, which is focused primarily
on increasing awareness of the capabilities of our technology,
developing relationships with content providers, wireless
carriers and Internet portals. We are also engaged in promoting
our brand name and creating demand for our software and
services. We market our products through industry trade shows,
press releases, public relations initiatives (including through
consultants) and our web site. In addition, we are actively
working with a number of trade publications and industry
analysts to educate the market on the deployment and benefits of
our software. As of August 31, 2001, we had 5 employees in
our marketing and sales department, and we expect this number to
increase over the next 12 months, subject to our liquidity
constraints.

14



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##### 



Competition

Our financial and operating success depends, among other things,
on the success of our existing and anticipated products and
services. If those products and services fail to keep pace with
the rapid changes in technology and customer and supplier
demands, we may not become or remain profitable. There can be no
assurance that our products and services will achieve market
acceptance or commercial success. We expect competition to
persist and intensify in the future.

We believe that the primary competitive factors of multimedia
business for the mobile and wireless environments will include:



| |   |                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------
| |  | pricing and licensing terms;                                                                                
|
| |  | compatibility with new and existing image, graphics and video
	compression formats;                         
|
| |  | compatibility with the users existing network components
	and software systems;                            
|
| |  | compatibility with the users need for on-the-fly
	information processing;                                  
|
| |  | quality and reliability;                                                                                    
|
| |  | access to distribution channels necessary to achieve broad
	distribution and use of technology and products;
|
| |  | capability to license or develop and support secure formats for
	digital media delivery, particularly video;
|
| |  | ease of use and interactive user features in products; and                                                  
|
| |  | ease of finding and accessing content over the Internet and
	wireless networks.                             

Our failure to adequately address any of the factors listed
above could harm our business strategy and our operating results.

The markets for our technology are rapidly evolving. In seeking
to establish a presence in the mobile and wireless Internet, we
expect to face competition from, among others:



| |   |                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | wireless infrastructure, equipment and device manufacturers,
	including Ericsson, Lucent Technologies, Matsushita
	Communications, Motorola, NEC Corporation, Nokia, Nortel,
	Samsung Electronics, Microsoft Corporation, PacketVideo
	Corporation and Toshiba, many of which are developing or have
	announced plans to develop competitive products;
|
| |  | Microsoft Corporation, which has announced that it intends to
	support multimedia capability in its Windows CE operating system
	for mobile information devices;                                                                                                                                                                                      
|
| |  | developers of streaming media technologies such as Apple
	Computer, Emblaze Systems and RealNetworks, Inc.;                                                                                                                                                                                                                                           
|
| |  | developers of video compression technology;                                                                                                                                                                                                                                                                                                           
|
| |  | wireless service providers, such as NTT DoCoMo, Orange, Sonera
	and US West;                                                                                                                                                                                                                                                                          
|
| |  | semiconductor designers and manufacturers such as Intel,
	Qualcomm and Texas Instruments, which may develop their own
	software to embed on the hardware they already produce; and                                                                                                                                                                    
|
| |  | providers of wireless software applications and content
	aggregation, such as Phone.com and InfoSpace, which may
	capitalize on their existing market share and expand their
	product offerings.                                                                                                                                                      

We may not be able to establish or maintain any significant
competitive position against current and potential competitors,
especially those with significantly greater financial,
marketing, service, support, technical and other resources.

We continually strive to incorporate new technology into our
products. Introducing new technology involves numerous technical
challenges, substantial amounts of personnel resources and
frequently requires months to complete. There can be no
assurance that we will be successful at integrating new
technology on a

15



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Research and Development




The market for our services is, and is likely to remain,
characterized by rapid technological change and evolving
industry standards, making timely product innovations critical.
The introduction of products embodying new technology and the
emergence of new industry standards could render existing
products obsolete and unmarketable. We believe that our future
success will depend on our ability to provide software and
technologies to meet specific market demands, license and/or
develop and market new products and enhancements to existing
products on a cost-effective and timely basis in response to
customer requirements, as well as market trends and demand.
Accordingly, our business plan provides for us to continue to
invest significantly in research and development. As of
September 30, 2001, we had 21 employees engaged in research
and development. Research and development currently represents
61% of our work force and 34% of our operational expenses.




Intellectual Property Rights

Much of our complex imaging and object recognition technology
currently or to be incorporated into our existing software
development kits and products under development for the medical
sector is the result of retaining ownership of inventions made
under U.S. government-funded research and development
projects. With respect to any invention made with government
assistance, the government has a non-exclusive,
non-transferable, irrevocable, paid-up license to use the
technology or have the technology employed for or on its behalf
throughout the world for government purposes. Under certain
conditions, the U.S. government has march-in
rights. These rights enable the U.S. government to
require us to grant a non-exclusive, partially exclusive or
exclusive license in any field of use to responsive applicants,
upon terms that are reasonable under the circumstances, for
governmental purposes. If we refuse, the government can grant
the license itself, provided that it determines that such action
is necessary because we have not achieved practical application
of the invention, or to alleviate health or safety needs, or to
meet requirements for public use specified by federal
regulations, or because products using such inventions are not
being produced substantially in the U.S. The exercise of these
rights by the U.S. government could create potential competitors
for us in the government sector if we later determine to develop
the technologies and utilize the inventions in which the
government has exercised these rights. Otherwise, we retain all
commercial rights to our technology.

We regard our copyrights, trademarks, trade secrets and similar
intellectual property as critical to our success and attempt to
protect our rights by relying on patent, trademark, service
mark, copyright and trade secret laws and restrictions on
disclosure and transferring title and other methods. We have
filed a United States trademark application for BlueFuel.
There can be no assurances that these steps will be adequate,
that we will be able to secure trademark registrations for all
of our marks in the United States or other countries or that
third parties will not infringe upon or misappropriate our
copyrights, trademarks, service marks and similar proprietary
rights.

We currently have no issued patents but have filed certain
provisional patent applications. We are also examining whether
further patent protection will be sought. There can be no
assurance that patents will become a significant part of our
intellectual property in the foreseeable future.

Effective trademark, service mark, copyright, trade secret and
patent protection may not be available in every country in which
our products may be distributed and policing unauthorized use of
our proprietary information will be difficult, if not impossible.

We generally enter into confidentiality agreements with our
employees and consultants and generally control access to and
distribution of our documentation and other proprietary
information. However, it may be possible for a third party to
copy or otherwise obtain and use our proprietary information
without authorization or to develop similar technology
independently.

16



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Legal standards relating to the validity, enforceability and
scope of protection of certain proprietary rights in
Internet-related businesses are uncertain and still evolving and
no assurance can be given as to the future viability or value of
any of our proprietary rights within this market. There can be
no assurance that the steps we have taken will prevent
misappropriation or infringement of our proprietary information
or rights. Any such misappropriation or infringement could have
a materially adverse effect on our business, results of
operations and financial condition. In addition, litigation may
be necessary to enforce and protect our intellectual property
rights, or to determine the validity and scope of the
proprietary rights of others. Such litigation might result in
substantial costs and diversion of resources and management
attention and could have a materially adverse effect on our
business, results of operations and financial condition.

From time to time, third parties have asserted and may assert
exclusive patent, copyright, trademark and other intellectual
property rights to technologies and related standards that are
important to us or to third party providers of technology to us.
We and/or such third party providers of technology may
increasingly face infringement claims as the number of
competitors in our industry segments grows and the functionality
of products and services in different industry segments
overlaps. Other than as disclosed in Item 3 of this
Form 10-K, we do not have any intellectual property
infringement claims or suits against us of any kind. However, we
may be party to additional litigation in the future. Any
third-party claims, with or without merit, could be
time-consuming to defend, result in costly litigation, divert
managements attention and resources or require us to enter
into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms
acceptable to us, if at all. A successful claim of infringement
against us could harm our future competitiveness and
profitability.

Government Regulation

Because of our contracts with governmental agencies, we are
required to comply with various government regulations and
policies. For instance, we are required to maintain employment
policies relating to equal employment opportunities, and are
subject to audit by the government to confirm compliance with
these policies. If we fail to comply with regulations that apply
to us, as a government contractor, we may face sanctions,
including substantial fines and disqualification from future
contract awards.

We are not otherwise currently subject to direct federal, state
or local government regulation, other than regulations that
apply to businesses generally. The telecommunications industry
is subject to regulation by federal and state agencies,
including the Federal Communications Commission (FCC), and
various state public utility and service commissions. While such
regulation does not necessarily affect us directly, the effects
of these regulations on the wireless network operators with whom
we are seeking to develop relationships may, in turn, negatively
affect our business. FCC regulatory policies affecting the
availability and licensing of bandwidth and other terms on which
service providers conduct their business may impede our plans
for the deployment of our technology.

Legislative proposals have been made in the U.S. that, if
enacted, would afford broader protection to owners of databases
of information such as stock quotes, weather and traffic
information and sports scores. If enacted, this legislation
could result in an increase in the price of services that
provide data to wireless communications devices and could create
potential liability for unauthorized use of this data.

Employees




As of September 30, 2001 we had 36 full-time employees,
including 5 in marketing and sales, 21 in research and
development and 10 in corporate operations and administration.
We also have engaged eight consultants, five in marketing, two
in product development and one in operations. We are not subject
to any collective bargaining agreements and believe that our
relationship with our employees is good. Our success depends to
a significant extent upon the performance of our executive
officers and other key personnel.




17



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RISK FACTORS

  We have incurred substantial
losses, expect to incur losses in the future and may never
achieve profitability.




The Company has incurred net losses throughout the periods
covered by the financial statements included in this annual
report on Form 10-K. For the years ended December 31,
2000 and 1999, the Company had net losses of $11,451,281 and
$8,846,980, respectively. As of December 31, 2000, the
Company had an accumulated deficit of $23,414,113 and a working
capital deficit of $3,727,660. With the foregoing in mind, the
Companys auditors have included in their report on the
Companys financial statements an explanatory paragraph
which expresses substantial doubt about the Companys
ability to continue as a going concern.




To date, we have generated limited revenue from our operations
(including the operations of Douglas May & Co., which
we have just sold) and have been dependent upon issuances of our
equity to raise the necessary operating capital to sustain our
operations. We intend to continue to expend significant
financial and management resources on the development of our
proposed products and services, and other aspects of our
business.




We will need to increase significantly our revenues to achieve
and maintain profitability. If our revenues grow more slowly
than anticipated or if operating expenses increase more than
expected, or are not reduced sufficiently, we may never achieve
profitability. With the foregoing in mind, our auditors have
included in their report on the Companys financial
statements as of and for the year ended December 31, 2000,
an explanatory paragraph which expresses substantial doubt as to
our ability to continue as a going concern.




  If we are unable to obtain
substantial additional financing we may not be able to remain in
business.

We require substantial working capital to fund our business. For
us to implement our business plan, we anticipate that we will
need approximately $15 million in working capital in the
next twelve months. We have had significant net losses and
negative cash flow from operations since inception and expect to
continue to do so for the foreseeable future. Our capital
requirements will depend on several factors, including the rate
of market acceptance of our products and services, the ability
to establish and expand a customer base and the growth and
effectiveness of our marketing efforts. If capital requirements
vary materially from those currently planned, we may require
additional financing. At present we have no arrangements or
commitments for any financing. Financing may not be available
when needed on terms favorable to us, or at all. If adequate
funds are not available or are not available on acceptable
terms, we may be unable to develop further or enhance our
products and services, take advantage of future opportunities,
respond to competitive pressures or, ultimately, to continue in
business.

  We are in default for non-payment
under several of our material contracts with previous and
existing vendors and such vendors may seek payment through
litigation or otherwise.




As of June 30, 2001, we had approximately $5.2 million
of accounts payable, accrued expenses, notes payable and capital
lease obligations and were in default in the aggregate amount of
$1.1 million with certain of our vendors, none of which are
supplying products or services critical to current product
development focus. As of September 30, 2001, the Company
had entered into settlement agreements or arrangements with
approximately 30 of its vendors, for which the Company owed
roughly $1.5 million, under which such vendors have agreed
to the Companys payment of less than the amounts due, the
extension of payment terms by between 9-18 months and/or the
satisfaction of the amounts due through a combination of cash
and stock. In addition to our indebtedness to vendors, we are
also delinquent in the payment of amounts due legal and other
advisors. There can be no assurance that our vendors and
advisors will be willing to agree to any concessions or that we
will be able to generate sufficient funds to satisfy our debts.




18



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Our ability to make payments on our debts depends upon our
future operating performance which is subject to general
economic and competitive conditions and to financial, business
and other factors, many of which we cannot control. If the cash
flow from our operating and financing activities is
insufficient, we may be required to continue to take actions
such as delaying or reducing capital expenditures, attempting to
restructure or refinance debt, seeking to have creditors agree
to payment in the form of our common stock or other equity
securities in lieu of cash, selling assets or operations, or
taking measures to reduce our expenses. Any or all of these
actions may not be sufficient to allow us to service our debt
obligations, avoid litigation by creditors or, ultimately, to
continue in business.

  We are attempting to commercialize
a new technology and new product line in what is for us a new
market and, to date, have invoiced no sales from this product
line.

We are attempting to commercialize our BlueFuel product
suite, which is currently under development, in what is, for us,
a new market. Although the Company is in the process of building
relationships with wireless and mobile device manufacturers,
content providers and cellular carriers, the Company has not, to
date, entered into any revenue generating contractual agreements
with these parties or executed any product orders for this
product line.




  With the divestiture of Douglas May
& Co., Inc. and our MaxxSystem-based rich media direct
service offering, the business operations of the Company that
remain are entirely that of Summus, Ltd. at the time of the
Summus, Ltd. asset acquisition. A significant percentage of
Summus, Ltd.s revenue stream in recent years has been
derived from agencies of the U.S. government. If the U.S.
government uses less of our services or terminates its
relationship with us, our revenues could decline substantially
and our business could be harmed.







We have recently divested ourselves of our rich media
direct business, which includes Douglas May &
Co., Inc. As a result, our continuing business operations
consist of that of Summus, Ltd. at the time of the Summus, Ltd.
asset acquisition. In the years ended December 31, 2000 and
1999, 60% and 76%, respectively, of Summus, Ltd.s revenues
were derived from agencies of the U.S. government, principally
the Department of Defense. We believe that government projects
are likely to continue to account for a significant portion of
our revenues for the foreseeable future.




Government contracts are often subject to a competitive bidding
process, which is governed by applicable federal and state
statutes and regulations. The procurement process for government
contracts is complex and can be very time consuming. Contracts
with governmental agencies are subject to the risk of unilateral
termination by the government for its convenience and reductions
in services, or modifications in contractual terms, due to
changes in the governments requirements or to budgetary
constraints. In addition, the government may not continue to
fund projects on which we work.

  The U.S. government has certain
rights relating to our intellectual property.

Much of our complex imaging and object recognition technologies
currently or to be incorporated into our existing software
development kits and products under development for the medical
sector is the result of retaining ownership of inventions made
under U.S. government-funded research and development projects.
With respect to any invention made with government assistance,
the government has a non-exclusive, non-transferable,
irrevocable, paid-up license to use the technology or have the
technology employed for or on its behalf throughout the world
for government purposes. Under certain conditions, the U.S.
government has march-in rights. These rights enable
the U.S. government to require us to grant a non-exclusive,
partially exclusive or exclusive license in any field of use to
responsive applicants, upon terms that are reasonable under the
circumstances. If we refuse, the government can grant the
license itself, provided that it determines that such action is
necessary because we have not achieved practical application of
the invention, or to alleviate health or safety needs, or to
meet requirements for public use specified by federal
regulations, or because products using such inventions are not
being produced substantially in the U.S. The exercise of these
rights by

19



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  Under the terms of his executive
employment agreement, we granted Dr. Bjorn Jawerth, our Co-Chief
Executive Officer and Chief Scientist, a license to make and use
new technology developed during the 12-month period following
the Summus, Ltd. asset acquisition, subject to his fiduciary
duties as a director and/or officer of the Company.







In connection with the Summus, Ltd. asset acquisition in
February 2001, we entered into an executive employment agreement
with Dr. Bjorn Jawerth. For a more complete description of
the terms of that employment agreement, see Item 11.
Executive Compensation  Employment
Agreements. Under the terms of the employment agreement,
we granted to Dr. Jawerth a personal, non-exclusive,
non-transferable worldwide license, without the right to
sublicense, to make and use New Technology (as
defined in the Companys Inventions Awards Plan) that is
developed at any time during the 12-month period beginning on
February 16, 2001, the closing date of the Summus, Ltd.
asset acquisition. The Inventions Awards Plan defines New
Technology as enhancements or new methods involving
the business of the Company and developed by any of the eligible
employees and owned by the Company, that generate revenue for
the Company. New Technology does not include existing technology
of the Company or technology from Summus, Ltd.







Dr. Jawerths rights under this license are subject to
his fiduciary duties as a director and officer of the Company
and to his obligations under the non-compete provisions of the
employment agreement, which have a duration of 18 months
following the termination of the employment agreement for any
reason. This license will terminate twelve months after the
closing of the asset acquisition or such later date as may be
determined by the Board of Directors, excluding
Dr. Jawerth. If the Company ceases to be a going concern
prior to the termination of the license, the license will be
perpetual and will include the rights to sell products and
services using the new licensed technology and the right to
sublicense. In view of the foregoing and particularly in light
of the Companys financial condition, Dr. Jawerth may
have certain conflicts of interest with respect to the
development of new technology. Should Dr. Jawerth take any
actions that we perceive to be inconsistent with or in breach of
his fiduciary duties as an officer or director of the Company,
the members of the Board of Directors other than
Dr. Jawerth will take actions deemed appropriate and
consistent with applicable law. However, we have no established
policies or procedures with respect to such matters.




In addition, if the Company were to cease to be a going concern,
its liquidation value would likely be diminished because, though
the technology subject to this license is proprietary to the
Company, Dr. Jawerths license may reduce the value of
such technology upon liquidation.




  The Company has issued equity
securities for consideration or, in the case of stock options,
with exercise prices below market value which has resulted and
will result in the recording of compensation expense and, in
turn, an increase in our net losses.







In the year ended December 31, 2000, Summus, Ltd. awarded
stock options to its employees and directors exercisable for
1,613,838 shares of its common stock at exercise prices below
market value on the date of grant. Summus, Ltd. issued 53,401
shares of its common stock in 1999 for consideration less than
the market value of such shares at the time of issuance. For the
years ended December 31, 2000 and 1999, Summus, Ltd.
incurred compensation expense related to the stock option grants
and share issuances in the amount of $3,106,472 (of which
$2,127,962 was amortized to expense) and $2,670,050,
respectively. In light of the accounting for the Summus, Ltd.
asset acquisition, the issuance by Summus, Ltd. of these stock
options will result in the recording of compensation expense and
an increase in the net loss of the Company.




As of December 31, 2000, we anticipate that the Company
will incur additional expense in the approximate amount of
$978,510 over the three years ending December 31, 2003. Our
earnings/(net loss) will be decreased/(increased) by the
corresponding amount of compensation expense in each of the
stated years.

20



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  Our past and potential future
issuances of equity securities have diluted and may continue to
materially dilute the interests of holders of the Companys
common stock.

We have issued equity securities in several instances in lieu of
effecting payment in cash of amounts due (or alleged to be due)
vendors, current and former officers and directors, and
shareholders. By way of example only:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | HSNS has issued an aggregate of 2,275,000 shares of its common
	stock to William  R. Dunavant and his counsel under the
	terms of several settlement agreements entered into following
	Mr. Dunavants initiation of litigation against HSNS
	in January 2000 as a result of its failure to register 350,000
	shares of its common stock by an agreed-upon date.                                                                                                                 
|
| |  | In June 2001, we entered into a settlement agreement with
	entities affiliated with one of our shareholders, Bradford
	Richdale, under which we issued 250,000 shares of our common
	stock in satisfaction of indebtedness to such entities in the
	aggregate amount of $435,301 (representing an effective value
	per share of $1.74).                                                                                                                                          
|
| |  | Under the terms of the executive employment agreement the
	Company entered into with Dr. Bjorn Jawerth in February
	2001, we were obligated to pay Dr. Jawerth $500,000 in cash
	as compensation for his non-competition covenants. In lieu of
	such cash payment, we issued to Dr. Jawerth options to
	purchase 166,667 shares of our common stock exercisable for
	$0.50 per share and options to purchase 333,333 shares of
	our common stock exercisable for $3.75 per share.

In addition, we have the ability to issue options and other
stock-based awards under our 2000 Equity Compensation Plan to
directors, officers, employees and consultants, and have
reserved up to 6,500,000 shares of our common stock under the
plan. We also have outstanding warrants exercisable for
6,466,096 shares of our common stock.

The issuance of shares of our common stock or other equity
interests for these and other purposes may not, in all cases, be
dilutive to shareholders because the purchase price (actual or
effective) or exercise price, as the case may be, may exceed the
market price of our common stock. However, in many instances,
issuances of shares of our common stock or other equity
interests have been at (or are exercisable for) a price that
represents a discount to the then traded value of our common
stock. In any event, past and anticipated future issuances of
additional shares of our common stock or other equity interests
have and will continue to dilute the proportional ownership
interests of existing shareholders.

  The sale of a large number of
shares of our common stock could depress our stock price.




Of the 36,056,030 shares of our common stock outstanding as of
September 30, 2001, an aggregate of 26,775,525 shares are
freely tradable without restriction in the public market unless
the shares are held by affiliates, as that term is
defined in Rule 144(a)(1) under the Securities Act of 1933.
This includes the 20,218,733 shares of common stock issued in
connection with the Summus, Ltd. asset acquisition. The terms of
the asset purchase agreement governing this transaction include
a market stand-off provision under which the Summus,
Ltd. shareholders who received shares of the Companys
common stock in the transaction have agreed to a limitation in
the number of shares that may be sold during the twelve-month
period following the closing of the transaction (which occurred
February 16, 2001). Specifically, only 1.5% of the shares
held by any such shareholder may be sold or otherwise disposed
of in public market transactions in each of the third through
twelfth months following the closing. This restriction does not,
however, apply to an indeterminate number of shares issued to
Dr. Bjorn Jawerth and his ex-spouse equal in value to
$2.5 million and $1.0 million, respectively. Upon the
first anniversary of the closing, there will be no contractual
restrictions on the sale or disposal of any of the shares issued
in the transaction.




21



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In addition, as of September 30, 2001, there were
outstanding warrants to purchase 7,103,144 shares of the
Companys common stock and options to purchase 4,637,733
shares of the Companys common stock, 2,047,241 of which
were fully vested.







In accordance with registration rights that we have granted to
various individuals and entities, we are obligated to register
approximately 14.5 million shares of our common stock,
including shares underlying warrant agreements, for public
resale. We intend to file a registration statement on
Form S-1 to register any and all shares for which the
holders seek to have covered by such registration statement as
soon as reasonably practicable. Further, we may be obliged to
grant registration rights in connection with future issuances of
securities providing for accelerated entry into the marketplace
of such securities.




The market price of our common stock could decline as a result
of sales of a large number of shares of our common stock in the
market, or the perception that such sales could occur. These
sales might also make it more difficult for us to sell equity
securities in the future at a price that we think is
appropriate, if at all.

  The mobile and wireless multimedia
industry is new and rapidly evolving, and we may not be able to
accurately predict its size, needs, development or rate of
growth.

The market for our software and technologies is new and rapidly
evolving. Wireless service providers are only beginning to offer
commercial services that require our software and, as a result,
we cannot assess current or future demand for wireless delivery
of multimedia content. We also do not know whether our software
will address the needs of the mobile and wireless market or
whether this market will be large enough to sustain our
business. We may not be able to develop and introduce software,
software enhancements or services that respond to market
demands, technology developments, increased competition or
industry standards on a timely basis, or at all. If this market
does not evolve in the manner or in the timeframe that we
anticipate, or if we are unable to respond to new market
developments promptly, our business and prospects may suffer.

  The success of our business will
greatly depend on our ability to develop and enter into
strategic relationships with wireless service providers,
semiconductor and device designers, wireless device
manufacturers and content providers.

Our business will depend on our ability to develop relationships
and enter into agreements with companies in key industry groups,
including:



| |   |                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | wireless service providers that we expect will deploy our
	technology to deliver multimedia content and services to their
	subscribers;                           
|
| |  | semiconductor and device designers and manufacturers that we
	expect will embed our technology in their products to enable the
	viewing of multimedia content; and
|
| |  | content providers that we expect will rely on our technology to
	deliver multimedia content over wireless networks.                                               

We are in the early stages of developing these relationships.
None of these relationships have been formalized as yet in
revenue-generating agreements. In particular, our relationships
with wireless service providers are at a very early stage and,
as a result, we have not determined whether our contemplated
revenue model will be accepted by them. We may need to modify
our revenue model to suit the needs of particular wireless
service providers. If we are unable to establish a sufficient
number of strategic relationships on terms commercially
favorable to us, our business and prospects are likely to be
adversely affected.

  Our business will depend on others
providing multimedia content and developing applications for
mobile information devices.

The amount and availability of multimedia content and
applications for delivery over wireless networks will likely be
key factors in determining whether, and the rate at which,
wireless service providers deploy our

22



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  Our business will depend on
wireless service providers adopting our BlueFuel
software and on their subscribers demand for multimedia
content.

Our success will depend heavily on timely deployment by wireless
service providers of our BlueFuel product suite in their
networks. Wireless service providers may not deploy, or may be
slow in deploying, our software due to a number of factors
including the availability of competing products, lack of
subscriber demand, as well as interoperability, implementation,
support or maintenance concerns. In addition, if our current or
future field trials with wireless service providers are
unsatisfactory, they may not deploy our software or may require
costly or time-consuming modifications to our software before
deployment.

Even if wireless service providers offer multimedia content
services based on our software, their subscribers may not be
willing to buy these services. Subscribers are accustomed to
viewing video images on the comparatively large displays of
television screens and PC monitors and may not be willing to use
mobile information devices, which typically have smaller screen
sizes, to view multimedia content. Additionally, subscribers may
not be willing to pay to view multimedia content on mobile
information devices because this content can be viewed at a
lower cost using other connections, such as satellite and
wireline connections. Moreover, subscribers may not be willing
to purchase new devices or upgrade their existing devices to
include multimedia content viewing capability.

  If mobile information devices for
delivery of multimedia content are not widely adopted or if
semiconductor and device designers and manufacturers fail to
embed our BlueFuel technology in their products, our
business will be harmed.

We believe that mobile information devices will be the principal
means for the wireless delivery of multimedia content. Only a
small percentage of these devices are currently capable of
receiving and displaying multimedia content. In order to enhance
the viewing of such content, new or upgraded devices that offer
more advanced displays and support higher bandwidth wireless
services are required. If semiconductor and device designers and
manufacturers are unable to design, manufacture and widely
distribute mobile information devices capable of displaying
multimedia content in a timely manner, our business will suffer.

We are in the early stages of building relationships with
semiconductor and device designers and manufacturers. Even if we
secure binding agreements with these designers and
manufacturers, they may not produce, promote or sell devices
that incorporate our technology. If we fail to achieve
widespread distribution of our technology in mobile information
devices, our business and prospects are likely to be adversely
affected.

  If we fail to commercialize our
BlueFuel technology, or to develop and commercialize
additional enhancements to such technology, we may not be able
to compete effectively and our business will suffer.

Our BlueFuel technology is new and has not yet been
commercially deployed. Our success depends on our ability to
commercially release our software based on our technology in a
timely manner. Our success also depends on our ability to
develop and commercialize new enhancements to our technology in
a timely manner. If we fail to commercialize successfully our
software and technology, or to develop new software and
technology, we will not be able to compete successfully.

23



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  Summus, Ltd. has in the past
experienced delays in product releases, and we may similarly
experience delays in the release of products and upgrades in the
future.

We will need to continue to introduce, on a timely basis, new
products and product upgrades to add new features, functionality
and technology that our target customer base desires. In the
past, Summus, Ltd. has experienced delays in the release dates
of certain of its software products and upgrades of such
products, including certain modules that were to comprise
MaxxSystem. As a result, no assurances can be provided that we
will be able to successfully complete the development of
currently planned or future products in a timely and efficient
manner. Due to the complexity of these products, internal
quality assurance testing and customer testing of pre-commercial
releases may reveal product performance issues or desirable
feature enhancements that could lead us to postpone the release
of products or product upgrades. In addition, the reallocation
of resources associated with any such postponement would likely
cause delays in the development and release of other future
products or enhancements to our currently available products.
This could have a material adverse effect on our results of
operations.

  We expect that the wireless
communications industry and its technology will undergo
significant change in the foreseeable future. If we do not
continuously improve our technology in a timely manner, our
products could be rendered obsolete.

The wireless communications industry is experiencing rapid and
significant technological change. This change includes the
increase in pace of upgrades in existing wireless systems,
evolving and constantly changing industry standards, ongoing
improvements in the capacity and quality of digital and
compression technologies, and changes in consumer needs and
preferences. Alternative technologies may develop for the
provision of wireless services and other compression
technologies to wireless services that are superior to those
that we plan to offer to the wireless market. These alternative
technologies may render our products and technologies obsolete
in the future. Accordingly, our success depends on our ability
to adapt to these changes, particularly to develop or adapt
products and services or acquire new products and services that
can compete successfully. There can be no assurance that we will
select and develop appropriate technology and products on a
timely basis. Our failure to develop or obtain appropriate
technology could adversely affect our ability to be competitive.

  Our products are complex and we may
not be able to prevent defects that could decrease their market
acceptance, result in product liability or harm our
reputation.

Our compression and multimedia software and other technology is
complex, and the steps we take to ensure that such software and
technology is free of errors or defects, particularly when first
introduced or when new versions or enhancements are released,
may not be successful. We cannot guarantee that current or
enhanced versions of our products will be free of significant
software defects or bugs. Despite our testing, and testing by
third-parties, current or future products may contain serious
defects. Serious defects or errors could result in lost revenue
or delay in market acceptance of our products and could
seriously harm our credibility and materially affect the market
acceptance and sales of our products. The occurrence of these
types of problems could materially adversely affect the
Companys business, results of operations and financial
condition.

Errors in our products may also be caused by defects in
third-party hardware or software incorporated into our products.
If so, we may be unable to fix these defects without the
cooperation of third-party providers. Because these defects may
not be as significant to these providers as they are to us, we
may not receive the rapid cooperation that may be required to
avoid serious harm to our business and operating results.
Errors, defects or other performance problems with our products
could also harm our customers businesses or result in
potential product liability claims. Even if unsuccessful, a
product liability claim brought against us would likely be
time-consuming, costly and harmful to our reputation.

24



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##### 

\

  If we endeavor to expand our
limited presence in international markets we will become subject
to additional business risks.

We may decide to expand what is now a limited presence, through
consultants and agents, in international operations. To do so we
would likely have to enter into relationships with foreign
business partners. This strategy contains risks, including
difficulty in managing international operations due to distance,
language and cultural differences, and an inability to
successfully market and operate services in foreign markets.
There are also risks inherent in doing business on an
international level, including unexpected changes in regulatory
requirements, trade barriers, difficulties in staffing and
managing foreign operations, fluctuations in currency exchange
rates, longer payment cycles in general, problems in collecting
accounts receivable, difficulty in enforcing contracts,
political and economic instability, and potentially adverse tax
consequences.

  Regulations governing the wireless
communications industry may indirectly adversely affect our
business.

The wireless communications industry is subject to regulation by
the Federal Communications Commission and various state
regulatory agencies. From time to time, legislation and
regulations could be adopted that could adversely affect this
industry.

Changes in regulatory environments governing the wireless
telecommunication industry could negatively affect our plans to
offer products and services. The licensing, ownership and
operation of wireless communications systems and the grant,
maintenance or renewal of applicable licenses and radio
frequency allocations are all subject to significant government
regulation. Government regulation may have an adverse effect on
the wireless telecommunication companies to which we plan to
market and sell our to-be-developed compression and multimedia
technology software packages. Delays in receiving required
regulatory approvals and licenses or the enactment of new and
adverse regulatory requirements may adversely affect our ability
to offer our technology and other new products and services. In
addition, legislative, judicial and regulatory agency actions
could negatively affect our ability to offer new technologies to
wireless telecommunication companies.

  Our common stock currently trades
on the Pink Sheets® and, as a result, there may be limited
trading volume in the stock, as well as a greater spread between
bid and asked prices.

Our common stock currently trades on the Pink Sheets®, a
quotation service operated by Pink Sheets, LLC. The Pink
Sheets® does not impose listing standards or requirements,
does not provide automatic trade executions, and does not
maintain relationships with quoted issuers. Issuers whose
securities are traded on the Pink Sheets® may experience a
greater spread between the bid and asked
prices of their securities compared with securities traded on a
national securities exchange or Nasdaq, and a limited liquidity
in their securities. In addition, many investors have policies
against the purchase or holding of securities traded in the
over-the-counter markets. Trading in an over-the-counter market
such as the Pink Sheets® has, and will continue to, affect
both the trading volume and the market value of our common stock
for the foreseeable future.

  We may acquire technologies or
companies in the future, and these acquisitions could dilute the
value of our stock and disrupt our business.

We may acquire technologies or companies in the future. Entering
into an acquisition entails many risks, any of which could harm
our business, including:



| |   |                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------
| |  | diversion of managements attention from other business
        concerns;                                         
|
| |  | failure to integrate the acquired company with our pre-existing
        business;                                 
|
| |  | failure to motivate, or loss of, key employees from either our
        existing business or the acquired business;

25



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##### 





| |   |                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------
| |  | inability to incorporate acquired technology into our software;                                                   
|
| |  | potential impairment of relationships with our employees and
	companies with whom we have strategic relationships;
|
| |  | additional operating expenses not offset by additional revenue;                                                   
|
| |  | incurrence of significant non-recurring charges; and                                                              
|
| |  | dilution of our stock as a result of issuing equity securities.                                                   

  We may be unable to adequately
protect the intellectual property used in our software.

We have applied for provisional patents with respect to some of
our technologies, and expect to apply for additional patents in
the future. These patent applications may not be granted or, if
granted, the resulting patents may be challenged or invalidated.
In addition to patents, we rely on copyright and trademark laws,
trade secrets, confidentiality provisions and other contractual
provisions to protect our proprietary rights. These measures,
which require the expenditure of substantial resources, afford
our intellectual property only limited protection because our
competitors and third parties independently may develop similar
technologies or may infringe our intellectual property.
Infringement is difficult to detect and costly to prevent. With
respect to the protection of our proprietary rights
internationally, the laws of some foreign countries may not
protect our proprietary rights adequately. In addition, we will
not have patent protection in countries where we do not file
patent applications. Thus, the measures we are taking to protect
our proprietary rights in the United States and abroad may not
be adequate and our business may be harmed as a result.

  We may be sued by third parties for
infringement of their intellectual property.

The wireless equipment and software industries are subject to
frequent intellectual property litigation. As the number of
entrants into our market increases, the likelihood of
infringement claims also increases. We may unknowingly be
infringing the intellectual property of others. In addition,
because patent applications can take many years to be approved,
there may be one or more patent applications now pending that
could lead to infringement actions against us if issued in the
future. If we are unable to successfully defend against a
product infringement claim, we may be precluded from using the
intellectual property or may have to license it on commercially
disadvantageous terms, either of which could harm our business.
Even if we successfully defend against an infringement claim, we
may have to devote significant time and resources to litigation
which could also harm our business.

  We face intense competition as a
technology provider in the wireless telecommunications
industry.

The wireless communications market is highly competitive. Our
failure to establish a customer base as a technology provider to
this industry will adversely affect operating results. The
competition with other technology providers to form alliances
with wireless telecommunications companies and Internet service
providers is significant. The loyalty of wireless industry
customers we may obtain could be easily influenced by a
competitors new offerings, especially if those offerings
provide cost savings or new methods of compression and
multimedia technology applicable to wireless communications. We
will face significant competition from traditional
telecommunications companies, virtually all of which have
greater market share and financial resources than we do. These
traditional telecommunications companies are better positioned
to finance research and development activities relating to
compression and multimedia technology. They are also able to
provide a wider range of products and services for a greater
spectrum of media and have greater resources with which to
purchase additional technologies or acquire other companies.

26



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##### 



  Ownership of our common stock is
concentrated in certain shareholders, which could make it more
difficult to effect or prevent a change in control or other
transactions.




The interest of management in our common stock could conflict
with the interest of our other shareholders. As of
September 30, 2001, our executive officers and directors
beneficially own, on a fully-diluted basis (but exclusive of the
2,000,000 shares of common stock, on an as-converted basis, held
in escrow under the terms of the asset purchase agreement by
which HSNS acquired the assets and operations of Summus, Ltd.),
an aggregate of approximately 37% of our outstanding shares of
common stock. As a result, our executive officers and directors
will be able to exercise greater control over the election of
directors and approval of significant corporate transactions.
This could have the effect of delaying or preventing a change of
control, and make some transactions more difficult or impossible
without the support of these shareholders, including proxy
contests, mergers, tender offers, and open-market share purchase
programs that could provide our shareholders with the
opportunity to realize a premium over the then-prevailing market
price for shares of our common stock, which, in turn, could
reduce the market price of such shares.




  We anticipate issuing additional
equity securities, which may dilute the interests of current
shareholders or carry rights or preferences senior to our shares
of common stock.

We anticipate issuing additional equity securities in order to
raise working capital. Accordingly, existing shareholders may
experience additional dilution of their percentage ownership
interest in the Company. In addition, the new equity securities
may have rights, preferences or privileges senior to those of
existing holders of shares of our common stock.

  We depend on key personnel to
operate our business.

Our future success depends on the continued services and
performance of our senior management and other key personnel,
including Dr. Bjorn Jawerth and Richard F. Seifert, our
co-Chief Executive Officers; Gary E. Ban, our Chief Operating
Officer/ Chief Information Officer; Robert S. Lowrey, our Chief
Financial Officer; Dr. Jiangying Zhou, our Vice President
of Research; Leonard Mygatt, our Executive Vice President of
Advanced Technology; and Barry J. Johnson, our Vice President
 Products. The loss of the services of any member of our
senior management or other key employees could cause significant
disruption in our business. We have employment agreements with
certain members of senior management but we do not currently
maintain any key person life insurance. Our future
success also depends on our ability to identify, attract, hire,
train, retain and motivate other highly skilled technical,
managerial, operations, sales and marketing and customer service
personnel. Competition for qualified personnel is intense,
particularly where we are located in Raleigh, North Carolina. If
we do not succeed in attracting new personnel or retaining and
motivating our current personnel, our business could be harmed.

  Our common stock is subject to
penny stock rules that may hamper our
shareholders ability to sell shares of such stock in the
secondary trading market.

Federal regulations under the Securities Exchange Act of 1934
regulate the trading of so-called penny stocks,
which are generally defined as any security not listed on a
national securities exchange or Nasdaq, priced at less than
$5.00 per share and offered by an issuer with limited net
tangible assets and revenues. Since our common stock currently
trades on the Pink Sheets® at less than $5.00 per share,
our common stock is a penny stock and may not be
traded unless a disclosure schedule explaining the penny
stock market and the risks associated with such stock is
delivered to a potential purchaser prior to any trade.

In addition, because our common stock is not listed on the
Nasdaq Stock Market or any national securities exchange and
currently trades at less than $5.00 per share, trading in our
common stock is subject to

27



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##### 







| |   |                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------
| |  | obtaining financial and investment information from the investor;                                           
|
| |  | obtaining a written suitability questionnaire and purchase
	agreement signed by the investor; and           
|
| |  | providing the investor a written identification of the shares
	being offered and the quantity of the shares.

If these penny stock rules are not followed by the
broker-dealer, the investor has no obligation to purchase the
shares. The application of these comprehensive rules will make
it more difficult for broker-dealers to sell our common stock
and our shareholders, therefore, may have difficulty in selling
their shares in the secondary trading market. These rules could
also hamper our ability to raise funds in the primary market for
our common stock.

Item 2.  Properties.




Our principal executive offices are located at 434 Fayetteville
Street Mall, Suite 600, Raleigh, North Carolina 27601. We
occupy an aggregate of 19,100 square feet of leased space at
such location under two leases. A lease for 17,189 square feet,
representing the principal executive offices of Summus, Ltd.
prior to the Summus, Ltd. asset acquisition, expires on
October 31, 2005. The current annual base rent for such
space is approximately $267,000 and will increase to
approximately $313,000 by the last year of the term. We are
obligated to pay additional rent in the amount of roughly $5,900
per month for the seven month period beginning May 1, 2001.
The additional rent is for a buildout of this office space in
March 2000. We also lease 1,911 square feet of space in the same
office building, representing the space occupied by HSNS prior
to the combination. The lease term expires on October 31,
2005. The current annual base rent for this space is
approximately $33,400. We are obligated to pay additional rent
in the amount of roughly $2,000 per month for the 24-month
period beginning August 1, 2001. The additional rent is to
be paid in connection with our termination of the lease of
approximately 4,900 square feet of office space at this location.




We believe the terms of these leases are consistent with terms
in the local market generally and that the space will be
adequate for our reasonably foreseeable future needs.

Item 3.  Legal Proceedings.

The Analysts International
Corporation Litigation

On March 30, 2001, Analysts International Corporation
(AIC) filed a civil summons and complaint in General
Court of Justice, District Court Division, County of Wake, North
Carolina, against High Speed Net Solutions, Inc. The complaint
alleges that we breached certain contracts with AIC, dated
December 9, 1999, February 11, 2000, April 25,
2000, May 9, 2000, and May 23, 2000, under which AIC
provided us with computer programming services. AIC has
requested that the court enter judgment in its favor for
$358,426, plus pre-judgment interest from September 26,
2000 on certain invoices at the rate of 18% per annum,
post-judgment interest at the rate of 8% per annum, reasonable
costs of AIC and other relief the court deems equitable.

The Company and AIC entered into a settlement agreement and
release, dated August 7, 2001, under which the Company has
agreed to pay the sum of $358,426, plus interest accruing at the
rate of 8% per annum from March 31, 2000 (the
Indebtedness) according to the following payment
schedule: (i) $20,000 upon execution of the settlement
agreement; (ii) $5,000 per month for a period of six
months, commencing one month after execution of the settlement
agreement; and (iii) $10,000 per month until the balance of
the Indebtedness is paid in full. The Company also executed a
consent order in favor of AIC providing for AICs entry of
a judgment by consent in the amount of the Indebtedness, less
any payments made under the settlement agreement, in the event
the Company defaults on its obligations under the settlement
agreement.

28



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##### 



The Cale Yarborough
Litigation

On April 25, 2001, Cale Yarborough, a Company shareholder,
filed a summons and complaint against High Speed Net Solutions,
Inc., David Gordon, Bear Stearns Securities Corp., MidSouth
Capital, Inc., and Interwest Stock Transfer Co. in the United
States District Court, District of South Carolina, Florence
Division, alleging, among other things, (i) breach of an
agreement Mr. Yarborough entered into with David Gordon under
which Mr. Gordon was to provide an opinion letter as to
Mr. Yarboroughs ability to resell shares of our
common stock in accordance with Rule 144 promulgated under
the Securities Act of 1933, (ii) violation of
Rule 144, (iii) professional negligence and breach of
fiduciary duty, and (iv) violation of federal and state
securities laws. All of the causes of action in the complaint
stem from the alleged failure to properly advise
Mr. Yarborough as to when the shares of our common stock
could properly be resold under Rule 144.

On May 17, 2001, the complaint was dismissed without
prejudice. As such, it is subject to being reopened upon the
showing of good cause within the 60-day period following the
issuance of the dismissal order. A check of the court docket
revealed that nothing was filed during this 60-day period. We
believe that Mr. Yarborough and Mr. Gordon are in the
process of reaching (or have reached) a settlement of this
matter. The Company has not recorded a loss contingency relating
to this complaint because, in managements opinion, it is
not probable that a loss contingency exists and an amount cannot
be reasonably estimated.

The ENELF Litigation

On March 15, 2001, ENELF, LLC filed a civil lawsuit in the
United States District Court for the Eastern District of Texas
alleging patent infringement by Microsoft Corporation, Texas
Instruments, Incorporated Aware, Inc. and Summus, Ltd. ENELF
alleged that certain modules of MaxxSystem and PhotoID SDK
infringed upon ENELFs U.S. Patent Number 4,599,567
entitled Signal Representation Generator. ENELF
sought to enjoin Summus, Ltd. from making, selling, offering for
sale, using, or importing its wavelet-based video and image
processing technology. In addition, ENELF sought an unspecified
amount of monetary damages. We have filed an answer denying
ENELFs allegations, and seeking a declaratory judgment of
non-infringement, invalidity, and unenforceability. We have
recently entered into settlement discussions with ENELF, but are
prepared to provide a vigorous defense to this lawsuit. The
Company has not recorded a loss contingency relating to this
complaint because, in managements opinion, it is not
probable that a loss contingency exists and an amount cannot
reasonably be estimated.

The Pin High Company
Litigation

In February, 2001, the Pin High Company, Inc. filed suit against
Summus, Ltd. and us in the Superior Court of Wake County, North
Carolina, for non-payment of consulting services rendered. On
April 30, 2001, we, Summus, Ltd. and Pin High entered into
a Release and Settlement Agreement. Under the terms of the
agreement, Summus, Ltd. agreed to pay an aggregate amount of
$20,145.08 in eight installments, the last of which will be due
in December, 2001. The agreement stipulates that if Summus, Ltd.
defaults in its payment obligations, Pin High will have the
right to file a confession of judgment previously executed by
both the Company and Summus, Ltd. making us jointly and
severally liable for the amounts due under the agreement, plus
costs and attorneys fees.

Item 4.  Submission of Matters to a Vote of
Security Holders.

During the fourth quarter of the year covered by this report, no
matter was submitted to a vote of the security holders of the
Company.

29



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##### 



PART II



|        |                                                                              
|------- | -----------------------------------------------------------------------------
|Item 5. | Market For Registrants Common Stock And Related
        Shareholder Matters.

Market Information

Our common stock, $.001 par value, currently trades on the Pink
Sheets®. Until October 24, 2000, our common stock was
quoted on the Over-The-Counter (OTC) Bulletin Board®.
The following table provides information about the high and low
bid prices of our common stock for each quarter during the last
two years on the OTC Bulletin Board® and on the Pink
Sheets®. These quotations reflect inter-dealer prices
without markup, markdown or commissions, and may not necessarily
represent actual transactions.

TRADING HISTORY OF OUR COMMON STOCK




|               |  |     |       |      |  |   |       | 
|-------------- |  | --- | ----- | ---- |  | - | ----- | 
|2001           |  | Low |       | High
|               |  |     |       |     
|First Quarter  |  | $   | 2.500 |      |  | $ | 4.300 | 
|              
|              
|              
|              
|Second Quarter |  | $   | 2.500 |      |  | $ | 5.750 | 
|              
|              
|              
|              
|Third Quarter  |  | $   | 1.300 |      |  | $ | 4.500 | 




|               |  |     |       |      |  |   |        | 
|-------------- |  | --- | ----- | ---- |  | - | ------ | 
|2000           |  | Low |       | High
|               |  |     |       |     
|First Quarter  |  | $   | 6.750 |      |  | $ | 31.875 | 
|              
|              
|              
|              
|Second Quarter |  | $   | 3.000 |      |  | $ | 13.250 | 
|              
|              
|              
|              
|Third Quarter  |  | $   | 3.938 |      |  | $ | 7.438  | 
|              
|              
|              
|              
|Fourth Quarter |  | $   | 1.300 |      |  | $ | 6.900  | 

|               |  |     |       |      |  |   |       | 
|-------------- |  | --- | ----- | ---- |  | - | ----- | 
|1999           |  | Low |       | High
|               |  |     |       |     
|First Quarter  |  | $   | 1.000 |      |  | $ | 6.250 | 
|              
|              
|              
|              
|Second Quarter |  | $   | 1.125 |      |  | $ | 4.875 | 
|              
|              
|              
|              
|Third Quarter  |  | $   | 1.500 |      |  | $ | 6.625 | 
|              
|              
|              
|              
|Fourth Quarter |  | $   | 2.688 |      |  | $ | 17.50 | 

Holders




As of September 30, 2001, we had 350 record holders of our
common stock. This number does not include the number of persons
whose shares of common stock are held in nominee or in
street name accounts through brokers. As of such
date, 36,056,030 shares of common stock were issued and
outstanding. An additional 7,103,144 and 4,637,733 shares of
common stock were subject to outstanding warrants and options,
respectively.




Dividends

We have never paid any cash dividends on our common stock. We
anticipate that we will retain earnings, if any, to finance the
growth and development of our business. Therefore, we do not
expect to pay cash dividends on our common stock for the
foreseeable future. Any future determination to pay cash
dividends will be at the discretion of our Board of Directors
and will depend upon our financial condition, operating results,
capital requirements, and whatever other factors that our Board
of Directors may deem relevant.

Penny Stock

The Companys common stock is subject to the provisions of
Section 15(g) and Rule 15g-9 of the Securities
Exchange Act of 1934 (the Exchange Act), commonly
referred to as the penny stock rule.
Section 15(g) sets forth certain requirements for
transactions in penny stocks and Rule 15g-9(d)(1)
incorporates the definition of penny stock that is
found in Rule 3a51-1 of the Exchange Act.

The SEC generally defines penny stock to be any
equity security that has a market price less than $5.00 per
share, subject to certain exceptions. If the Companys
common stock is deemed to be a penny stock,

30



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OTC Bulletin Board® Eligibility Rules

HSNSs common stock was quoted on the OTC Bulletin
Board® under the symbol HSNS until
October 24, 2000.

On January 4, 1999, the SEC granted approval of amendments
to the NASD OTC Bulletin Board® Eligibility Rules 6530
and 6540 (the Eligibility Rules). The Eligibility
Rules require a company listed on the OTC Bulletin Board®
to be a reporting company with the SEC to maintain the listing
of its stock on the OTC Bulletin Board®. In HSNSs
case, the Eligibility Rules required HSNS to become fully
compliant by May 17, 2000 (its Phase-in Date).
On February 22, 2000, HSNS filed a registration statement
on Form 10 for such purpose. HSNS filed an amendment to
such registration statement on March 13, 2000, in response
to the comments received from the staff of the SEC. The
Eligibility Rules require that the SEC come to a position of no
further comment regarding any registration statement on Form 10
before the NASD considers a company compliant. HSNS, having
determined that it would not be possible to clear the SEC
staffs comments by its Phase-in Date, withdrew the
Form 10 on April 19, 2000.

HSNS, instead, sought to become an Exchange Act reporting
company through its acquisition, in late April 2000, of
J.S.J. Capital Corporation, a publicly-held shell corporation.
On May 8, 2000, HSNS filed a Current Report on
Form 8-K in connection with the acquisition of J.S.J.
Capital. HSNS was unaware at the time that the staff of the SEC
staff had issued a letter to the Director of Listing
Qualifications of Nasdaq, dated April 7, 2000, indicating
that a non-Exchange Act reporting company, upon acquiring a
reporting blank check company (i.e., a development
stage company that has no specific business plan or purpose),
would not be deemed to be a successor issuer to that
company. Further, the non-reporting company would have to file a
Form 10 or Form 10-SB registration statement, or a
Form 8-K with a minimally acceptable level of information,
with such filing being subject to SEC staff review and comment,
to become an Exchange Act reporting company. Since HSNS was not
able to clear the SEC staffs comments on the
Form 8-K, HSNS was not able to become fully compliant by
its Phase-in Date.

HSNS was able to obtain from the SEC a temporary stay of
Nasdaqs delisting of its common stock from the OTC
Bulletin Board® pending its appeal of Nasdaqs
delisting decision. However, HSNSs appeal was
unsuccessful. HSNSs common stock was removed from the OTC
Bulletin Board®, effective October 24, 2000, and has
since traded on the Pink Sheets®.

Shares Eligible for Future Sale




Of the 36,056,030 shares of common stock outstanding as of
September 30, 2001, an aggregate of 26,775,525 shares are
freely tradable without restriction in the public market unless
the shares are held by affiliates, as that term is
defined in Rule 144(a)(1) under the Securities Act of 1933.
For purposes of




31



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##### 







| |   |                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 20,218,733 shares that were issued in connection with the
	Summus, Ltd. asset acquisition (such shares having been issued
	in a transaction exempt from registration under
	Section 3(a)(10) of the Securities Act of 1933);                        
|
| |  | 5,812,111 shares issued in transactions exempt from registration
	under Rule 504 of Regulation D, promulgated under the
	Securities Act of 1933, when that rule provided that shares
	issued thereunder would be deemed unrestricted securities; and
|
| |  | 744,681 shares for which the two-year holding period requirement
	of Rule 144(k) has now been satisfied.                                                                                                                                            

The remaining shares of common stock outstanding are
restricted securities under the Securities Act of
1933 and may be sold in the public market upon the expiration of
the holding periods under Rule 144, described below,
subject to the volume, manner of sale and other limitations of
Rule 144, as applicable.

In general, under Rule 144 as currently in effect, a person
who has beneficially owned shares for at least one year,
including an affiliate, is entitled to sell, within
any three-month period, a number of shares that does not exceed
the greater of:



| |   |                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------
| |  | 1% of the then outstanding shares of the Companys common
	stock; or                                                               
|
| |  | the average weekly trading volume during the four calendar weeks
	preceding filing of notice of the sale of shares of common stock.

Sales under Rule 144 are also subject to certain manner of
sale provisions, notice requirements and the availability of
current public information about the Company. A shareholder who
is deemed not to have been an affiliate of the
Company at any time during the 90 days preceding a sale,
and who has beneficially owned restricted shares for at least
two years, would be entitled to sell shares under
Rule 144(k) without regard to the volume limitations,
manner of sale provisions or public information requirements.




In addition to sales pursuant to Rule 144, we have issued
approximately 14.5 million shares of our common stock,
including shares underlying warrants, with registration rights
requiring us to offer to the holders of these shares the
opportunity to have their shares included in a registration
statement that we may file with the SEC under the Securities Act
of 1933. We intend to file a registration statement on
Form S-1 to register any and all shares for which the
holders of such shares seek to have covered by such registration
statement as soon as reasonably practicable after resolving all
comments of the staff of the Securities and Exchange Commission
with respect to this annual report on Form 10-K for the
year ended December 31, 2000.




Recent Sales of Unregistered Securities.




From January 1, 1998 through September 30, 2001, the
Company issued an aggregate of 52,817,334 shares of its common
stock to approximately 279 persons, 2000 shares of its
Series A convertible preferred stock to three persons and
6,000 shares of its Series B convertible preferred stock to
50 persons. These securities were not registered under the
Securities Act of 1933. Except as noted below, the issuances of
the securities described below were issued in transactions
deemed to be exempt from registration under the Securities Act
in reliance on Section 4(2) of the Securities Act as
transactions by an issuer not involving any public offering. All
of such securities, except for those issued in reliance upon
Rule 504 of Regulation D, promulgated under the
Securities Act, are deemed to be restricted
securities as defined in Rule 144(a)(3) under the
Securities Act. Except as noted below, no commissions were paid
in connection with any of the issuances.




32



---



##### 






Stock Issuances in
Connection with Acquisitions




In August 1998, HSNS issued 9,275,000 shares of its common
stock to Marketers World, Inc., in partial consideration for all
the assets of Marketers World. In August 1999, following
negotiations, on an individual basis, with each of the holders
of the shares issued in connection with this transaction, such
holders agreed to surrender an aggregate of 5,161,100 shares.

In September 1998, HSNS issued 775,000 shares of common
stock to Ormond Trust, an affiliate of Mr. Richdale, in
consideration for all the issued and outstanding shares of
capital stock of Brad Richdale Direct, Inc.

In September 1998, HSNS issued 100,000 shares of common
stock to Mr. Richdale in expectation of consummating the
acquisitions of HealthTec, Inc. and National Direct Corporation.
HSNSs expectation was that HSNS would receive all the
issued and outstanding shares of capital stock of these
companies. However, these transactions were not consummated and
in August 1999 the shares issued by HSNS were returned for
cancellation.

In February 1999, HSNS granted an option to purchase
1,000,000 shares of common stock to Mr. Richdale at an
exercise price of $.01 per share as part of the consideration
paid to acquire the licensing and marketing rights, held by Brad
Richdale Direct, to certain products under development by
Summus, Ltd. In August 1999, Ormond Trust, as assignee of
the option, exercised the option in full and HSNS waived payment
of the exercise price.

In August 1999, HSNS issued 795,001 shares of its common
stock (valued at $643,951, or $0.81 per share) to five
individuals  Cale Yarborough (366,667 shares),
William R. Dunavant (350,000 shares), Rick Turbin (30,000
shares), Robert Chalnick (30,000 shares) and Wallace Permenter
(18,334 shares)  and made a cash payment of $102,000
($100,000 to Mr. Dunavant and $2,000 to an attorney), in
exchange for an aggregate of 402,000 shares of stock of Summus
Technologies, Inc. held by these individuals. Concurrent with
the acquisition of such shares of Summus Technologies
stock, affiliates of Mr. Richdale transferred an additional
598,182 shares of Summus Technologies stock to HSNS. The
issuance of HSNSs securities was deemed to be exempt from
registration under the Securities Act in reliance upon the
exemption provided by Rule 504 of Regulation D.

In May 2000, under an agreement and plan of merger, dated
as of April 18, 2000, between HSNS and J.S.J Capital Corp.,
HSNS acquired all the outstanding shares of common stock of
J.S.J. Capital Corp. from its sole stockholder in exchange for
50,000 shares of HSNSs common stock.

Effective July 10, 2000, HSNS acquired from Douglas May,
the sole shareholder of Douglas May & Co., Inc., all
the issued and outstanding shares of that companys capital
stock in exchange for an aggregate of 183,070 shares of HSNS
common stock.

On February 16, 2001, in connection with the acquisition of
the assets of Summus, Ltd., HSNS issued to Summus, Ltd. for
distribution to the Summus, Ltd. shareholders:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a total of 20,218,733 shares of HSNS common stock and 6,000
	shares of Series B preferred stock. As a shareholder of
	Summus, Ltd., HSNS was entitled to receive 3,604,445 of the
	total number of shares of common stock issued in the
	transaction. However, under the terms of the Asset Purchase
	Agreement, these shares were canceled, resulting in a net
	issuance of 16,614,288 shares of HSNSs common stock. In
	addition, the asset purchase agreement provided for the
	cancellation of 8,217,781 shares of HSNSs common stock
	owned by Summus, Ltd. prior to the parties execution of
	the agreement;
|
| |  | 6,000 shares of newly created Series B preferred stock, of
	which 2,000 shares were deposited with an escrow agent as
	security for any indemnification obligations of Summus, Ltd. and
	its shareholders under the asset purchase agreement; and                                                                                                                                                                                                                                                                                                                                                                    

33



---



##### 





| |   |                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | warrants to purchase a total of 500 shares of its Series B
        preferred stock, exercisable for a period of 5 years from
        February 16, 2001. The exercise price of the warrants is
        $5,500.00 per share of Series B preferred stock ($5.50 per
        share of the Companys common stock on an as-converted
        basis).

The securities issued in the transaction were exempt from
registration pursuant to Section 3(a)(10) under the
Securities Act.

Stock Issuances for Cash/Satisfaction
of Indebtedness




In August 1998, HSNS issued an aggregate of 3,766,600
shares of common stock for average consideration of $0.084 per
share, to 8 investors, consisting of 2,446,000 shares issued to
Mr. Rene Hamouth, HSNSs sole director and officer at
the time, and the Hamouth Family Trust, 1,1100,000 shares to
StoneLeigh Ltd., an affiliate of Mr. Richdale, and
aggregate of 220,000 shares to five other unaffiliated
investors, (i.e., Mike Pruit, Jule Berar, Clair Calvert, Virtual
Realty Mall, Inc. and Catherine Cox). The total consideration
received for these shares was $317,000. The issuance of these
securities was deemed to be exempt from registration under the
Securities Act in reliance upon the exemption provided by
Rule 504 of Regulation D.




In September 1998, HSNS issued 1,550,000 shares of common
stock to Mr. Richdale in satisfaction of HSNSs
indebtedness to Mr. Richdale in the aggregate amount of
$149,820. This represents a per share value of the shares issued
of $0.097. The issuance of these securities was deemed to be
exempt from registration under the Securities Act in reliance
upon the exemption provided by Rule 504 of
Regulation D.

In February 1999, HSNS issued 157,323 shares of our common
stock to GEM Singapore in consideration for GEM Singapores
agreement to pay $471,987 (or $3.00 per share). In
July 1999, the shares were cancelled for lack of
consideration.




From February to April 1999, HSNS issued an aggregate of
338,188 shares of its common stock to 15 unaffiliated investors
(Joel Holt, Joe Pacifico, Tom Godfrey, D. Mark White, First
Southwest, C. Dawkins, Greg Thompson, OL Thompson,
N. Maero, John D. Allen, Jerry Wilhite, Rene Hausen,
D.L. and J.P. Smith, J. Walsh and J & L
Nadelman) for a price per share ranging from $1.00 to $2.50 and
aggregate consideration of $347,500. The issuance of these
securities was deemed to be exempt from registration under the
Securities Act in reliance upon the exemption provided by
Rule 504 of Regulation D.




In August 1999, HSNS issued 1,500,000 shares of its common
stock to Summus, Ltd. in lieu of the fourth and final cash
payment (in the amount of $750,000) due under the
February 1999 Marketing License Agreement.

In August 1999, HSNS issued 250,000 shares of its common
stock to Mr. and Mrs. Seifert (the parents of Richard F.
Seifert, the Companys current co-Chief Executive Officer)
for total consideration of $250,000 ($1.00 per share). Because
the purchase price per share was below the fair market value of
the common stock on the date of purchase (i.e., $4.38 per
share), HSNS recorded $845,000 of expense for the year ended
December 31, 1999 in connection with this issuance.

On February 28, 2000, HSNS issued 2,000 shares of
Series A convertible preferred stock, par value $.001 per
share, to three investors for an aggregate consideration of
$2,000,000 ($1,000 per share) and net proceeds of $1,850,952.
The investors were F. van Lanschot Bankiers (350 shares),
Insinger de Bearfort (250 shares) and AAA Trust Company, Ltd.
(1,400 shares). Each share of Series A convertible preferred
stock is convertible into shares of common stock equal to the
liquidation preference ($1,000) divided by a conversion price,
which is subject to adjustment, of $14.24. HSNS recorded a
beneficial conversion feature in the amount of $294,900 in
connection with the issuance of these shares, which were
convertible on the date of issuance.

From July through October 2000, HSNS issued an aggregate of
650,012 shares of its common stock, and warrants to purchase
1,300,024 shares of HSNSs common stock, for an aggregate
consideration of $3,000,000, to two investors: AAA Trust
Company, Ltd. (281,671 shares and warrants to purchase 563,342
shares); and Van Ernst Jakobs (368,341 shares and warrants to
purchase 736,682 shares). The warrants have

34



---



##### 








In November and December 2000, HSNS issued an aggregate of
861,777 shares of our common stock to 38 investors (all of whom
were accredited investors, as defined in
Rule 501(a) of Regulation D) for a price ranging from
$1.38 to $3.00 per share, and issued warrants to purchase, at an
exercise price of $4.00 per share, an additional 697,540 shares
of HSNSs common stock, for aggregate consideration of
$1,777,554. Each warrant has a term of five years. The shares
and warrants were issued in transactions deemed to be exempt
from registration under the Securities Act in reliance upon the
exemption provided by Rule 506 of Regulation D. The
names of the purchasers and the number of shares purchased are
as follows:







|                                                |  |                  |         | 
|----------------------------------------------- |  | ---------------- | ------- | 
|Name of Purchaser                               |  | Number of Shares
|                                                |  |                 
|James D. Bailey & Eleanor M. Bailey JT TEN      |  |                  | 12,000  | 
|                                               
|                                               
|                                               
|                                               
|John R. Bako                                    |  |                  | 8,334   | 
|                                               
|                                               
|                                               
|                                               
|William B. Bandy                                |  |                  | 40,000  | 
|                                               
|                                               
|                                               
|                                               
|Brian Boxer                                     |  |                  | 20,000  | 
|                                               
|                                               
|                                               
|                                               
|Hendrika Braam & Franke N.I. Scheper            |  |                  | 27,500  | 
|                                               
|                                               
|                                               
|                                               
|Douglas J. DeDecker                             |  |                  | 12,000  | 
|                                               
|                                               
|                                               
|                                               
|Benjamin R. Densieski TTEE                      |  |                  | 10,000  | 
|                                               
|                                               
|                                               
|                                               
|James Markham Edson and Lynn M. Edson JT TEN    |  |                  | 10,000  | 
|                                               
|                                               
|                                               
|                                               
|Patrick Fromer                                  |  |                  | 8,000   | 
|                                               
|                                               
|                                               
|                                               
|Clayton Garmon                                  |  |                  | 2,500   | 
|                                               
|                                               
|                                               
|                                               
|David Gleason                                   |  |                  | 10,000  | 
|                                               
|                                               
|                                               
|                                               
|Bruce Goldfarb                                  |  |                  | 29,348  | 
|                                               
|                                               
|                                               
|                                               
|Lanny & Diana Grissom JT TEN                    |  |                  | 72,464  | 
|                                               
|                                               
|                                               
|                                               
|Boyd A. Guard                                   |  |                  | 1,000   | 
|                                               
|                                               
|                                               
|                                               
|Neal Guenther & Nancy Jablonski                 |  |                  | 25,000  | 
|                                               
|                                               
|                                               
|                                               
|Pascal Hazeleger                                |  |                  | 100,000 | 
|                                               
|                                               
|                                               
|                                               
|Mark D. Henrikson                               |  |                  | 8,334   | 
|                                               
|                                               
|                                               
|                                               
|Keith L. Kaat                                   |  |                  | 30,000  | 
|                                               
|                                               
|                                               
|                                               
|James Kapral                                    |  |                  | 10,000  | 
|                                               
|                                               
|                                               
|                                               
|Joseph M. Leho                                  |  |                  | 10,000  | 
|                                               
|                                               
|                                               
|                                               
|Pat E. McCoy                                    |  |                  | 8,000   | 
|                                               
|                                               
|                                               
|                                               
|Steve Wayne McDowell                            |  |                  | 3,500   | 
|                                               
|                                               
|                                               
|                                               
|Larry McKenzie                                  |  |                  | 20,000  | 
|                                               
|                                               
|                                               
|                                               
|Robert L. Nicholson                             |  |                  | 10,000  | 
|                                               
|                                               
|                                               
|                                               
|Richard W. Nuckols                              |  |                  | 36,232  | 
|                                               
|                                               
|                                               
|                                               
|Charles T. Olsen                                |  |                  | 21,600  | 
|                                               
|                                               
|                                               
|                                               
|Randall S. Pond & Susan Pond                    |  |                  | 12,000  | 
|                                               
|                                               
|                                               
|                                               
|Rainwater Enterprises Ltd. Defined Benefit Plan |  |                  | 72,464  | 
|                                               
|                                               
|                                               
|                                               
|Jerry Robbins                                   |  |                  | 8,334   | 
|                                               
|                                               
|                                               
|                                               
|Clayton J. Roberts                              |  |                  | 8,334   | 
|                                               
|                                               
|                                               
|                                               
|Michael Spickard                                |  |                  | 2,334   | 
|                                               
|                                               
|                                               
|                                               
|H. Randolph Straughan III                       |  |                  | 8,500   | 
|                                               
|                                               
|                                               
|                                               
|Karl Striegal                                   |  |                  | 25,000  | 
|                                               
|                                               
|                                               
|                                               
|Peter van der Meij                              |  |                  | 100,000 | 
|                                               
|                                               
|                                               
|                                               
|Darryl J. Verduin                               |  |                  | 10,000  | 
|                                               
|                                               
|                                               
|                                               
|Michael Veselak                                 |  |                  | 10,000  | 
|                                               
|                                               
|                                               
|                                               
|Gomar Vijverman                                 |  |                  | 50,000  | 
|                                               
|                                               
|                                               
|                                               
|Martha R. Wade                                  |  |                  | 9,000   | 






35



---



##### 






From January 1, 2001 to March 31, 2001, the Company
issued an aggregate of 642,251 shares of common stock to 36
accredited investors, all unaffiliated with the Company, for a
price per share ranging from $2.50 to $3.00, and issued warrants
to purchase, at an exercise price of $3.50 to $4.00 per share,
an additional 1,284,502 shares of common stock, for aggregate
consideration of $1,829,757. The names of the purchasers and the
number of shares purchased are as follows:







|                                               |  |                  |         | 
|---------------------------------------------- |  | ---------------- | ------- | 
|Name of Purchaser                              |  | Number of Shares
|                                               |  |                 
|James D. Bailey                                |  |                  | 14,000  | 
|                                              
|                                              
|                                              
|                                              
|Richard Baumgartner                            |  |                  | 8,333   | 
|                                              
|                                              
|                                              
|                                              
|Robert Bell                                    |  |                  | 25,000  | 
|                                              
|                                              
|                                              
|                                              
|James L. Bonds                                 |  |                  | 10,000  | 
|                                              
|                                              
|                                              
|                                              
|Richard W. Bonenberger                         |  |                  | 16,667  | 
|                                              
|                                              
|                                              
|                                              
|Robert Bonenberger                             |  |                  | 16,667  | 
|                                              
|                                              
|                                              
|                                              
|Brian Boxer                                    |  |                  | 10,000  | 
|                                              
|                                              
|                                              
|                                              
|David C. Cox                                   |  |                  | 10,000  | 
|                                              
|                                              
|                                              
|                                              
|D&R Holding, Co. L.L.C.                        |  |                  | 10,000  | 
|                                              
|                                              
|                                              
|                                              
|Douglas J. DeDecker                            |  |                  | 15,800  | 
|                                              
|                                              
|                                              
|                                              
|Christopher V. Devone                          |  |                  | 10,000  | 
|                                              
|                                              
|                                              
|                                              
|Francis L. Ehling & Lorraine E. Devone
	JT TEN |  |                  | 8,334   | 
|                                              
|                                              
|                                              
|                                              
|Isabel R. Ellis                                |  |                  | 9,000   | 
|                                              
|                                              
|                                              
|                                              
|I. James Folds                                 |  |                  | 10,000  | 
|                                              
|                                              
|                                              
|                                              
|Bruce Goldfarb                                 |  |                  | 100,000 | 
|                                              
|                                              
|                                              
|                                              
|Halifax Estate Limited Partnership             |  |                  | 22,785  | 
|                                              
|                                              
|                                              
|                                              
|John Hinton                                    |  |                  | 8,333   | 
|                                              
|                                              
|                                              
|                                              
|Neal Guenther & Nancy Jablonski                |  |                  | 95,000  | 
|                                              
|                                              
|                                              
|                                              
|Marion and Dorothy J. Jablonski                |  |                  | 25,000  | 
|                                              
|                                              
|                                              
|                                              
|Stanley W. Jablonski                           |  |                  | 20,000  | 
|                                              
|                                              
|                                              
|                                              
|Keith L. Kaat                                  |  |                  | 25,000  | 
|                                              
|                                              
|                                              
|                                              
|Joseph M. Leho                                 |  |                  | 10,000  | 
|                                              
|                                              
|                                              
|                                              
|Gregory A. Lynch & Janet L. Lynch JT TEN       |  |                  | 10,000  | 
|                                              
|                                              
|                                              
|                                              
|Steve Wayne McDowell                           |  |                  | 5,000   | 
|                                              
|                                              
|                                              
|                                              
|Larry McKenzie                                 |  |                  | 10,000  | 
|                                              
|                                              
|                                              
|                                              
|Ronald Brien Moore                             |  |                  | 10,000  | 
|                                              
|                                              
|                                              
|                                              
|Robert L. Nicholson                            |  |                  | 10,000  | 
|                                              
|                                              
|                                              
|                                              
|Eric Raeber                                    |  |                  | 30,000  | 
|                                              
|                                              
|                                              
|                                              
|Clayton J. Roberts                             |  |                  | 3,333   | 
|                                              
|                                              
|                                              
|                                              
|Larry B. Shook                                 |  |                  | 10,000  | 
|                                              
|                                              
|                                              
|                                              
|Rodney Spielman                                |  |                  | 10,000  | 
|                                              
|                                              
|                                              
|                                              
|John Stephanus                                 |  |                  | 8,333   | 
|                                              
|                                              
|                                              
|                                              
|Michael M. Spickard                            |  |                  | 5,666   | 
|                                              
|                                              
|                                              
|                                              
|Harvey Underwood                               |  |                  | 10,000  | 
|                                              
|                                              
|                                              
|                                              
|Richard L. & Delores R. Vanstory               |  |                  | 30,000  | 
|                                              
|                                              
|                                              
|                                              
|James A. Zacher                                |  |                  | 10,000  | 







From April 1, 2001 to June 30, 2001, the Company
issued an aggregate of 636,421 shares of common stock to 37
accredited investors (all of whom were unaffiliated with the
Company) for a price per share ranging from $2.00 to $4.25, and
issued warrants to purchase, at an exercise price of $3.50 to
$5.25 per share, an additional 1,316,364 shares of common stock,
for aggregate consideration of $1,711,630. In connection with
the issuance of these shares, the Company issued 8,194 shares of
its restricted common stock, as commissions, to the placement
agents involved in such sales. The shares and warrants were
issued in transactions deemed to




36



---



##### 














|                                        |  |                  |        | 
|--------------------------------------- |  | ---------------- | ------ | 
|Name of Purchaser                       |  | Number of Shares
|                                        |  |                 
|John R. Bako                            |  |                  | 1,666  | 
|                                       
|                                       
|                                       
|                                       
|William B. Bandy                        |  |                  | 20,000 | 
|                                       
|                                       
|                                       
|                                       
|Thomas Bivens                           |  |                  | 16,000 | 
|                                       
|                                       
|                                       
|                                       
|John Bodolay                            |  |                  | 20,000 | 
|                                       
|                                       
|                                       
|                                       
|Sharon L. Cimino                        |  |                  | 10,000 | 
|                                       
|                                       
|                                       
|                                       
|Doug Cline                              |  |                  | 30,000 | 
|                                       
|                                       
|                                       
|                                       
|Douglas J. DeDecker                     |  |                  | 5,000  | 
|                                       
|                                       
|                                       
|                                       
|Christopher V. Devone                   |  |                  | 8,334  | 
|                                       
|                                       
|                                       
|                                       
|Donald R. Duffy                         |  |                  | 10,000 | 
|                                       
|                                       
|                                       
|                                       
|Herbert E. Fitzgerald III               |  |                  | 10,000 | 
|                                       
|                                       
|                                       
|                                       
|Suzanne Harris Gilbert                  |  |                  | 40,000 | 
|                                       
|                                       
|                                       
|                                       
|Gregory E. Gilbert                      |  |                  | 10,000 | 
|                                       
|                                       
|                                       
|                                       
|David Gleason                           |  |                  | 8,333  | 
|                                       
|                                       
|                                       
|                                       
|Bruce Goldfarb                          |  |                  | 50,000 | 
|                                       
|                                       
|                                       
|                                       
|Lanny Grissom and Diana Grissom JT Ten  |  |                  | 48,000 | 
|                                       
|                                       
|                                       
|                                       
|Neal Guenther and Nancy Jablonski       |  |                  | 80,000 | 
|                                       
|                                       
|                                       
|                                       
|Marion and Dorothy J. Jablonski         |  |                  | 20,000 | 
|                                       
|                                       
|                                       
|                                       
|Stanley W. Jablonski                    |  |                  | 30,000 | 
|                                       
|                                       
|                                       
|                                       
|Jamack L.P.                             |  |                  | 7,125  | 
|                                       
|                                       
|                                       
|                                       
|R. Michael Johns & Debra Lee Johns      |  |                  | 5,000  | 
|                                       
|                                       
|                                       
|                                       
|James Kapral                            |  |                  | 5,000  | 
|                                       
|                                       
|                                       
|                                       
|Joseph M. Leho                          |  |                  | 10,000 | 
|                                       
|                                       
|                                       
|                                       
|Raymond C. Marvel                       |  |                  | 6,500  | 
|                                       
|                                       
|                                       
|                                       
|Pat E. McCoy                            |  |                  | 15,500 | 
|                                       
|                                       
|                                       
|                                       
|Robert L. Nicholson                     |  |                  | 5,000  | 
|                                       
|                                       
|                                       
|                                       
|Charles T. Olsen                        |  |                  | 3,000  | 
|                                       
|                                       
|                                       
|                                       
|Rocco Swank Piscazzi                    |  |                  | 10,000 | 
|                                       
|                                       
|                                       
|                                       
|Randall S. Pond & Susan Pond            |  |                  | 12,000 | 
|                                       
|                                       
|                                       
|                                       
|Scott M. Schneider                      |  |                  | 10,000 | 
|                                       
|                                       
|                                       
|                                       
|Belvin G. Smith                         |  |                  | 20,000 | 
|                                       
|                                       
|                                       
|                                       
|Jesse J. Stafford & Emogene L. Stafford |  |                  | 10,000 | 
|                                       
|                                       
|                                       
|                                       
|John Stephanus                          |  |                  | 16,667 | 
|                                       
|                                       
|                                       
|                                       
|H. Randolph Straughan III               |  |                  | 5,000  | 
|                                       
|                                       
|                                       
|                                       
|Richard G. Ward                         |  |                  | 33,333 | 
|                                       
|                                       
|                                       
|                                       
|Herbert I. White                        |  |                  | 10,000 | 
|                                       
|                                       
|                                       
|                                       
|Alfred Williams & Co.                   |  |                  | 11,433 | 
|                                       
|                                       
|                                       
|                                       
|Lewis M. Wrenn, Jr.                     |  |                  | 23,530 | 







In May 2001, the Company issued 2,000 shares of its common
stock to Robert Thompson upon his exercise of an outstanding
stock option. The Company received $500 in proceeds from the
exercise of the stock option.







From July 1, 2001 to September 30, 2001, the Company
issued an aggregate of 1,125,857 shares of common stock to 36
accredited investors (all of whom were unaffiliated with the
Company) for a price per share ranging from $1.80 to $3.00, and
issued warrants to purchase, at an exercise price of $2.50 to
$4.00 per share, an additional 2,504,714 shares of common stock,
for an aggregate consideration of $2,214,300. In connection with
the issuance of these shares, the Company issued 1,350 shares of
its restricted common stock as commissions to the placement
agent involved in such sales. These shares and warrants were
issued in transactions deemed to be exempt from registration
under the Securities Act in reliance upon the exemption




37



---



##### 














|                                                       |  |                  |         | 
|------------------------------------------------------ |  | ---------------- | ------- | 
|Name of Purchaser                                      |  | Number of Shares
|                                                       |  |                 
|James D. Andrews                                       |  |                  | 5,000   | 
|                                                      
|                                                      
|                                                      
|                                                      
|James N. Ashby                                         |  |                  | 5,000   | 
|                                                      
|                                                      
|                                                      
|                                                      
|James D. Bailey & Eleanor M. Bailey
	JT TEN            |  |                  | 6,500   | 
|                                                      
|                                                      
|                                                      
|                                                      
|William B. Bandy                                       |  |                  | 30,000  | 
|                                                      
|                                                      
|                                                      
|                                                      
|Thomas Bivens                                          |  |                  | 28,278  | 
|                                                      
|                                                      
|                                                      
|                                                      
|James L. Bonds                                         |  |                  | 12,500  | 
|                                                      
|                                                      
|                                                      
|                                                      
|Richard W. Bonenberger                                 |  |                  | 137,500 | 
|                                                      
|                                                      
|                                                      
|                                                      
|Robert Bonenberger                                     |  |                  | 77,500  | 
|                                                      
|                                                      
|                                                      
|                                                      
|Gerald Brink & Pamela A. Vancil                        |  |                  | 25,000  | 
|                                                      
|                                                      
|                                                      
|                                                      
|C.E. Bryant, Jr.                                       |  |                  | 100,000 | 
|                                                      
|                                                      
|                                                      
|                                                      
|Jennifer Catano                                        |  |                  | 1,300   | 
|                                                      
|                                                      
|                                                      
|                                                      
|Gina M. Cimino                                         |  |                  | 166,667 | 
|                                                      
|                                                      
|                                                      
|                                                      
|David C. Cox                                           |  |                  | 5,000   | 
|                                                      
|                                                      
|                                                      
|                                                      
|D&R Holding, Co. L.L.C.                                |  |                  | 15,000  | 
|                                                      
|                                                      
|                                                      
|                                                      
|Douglas J. DeDecker & Lorna Trowbridge                 |  |                  | 5,000   | 
|                                                      
|                                                      
|                                                      
|                                                      
|Christopher V. Devone                                  |  |                  | 5,000   | 
|                                                      
|                                                      
|                                                      
|                                                      
|Herbert E. Fitzgerald III                              |  |                  | 12,500  | 
|                                                      
|                                                      
|                                                      
|                                                      
|The Great Commission                                   |  |                  | 55,556  | 
|                                                      
|                                                      
|                                                      
|                                                      
|Gregory E. Gilbert                                     |  |                  | 10,000  | 
|                                                      
|                                                      
|                                                      
|                                                      
|Neal Guenther and Nancy Jablonski                      |  |                  | 92,000  | 
|                                                      
|                                                      
|                                                      
|                                                      
|Henk Hazeleger                                         |  |                  | 17,000  | 
|                                                      
|                                                      
|                                                      
|                                                      
|Mark O. Henrikson                                      |  |                  | 12,000  | 
|                                                      
|                                                      
|                                                      
|                                                      
|Marion and Dorothy J. Jablonski                        |  |                  | 27,500  | 
|                                                      
|                                                      
|                                                      
|                                                      
|R. Michael Johns & Debra Lee Johns                     |  |                  | 5,000   | 
|                                                      
|                                                      
|                                                      
|                                                      
|C.W. McDonald                                          |  |                  | 50,000  | 
|                                                      
|                                                      
|                                                      
|                                                      
|Larry McKenzie                                         |  |                  | 32,500  | 
|                                                      
|                                                      
|                                                      
|                                                      
|Eric Raeber                                            |  |                  | 70,000  | 
|                                                      
|                                                      
|                                                      
|                                                      
|Clayton J. Roberts                                     |  |                  | 5,000   | 
|                                                      
|                                                      
|                                                      
|                                                      
|Ronald Johnson                                         |  |                  | 5,000   | 
|                                                      
|                                                      
|                                                      
|                                                      
|Richard J. & Rita M. Seifert                           |  |                  | 55,556  | 
|                                                      
|                                                      
|                                                      
|                                                      
|Richard G. Singer                                      |  |                  | 20,000  | 
|                                                      
|                                                      
|                                                      
|                                                      
|John Stephanus                                         |  |                  | 25,000  | 
|                                                      
|                                                      
|                                                      
|                                                      
|H. Randolph Straughan III & Diana
	K. Straughan JT TEN |  |                  | 6,000   | 




Issuances of Convertible
Debentures/ Underlying Shares of Common Stock




Between February 1, 1999 and August 18, 1999, HSNS
issued 8.0% convertible debentures in the aggregate principal
amount of $2,655,749 ($2,157,999 to Mr. Richdale and his
affiliates) to 11 investors (i.e., Darlene Beck, John Minton,
Mike Bissell, Joe Pacifico, Tom Godfrey, William D.
Glycenfer, Bradford Richdale, Ormond Trust, StoneLeigh Ltd.,
Williston UBOT, Joseph Repko). Debentures in the aggregate
principal amount of $2,097,109 were issued to Mr. Richdale
and his affiliates in partial consideration for his cash
payment, on HSNSs behalf, of virtually all of the first
three cash payments of $750,000 each due Summus, Ltd. under the
February 1999 Marketing License Agreement. The other
$497,500 in principal amount of debentures was sold to 6
individual investors, two of whom had previously made small
investments in HSNSs common stock.




The debentures were convertible into shares of HSNS common stock
at prices ranging from $0.25 to $1.33 per share. All such
debentures were converted in 1999 into an aggregate of 4,852,860
shares of HSNS

38



---



##### 





Stock Issuances for Services
Rendered

In September 1998, HSNS issued a total of 565,000 shares of
its common stock (including 225,000 shares issued in connection
with the acquisition of Brad Richdale Direct) to
Mr. Michael Cimino, HSNSs President at the time, and
100,000 shares to Mr. Marc Zboch for services rendered,
including services in connection with contemplated acquisitions,
to HSNS. These shares were valued at $66,500 ($0.10 per share)
based on the estimated fair value of HSNSs common stock,
as determined by sales of such stock near the time of such
issuances. HSNSs common stock was not publicly traded at
the time. In August 1999, 530,000 shares (including 100,000
shares issued to each of Messrs. Cimino, Richdale and Zboch
in connection with the contemplated acquisitions of HealthTec
and National Direct Corporation) were surrendered for
cancellation when the contemplated transactions were ultimately
not pursued or were not consummated.

In 1999, HSNS issued an aggregate of 85,500 shares of its common
stock to consultants for services rendered. These shares were
valued at $130,814 based on the traded value of HSNSs
common stock at the time of such issuances. In July 1999,
HSNS issued 500 shares of its common stock to Mr. Jason
Parsons in exchange for all rights in and to the HSNS logo. In
July 1999, HSNS issued to Mr. Ron de Jong 50,000
shares of its common stock and warrants to purchase 100,000
shares of HSNSs common stock at $2 per share, with
warrants to purchase 50,000 shares vesting on September 16,
1999, and warrants to purchase 50,000 shares vesting on
March 31, 2000, in consideration for services rendered
under a consulting agreement with de Jong & Associates, Inc.
In July 1999, HSNS issued 10,000 shares of its common stock
to Mr. Greg Catinella in exchange for services provided by
him to HSNS. In July 1999, HSNS issued 25,000 shares of its
common stock to Brad and Debra Richdale ATBE in consideration
for Mr. Richdales assistance in HSNSs acquisition of
the stock of Summus Technologies, Inc. In August 1999,
these shares were cancelled.

In November 2000, HSNS issued 8,988 shares of its common
stock to Alfred Williams & Company in lieu of rental
payments due under an office furniture lease.

Stock/Option Issuances to Directors, Officers
and Employees

Issuances in 1999

During the year ended December 31, 1999, HSNS granted
options to purchase an aggregate of 1,315,000 shares of HSNS
common stock to its officers and employees as follows:

|                   |  |            |             |                   |  |                |         |  |  |   |       | 
|------------------ |  | ---------- | ----------- | ----------------- |  | -------------- | ------- |  |  | - | ----- | 
|                   |  |            |             | Number of         |  |               
|Recipient          |  | Grant Date |             | Underlying Shares |  | Exercise Price
|                   |  |            |             |                   |  |               
|Peter Rogina       |  |            | March 1999  |                   |  |                | 100,000 |  |  | $ | 0.01  | 
|                  
|                  
|                  
|                  
|Myung Kim          |  |            | April 1999  |                   |  |                | 200,000 |  |  | $ | 0.01  | 
|                  
|                  
|                  
|                  
|Myung Kim          |  |            | April 1999  |                   |  |                | 50,000  |  |  | $ | 4.00  | 
|                  
|                  
|                  
|                  
|Michael Cimino     |  |            | May 1999    |                   |  |                | 425,000 |  |  | $ | 0.01  | 
|                  
|                  
|                  
|                  
|Richard F. Seifert |  |            | May 1999    |                   |  |                | 200,000 |  |  | $ | 0.01  | 
|                  
|                  
|                  
|                  
|Richard F. Seifert |  |            | May 1999    |                   |  |                | 50,000  |  |  | $ | 4.00  | 
|                  
|                  
|                  
|                  
|Alan R. Keinmaier  |  |            | August 1999 |                   |  |                | 50,000  |  |  | $ | 4.00  | 
|                  
|                  
|                  
|                  
|Andrew L. Fox      |  |            | August 1999 |                   |  |                | 160,000 |  |  | $ | 13.00 | 
|                  
|                  
|                  
|                  
|Andrew L. Fox      |  |            | August 1999 |                   |  |                | 80,000  |  |  | $ | 4.38  | 

HSNS also issued options to purchase an additional 1,140,000
shares of its common stock to non-employees. Specifically, HSNS
issued options to purchase 1,000,000 shares to Mr. Richdale
(see the disclosure under Stock Issuances in connection
with Business Combinations/ Acquisitions above) and

39



---



##### 





HSNSs grant in 1999 of options to officers and directors
to purchase an aggregate of 1,075,000 shares with exercise
prices below the fair value of HSNSs common stock at
issuance resulted in the recording of $2,006,250 in non-cash
compensation expense. Additional information regarding the
option grants reflected in the above table is provided below.

In April 1999, HSNS granted to Mr. Myung Kim options
to purchase 200,000 shares of its common stock at an exercise
price of $0.01 per share and additional options to purchase
50,000 shares at an exercise price of $4.00 per share under the
terms of an employment and stock option agreement. Non-cash
compensation expense has been recognized related to the grant of
these options. In August 1999, Mr. Kim exercised the
options to purchase 200,000 shares and HSNS waived payment of
the exercise price.

In May 1999, HSNS granted to Mr. Cimino options to
purchase 425,000 of its common shares at an exercise price of
$0.01 for services rendered. Non-cash compensation expense has
been recognized related to the grant of these options. In
June 1999, Mr. Cimino exercised the option in full and
HSNS waived payment of the exercise price.

In May 1999, HSNS granted to Mr. Richard F. Seifert
options to purchase 200,000 shares of its common stock at an
exercise price of $0.01 per share and additional options to
purchase 50,000 shares at an exercise price of $4.00 per share
under the terms of his employment and stock option agreement.
Non-cash compensation expense has been recognized related to the
grant of these options. In August 1999, Mr. Seifert
exercised the options to purchase 200,000 shares and HSNS waived
payment of the exercise price.

In August 1999, HSNS granted to Mr. Alan R. Kleinmaier
options to purchase 50,000 shares of its common stock at an
exercise price of $4.00 per share under the terms of an
employment offer letter. The options vested upon Mr.
Kleinmaiers acceptance of such offer. Non-cash
compensation expense has been recognized related to the grant of
these options.

In August 1999, HSNS granted to Mr. Andrew Fox options
to purchase 160,000 and 80,000 shares of its common stock at an
exercise price of $13.00 and $4.38 per share, respectively,
under the terms of an employment offer letter. Options
exercisable for 80,000 shares (at an exercise price of $4.38 per
share) vested on August 25, 2000, and options exercisable
for 80,000 shares each (at an exercise price of $13.00 per
share) will vest on the first and second anniversaries of that
date.

On September 22, 1999, HSNS entered into a settlement
agreement with Summus, Ltd. and Peter Rogina in settlement of a
dispute under Mr. Roginas employment and stock option
agreement that provided for payment of an aggregate amount of
$110,000 to Mr. Rogina, along with the issuance of options
to purchase 240,000 shares of HSNSs common stock at an
exercise price of $0.01 per share. Options to purchase 100,000
shares were to have been issued upon Mr. Roginas
execution of his employment and stock option agreement in March
1999. By the terms of the settlement agreement, HSNS issued
options to purchase 200,000 shares of its common stock, subject
to the provisions of Mr. Roginas employment and stock
option agreement. These options are exercisable over a period of
ten years from the commencement date of Mr. Roginas
employment. Options for the remaining 40,000 shares of common
stock are, by the terms of the settlement agreement, exercisable
beginning on or after July 1, 2000 and within five years of the
date of the settlement agreement, at an exercise price of $0.01.
Non-cash expense has been recognized related to the grant of
these options.

Issuances in 2000

During the year ended December 31, 2000, HSNS granted
options to purchase an aggregate of 780,800 shares of its common
stock to our directors, officers and employees under HSNSs
2000 Equity Compensation Plan in consideration for services
rendered. Options exercisable for 200,500 shares of common stock
were cancelled in 2001 in connection with employment
terminations or resignations of employees and directors prior to
vesting.

40



---



##### 



With the exception of the grant of options to purchase an
aggregate of 15,000 shares of common stock issued to
Mr. Seifert (described in the next paragraph), the options
granted under the Plan were, in each case, granted with exercise
prices equal to the fair market value at the time of grant and
were subject to a three-year vesting schedule tied to the
recipients continued employment with HSNS or continued
service as a director, as applicable.

In February 2000 HSNS granted to Mr. Seifert options
to purchase 15,000 shares of common stock at an exercise price
of $4.00 per share in connection with his termination of
employment with HSNS and in consideration for his continued
service as a director of HSNS. Non-cash compensation expense of
$333,750 has been recognized based on the difference between the
exercise price and the traded value of the common stock on the
date of grant.

In addition to the options granted to directors, officers and
employees under HSNSs 2000 Equity Compensation Plan, in
February 2000 HSNS granted to Mr. Kim options to
purchase 15,000 shares of common stock at an exercise price of
$4.00 per share in settlement of his employment and stock option
agreement. Also, in December 2000, HSNS entered into a
revised settlement agreement with Peter Rogina amending certain
provisions of the original settlement agreement. Under the terms
of the revised settlement agreement HSNS issued options to
purchase 35,000 shares of its common stock at an exercise price
of $0.01 per share. The options for the 35,000 shares are
exercisable at any time before September 22, 2004. In
addition, HSNS agreed to use its best efforts to include
Mr. Roginas option shares in any registration of our
securities. HSNS recorded non-cash expense in the aggregate
amount of $468,171 related to these option issuances.

In June 2000, HSNS issued an aggregate of 7,500 shares of
its common stock to Mr. Gregory S. Gush as partial
consideration for Mr. Gushs acceptance of employment
as an Executive Vice President of HSNS pursuant to the terms of
an employment letter agreement dated June 21, 2000.

Issuances in 2001

During the three months ended March 31,2001, the Company
granted options to purchase an aggregate of 2,617,375 shares of
common stock to our directors, officers and employees under the
Companys 2000 Equity Compensation Plan.

Options exercisable for 346,667 shares of common stock were
issued with exercise prices below the fair market value at the
time of issuance, and we recorded non-cash compensation expense
in the aggregate amount of $639,188 related to these option
issuances. This consisted of options issued to Dr. Bjorn Jawerth
exercisable for 166,667 shares of common stock; options issued
to Alan Kleinmaier exercisable for 150,000 shares; and options
issued to Gregory Gush exercisable for 30,000 shares. Options
exercisable for an additional 110,900 shares of common stock
were issued to former Summus, Ltd. employees (now Company
employees) for payment of bonuses in lieu of cash for services
performed in fiscal 2000. All of the above-described options
were fully vested upon issuance.

Prior to the combination with Summus, Ltd., options exercisable
for an aggregate of 460,000 shares of common stock were issued
to Messrs. Robert Lowrey and Andrew Fox with exercise
prices below the fair market value at the time of issuance and
options for an additional 93,744 shares of common stock were
issued to HSNS employees for payment of bonuses in lieu of cash
for services performed in fiscal 2000. These options were fully
vested upon issuance.

Of the remaining options exercisable for 1,606,064 shares of
common stock, such options were issued with exercise prices
equal to the fair market value at the time of grant and were
subject to a three-year vesting schedule tied to the
recipients continued employment with the Company or
continued service as a director, as applicable.

During the three months ended June 30, 2001, the Company
granted options to purchase an aggregate of 219,500 shares of
common stock to employees under the Companys 2000 Equity
Compensation Plan. These

41



---



##### 





Stock Issuances in
Settlement of Litigation

In June 2000, HSNS settled a lawsuit brought against us by
Mr. Dunavant. The settlement agreement was subsequently
amended and restated. As of December 31, 2000 HSNS had issued an
aggregate of 1,700,000 shares under the settlement agreement, as
amended and restated. See Item 13. Certain
Relationships and Related Transactions. Under the terms of
a second amended and restated settlement agreement, dated
October 26, 2000, the Company issued 25,000 shares of
common stock to Mr. William R. Dunavant in each of the
months of January, February, March and April of 2001. Under the
terms of a settlement agreement, dated June 29, 2000, the
Company issued 475,000 shares of its common stock to
Mr. Dunavant and his counsel.

On January 31, 2001, HSNS issued 30,000 shares of common
stock to Ronald P. Cropper under the terms of a settlement
agreement and general release of all claims, effective
April 25, 2001, among the Company, RPC International L.C.
and Ronald P. Cropper.

Under the terms of a settlement agreement, dated May 18,
2001, the Company issued 5,560 shares of its common stock as
partial payment on amounts owed to Avenel Financial Group.

Under the terms of an agreement of settlement and compromise,
dated June 25, 2001, the Company issued 250,000 shares of
its common stock to Mr. Brad Richdale in full satisfaction
of indebtedness, in the aggregate amount of $435,815, payable to
Mr. Richdale or entities controlled by him.

Item 6.  Selected Financial Data.




On February 16, 2001, HSNS acquired all the assets and
operations of Summus, Ltd. under the terms of an asset purchase
agreement, dated October 30, 2000, as amended. In legal
form, the transaction was effected by HSNS issuing shares of its
common and Series B preferred stock, and other equity
interests, in exchange for the net assets of Summus, Ltd. As
explained in the Explanatory Reference on
page 1 of this registration statement on Form 10, the
Summus, Ltd. asset acquisition has been accounted for as a
capital transaction, accompanied by a recapitalization. As a
result of the transaction, the historical financial statements
of Summus, Ltd. are, for accounting purposes, deemed to be those
of the Company. However, in view of the significance of Summus,
Ltd.s equity interest in HSNS prior to the transaction.
HSNSs audited financial statements for the three years
ending December 31, 2000, are included in this annual
report on Form 10-K.




Summus, Ltd.s financial statements for the year ended
December 31, 1999, have been restated. All financial
information included in this registration statement on
Form 10 reflects the restatements. For a discussion of the
restatements, see Summus, Ltd.s financial statements and
related notes included elsewhere in this annual report on
Form 10-K for the year ended December 31, 2000.




The following selected historical annual financial data has been
derived from the financial statements of Summus, Ltd.
(notwithstanding that such selected historical annual data has
been labeled as that of HSNS). The financial statements as of
and for the years ended December 31, 1999 and 2000, have
been audited by Ernst & Young LLP, independent auditors, as
indicated in their report included elsewhere in this annual
report on Form 10-K for the year ended December 31,
2000, which includes an explanatory paragraph which expresses
substantial doubt about the Companys ability to continue
as a going concern. Summus, Ltd.s




42



---



##### 








The financial data set forth below should be read in conjunction
with Managements Discussion and Analysis of
Financial Condition and Results of Operations and the
Companys audited financial statements and notes, which are
contained elsewhere in this annual report on Form 10-K for
the year ended December 31, 2000.




We have presented all amounts, except per share
amounts, in dollars.

43



---



##### 






HIGH SPEED NET SOLUTIONS, INC.




SELECTED FINANCIAL DATA





|                                                                                           |                                          |                           |                              |         |         |         |            |         |          |         |            |         |            |         |            |            |            |            |             |            |             |            |  
|------------------------------------------------------------------------------------------ | ---------------------------------------- | ------------------------- | ---------------------------- | ------- | ------- | ------- | ---------- | ------- | -------- | ------- | ---------- | ------- | ---------- | ------- | ---------- | ---------- | ---------- | ---------- | ----------- | ---------- | ----------- | ---------- | -
|                                                                                           |                                          |                          
|                                                                                           |                                          | Year ended December 31   
|                                                                                           |                                          |                          
|                                                                                           |                                          | 1996                      |                              | 1997    |         | 1998    |            | 1999    |          | 2000   
|                                                                                           |                                          |                           |                              |         |         |         |            |         |          |        
|Revenues                                                                                   |                                          | $                         | 658,591                      |         |         | $       | 606,633    |         |          | $       | 556,638    |         |            | $       | 515,216    |            |            | $          | 1,068,658   |           
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|Costs of revenues                                                                          |                                          |                           | 339,724                      |         |         |         | 528,346    |         |          |         | 271,701    |         |            |         | 281,254    |            |            |            | 398,326     |           
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|Selling, general and administrative expenses                                               |                                          |                           | 271,284                      |         |         |         | 342,833    |         |          |         | 2,720,152  |         |            |         | 3,797,067  |            |            |            | 6,221,362   |           
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|Non-cash compensation                                                                      |                                          |                           |                             |         |         |         |           |         |          |         |           |         |            |         | 2,670,050  |            |            |            | 2,127,962   |           
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|Research and development                                                                   |                                          |                           |                             |         |         |         |           |         |          |         | 421,685    |         |            |         | 1,356,686  |            |            |            | 1,119,333   |           
|                                                                                           |                                          |                           |                              |         |         |         |            |         |          |         |            |         |            |         |            |            |            |            |             |           
|Operating loss                                                                             |                                          |                           | (12,417                      | )       |         |         | (264,546   | )       |          |         | (2,856,900 | )       |            |         | (7,589,841 | )          |            |            | (8,798,325  | )         
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|Other income (expense):                                                                    |                                          |                           |                              |         |         |         |            |         |          |         |            |         |            |         |            |            |            |            |             |           
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                           | Gain on sale of stock of equity investee |                           |                              |        |         |         |            |        |          |         |            |        |            |         |            | 2,314,390  |            |            |             | 3,680,065  |            
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                           | Participation in loss of equity investee |                           |                              |        |         |         |            |        |          |         |            |        |            |         |            | (3,447,110 | )          |            |             | (6,356,932 | )          
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                           | Loss on disposal of assets               |                           |                              | (19,224 | )       |         |            | (262    | )        |         |            | (9,869  | )          |         |            | (119,180   | )          |            |             |           |            
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                           | Interest income (expense), net           |                           |                              | (4,951  | )       |         |            | (15,617 | )        |         |            | (14,455 | )          |         |            | (5,239     | )          |            |             | 23,911     |            
|                                                                                           |                                          |                           |                              |         |         |         |            |         |          |         |            |         |            |         |            |            |            |            |             |           
|                                                                                           |                                          |                           | Total other income (expense) |         |         | (24,175 | )          |         |          | (15,879 | )          |         |            | (24,324 | )          |            |            | (1,257,139 | )           |            |             | (2,652,956 | )
|                                                                                           |                                          |                           |                              |         |         |         |            |         |          |         |            |         |            |         |            |            |            |            |             |           
|Loss from continuing operations                                                            |                                          |                           | (36,592                      | )       |         |         | (280,425   | )       |          |         | (2,881,224 | )       |            |         | (8,846,980 | )          |            |            | (11,451,281 | )         
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|Loss from operations of discontinued Rich Media
	Direct business                           |                                          |                           |                             |         |         |         |           |         |          |         |           |         |            |         |           |            |            |            |            |           
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|Loss on disposal of Rich Media Direct business                                             |                                          |                           |                             |         |         |         |           |         |          |         |           |         |            |         |           |            |            |            |            |           
|                                                                                           |                                          |                           |                              |         |         |         |            |         |          |         |            |         |            |         |            |            |            |            |             |           
|Net loss                                                                                   |                                          | $                         | (36,592                      | )       |         | $       | (280,425   | )       |          | $       | (2,881,224 | )       |            | $       | (8,846,980 | )          |            | $          | (11,451,281 | )         
|                                                                                           |                                          |                           |                              |         |         |         |            |         |          |         |            |         |            |         |            |            |            |            |             |           
|Net loss applicable to common shareholders:                                                |                                          |                           |                              |         |         |         |            |         |          |         |            |         |            |         |            |            |            |            |             |           
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                           |                                          | Net loss                  |                              | $       | (36,592 | )       |            | $       | (280,425 | )       |            | $       | (2,881,224 | )       |            | $          | (8,846,980 | )          |             | $          | (11,451,281 | )         
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                           |                                          | Preferred stock dividends |                              |         |        |         |            |         |         |         |            |         |           |         |            |            |           |            |             |            |            |           
|                                                                                           |                                          |                           |                              |         |         |         |            |         |          |         |            |         |            |         |            |            |            |            |             |           
|Net loss applicable to common shareholders                                                 |                                          | $                         | (36,592                      | )       |         | $       | (280,425   | )       |          | $       | (2,881,224 | )       |            | $       | (8,846,980 | )          |            | $          | (11,451,281 | )         
|                                                                                           |                                          |                           |                              |         |         |         |            |         |          |         |            |         |            |         |            |            |            |            |             |           
|Per Share amounts (basic and diluted):                                                     |                                          |                           |                              |         |         |         |            |         |          |         |            |         |            |         |            |            |            |            |             |           
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|Loss applicable to common shareholders from
	continuing operations                         |                                          | $                         | (.001                        | )       |         | $       | (0.09      | )       |          | $       | (0.09      | )       |            | $       | (0.27      | )          |            | $          | (0.35       | )         
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|Loss applicable to common shareholders from
	discontinued operations                       |                                          |                           |                             |         |         |         |           |         |          |         |           |         |            |         |           |            |            |            |            |           
|                                                                                           |                                          |                           |                              |         |         |         |            |         |          |         |            |         |            |         |            |            |            |            |             |           
|Net loss                                                                                   |                                          | $                         | (.001                        | )       |         | $       | (0.09      | )       |          | $       | (0.09      | )       |            | $       | (0.27      | )          |            | $          | (0.35       | )         
|                                                                                           |                                          |                           |                              |         |         |         |            |         |          |         |            |         |            |         |            |            |            |            |             |           
|Weighted average shares of common stock
	outstanding giving effect to the recapitalization |                                          |                           | 31,768,177                   |         |         |         | 31,768,177 |         |          |         | 32,581,200 |         |            |         | 32,820,110 |            |            |            | 32,958,803  |           
|                                                                                           |                                          |                           |                              |         |         |         |            |         |          |         |            |         |            |         |            |            |            |            |             |           




|                                    |  |             |         |      |  |      |          |      |  |      |         |  |  |   |           |  |  |   |            |  
|----------------------------------- |  | ----------- | ------- | ---- |  | ---- | -------- | ---- |  | ---- | ------- |  |  | - | --------- |  |  | - | ---------- | -
|                                    |  |            
|                                    |  | December 31
|                                    |  |            
|                                    |  | 1996        |         | 1997 |  | 1998 |          | 1999 |  | 2000
|                                    |  |             |         |      |  |      |          |      |  |     
|Balance Sheet Data:                 |  |             |         |      |  |      |          |      |  |      |         |  |  |   |           |  |  |   |            |  
|                                   
|                                   
|                                   
|                                   
|Cash                                |  | $           | 66,108  |      |  | $    | 11,819   |      |  | $    | 137,038 |  |  | $ | 647,704   |  |  | $ | 208,495    |  
|                                   
|                                   
|                                   
|                                   
|Total Assets                        |  |             | 479,588 |      |  |      | 441,128  |      |  |      | 726,764 |  |  |   | 7,382,646 |  |  |   | 1,406,271  |  
|                                   
|                                   
|                                   
|                                   
|Total Shareholders Equity (Deficit) |  |             | 246,297 |      |  |      | (302,033 | )    |  |      | 316,828 |  |  |   | 3,345,692 |  |  |   | (4,653,812 | )
|                                    |  |             |         |      |  |      |          |      |  |      |         |  |  |   |           |  |  |   |            |  




As explained in the Explanatory Reference on
page 1 of this annual report on Form 10-K, the Summus,
Ltd. asset acquisition has been accounted for as a capital
transaction, accompanied by a




44



---



##### 











The following discussion contains forward-looking statements
that involve risks and uncertainties. Our actual results could
differ materially from those anticipated in these
forward-looking statements as a result of certain factors. The
following discussion is qualified in its entirety by, and should
be read in conjunction with, the more detailed information in
the Companys consolidated financial statements and the
notes thereto appearing elsewhere in this annual report on
Form 10-K for the year ended December 31, 2000.

As discussed in Note 2 to Summus, Ltd.s financial
statements, Summus, Ltd. has restated its financial statements
for the year ended December 31, 1999. The following
discussion gives effect to the restatement.






|        |                                                                                        
|------- | ---------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial
	Condition and Results of Operations.




Overview




Acquisition of Marketers
World, Inc./ Brad Rich Direct, Inc.







HSNS was originally incorporated in 1984 under the name of EMN
Enterprises, Inc. EMN Enterprises remained a non-operating shell
company until August 1998. In August 1998, EMN
Enterprises acquired all the assets (with a book value of
$495,259) and assumed the liabilities (in the amount of $75,000)
of Marketers World, Inc., a private company that intended to
engage in leasing computer systems to businesses and performing
related services. Upon acquiring the Marketers World assets, EMN
Enterprises changed its name to Zzap.net.inc. Marketers World
received 10,000,000 shares of EMN Enterprises common stock
in the transaction, of which EMN Enterprises issued 9,275,000
shares and Mr. Rene Hamouth, the then President of EMN
Enterprises, transferred 725,000 shares. Upon distribution of
the shares received in the transaction by Marketers World,
Ormont Trust, an affiliate of Mr. Richdale, held a
controlling interest in EMN Enterprises. At the time of the
transaction, EMN Enterprises had no assets or liabilities and,
accordingly, the transaction was accounted for as a
recapitalization of EMN Enterprises. As such, the shares of EMN
Enterprises common stock issued in the transaction were
not valued and, consequently, no goodwill was recorded.







In September 1998, Zzap.net.inc. issued a total of
1,000,000 shares of its common stock in partial consideration
for all the issued and outstanding shares of Brad Richdale
Direct, Inc. (BRD). Of the shares issued in the
transaction, 775,000 shares were issued to Ormond Trust, valued
at $77,500, and 225,000 shares were issued to Michael Cimino,
the then President of both BRD and Zzap.net.inc, in
consideration for services rendered. The primary purpose of this
transaction was to obtain licensing and marketing rights, held
by BRD, to certain products under development by Summus, Ltd.







Organized in 1991, Summus, Ltd. had focused its operations on
contract engineering and research and development for U.S.
government agencies, principally the Department of Defense. Its
government contract work included battlefield and armament
imaging and object recognition, real-time imaging form vehicles
over limited bandwidth private radio systems, and application of
its wavelet-based technology to space programs. Summus, Ltd.
developed its expertise in wavelets, a field of mathematics,
through its founder, Dr. Bjorn Jawerth, and through ten
years of government research work. In 1998, Summus, Ltd.
commercialized some of its technology through packaged software
sales of initial versions of its Wavelet Image and Photo ID
Software Developers Kits (SDKs) and the licensing of its video
e-mail product. Summus, Ltd. realized revenues in 1998 in the
aggregate amount of $246,483 from the sale and licensing of
these products.







By year-end 1998, Zzap.net.inc., in part because of its limited
financial resources, determined to discontinue the operations of
the former Marketers World business. Coincident with that
decision, Zzap.net.inc. changed its name to High Speed Net
Solutions, Inc.




45



---



##### 






Business Relationships
between HSNS and Summus, Ltd.




In 1999, Summus, Ltd. continued to sell its SDKs and license its
MaxxNote video e-mail application (generating $107,230 in
revenues from such products), but shifted its focus to the
development and/or commercialization of, among other things:



| |   |                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a streaming video application that would incorporate Summus,
	Ltd.s compression  decompression technology;                                             
|
| |  | its 4U2C wavelet-based image compression software (to enable the
	viewing of still images);                                                              
|
| |  | a video e-mail product, to be used for recording, compressing
	and e-mailing of personal video clips recorded from a personal
	computer video camera; and
|
| |  | a video conferencing product to enable the two-way exchange of
	video via a communications link.                                                         

In February 1999, Summus, Ltd. entered into a Marketing
License Agreement (MLA) with HSNS under which
Summus, Ltd. granted HSNS:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the exclusive right (other than with respect to government
	agencies and government contractors, and the OEM market, for
	which Summus, Ltd. retained all rights) to resell and sublicense
	the streaming product (for which Summus, Ltd. had then developed
	a demo to be used as a tool to demonstrate the
	quality and robustness of Summus, Ltd.s video compression
	 decompression technology in a streaming video application
	over networked and low bandwidth communication channels (such as
	the incremental delivery and playing of video clips over the
	Internet), with specific customer specifications to then be
	identified and incorporated into the product); and
|
| |  | the non-exclusive right to resell and sublicense the other
	software products described above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

Under the terms of the MLA, HSNS was obligated to pay an
up-front royalty payment of $3,000,000, to be paid in four
installments of $750,000 each, the first payment due upon
execution of the MLA and the last three payments due in monthly
intervals at the end of each of the three months thereafter.
Summus, Ltd. received cash payments from HSNS in the aggregate
amount of $2,250,000. HSNS issued to Summus, Ltd.
1.5 million shares of its common stock in lieu of the final
payment due under the MLA. Because of HSNSs very limited
financial resources and marketing personnel at the time,
HSNSs marketing efforts with respect to the Summus,
Ltd.-licensed products were made principally from its web site
and HSNS did not realize any revenues from these products. As a
result, Summus, Ltd. received no other royalties under the terms
of the MLA, which tied such royalties to revenues generated by
HSNS from the sale of such products.

In August 1999, Summus, Ltd. acquired a majority of the
then outstanding shares of common stock of HSNS. Summus, Ltd.
subsequently sold a portion of its shares of HSNSs common
stock to third parties such that by December 31, 1999,
Summus, Ltd.s interest had been reduced to approximately
44%. In connection with the transaction, Summus, Ltd. replaced
HSNSs management team with its designees. Over the next
several months, Summus, Ltd. again shifted its product
development focus, to the development of the MaxxSystem suite of
software products targeted at advancing the delivery of rich
media for online advertising and the development of wireless
Internet applications for its technology. The MaxxSystem
software suite was to consist of the following modules:



| |   |                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | MaxxNote Version 2.5  to allow the user to import,
	create and compress content, bundle a player, then e-mail the
	content via a MAPI compliant software program to intended
	recipients;                                                                                                     
|
| |  | MaxxAd Version 1.0  which would function as the
	advertisement that would be sent to end-users via e-mail;                                                                                                                                                                                    
|
| |  | MaxxShow Version 1.0  a completely integrated media
	presentation, designed to be launched from a web site,
	encapsulating rich media (images, video, slide shows, text) with
	electronic commerce capabilities, web site referral and
	e-commerce sales effectiveness measurement collection;

46



---



##### 





| |   |                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | MaxxOrchestrator Version 1.0 (later renamed
	MaxxLayout)  to allow content creators to format
	existing content in MaxxAds, allowing them to combine images,
	video, slide shows and text into a compelling advertisement
	utilizing the benefits of Summus, Ltd.s wavelet-based
	technology; and
|
| |  | MaxxServer Version 1.0  to stream and cache code and
	media content to MaxxAd.                                                                                                                                                                                                                    

In conjunction with the change in Summus, Ltd.s product
development focus, HSNS changed its business plan. Rather than
function as a reseller of Summus, Ltd. software products, its
management determined that HSNS should function as an
application service provider, or service bureau, utilizing
Summus, Ltd.s compression technology to enhance the
effectiveness of e-commerce, digital advertising, direct
marketing campaigns and multimedia.

As a result of the change in Summus, Ltd.s product
development focus (and HSNSs change in business plan), the
companies entered into negotiations beginning in
December 1999 to modify their contractual relationship
under the MLA. These negotiations resulted in the
companies execution of several agreements (i.e., a master
agreement, software license agreement, software maintenance
agreement, revenue sharing agreement and software escrow
agreement) in mid-February 2000. These agreements
superseded the MLA in its entirety. Under these agreements,
Summus, Ltd. granted to HSNS a non-exclusive license to use the
MaxxSystem suite of software products.

The terms of the software license agreement provided for
HSNSs payment of a one-time license fee of $1 million
(against which HSNS received a credit of $1 million, under
the terms of the master agreement, in recognition of payments
HSNS had made under the MLA), and a revenue-based fee of the
greater of (i) 10% of the gross revenues generated by HSNS
with MaxxSystem, or (ii) $.03 multiplied by the number of rich
media messages delivered to recipients (against which HSNS also
received a credit of $1 million, under the terms of the
master agreement, in recognition of payments made under the MLA).

The revenue sharing agreement entered into between the two
companies provided for Summus, Ltd.s payment to HSNS of
20% of all revenues received by Summus, Ltd. in connection with
the licensing of the MaxxSystem suite of software products, and
15% of all revenues received by Summus, Ltd. from any new
customer during the one-year period commencing from the date of
initial receipt of revenues from such customer.

As expressly contemplated by the software license agreement,
Summus, Ltd. envisioned a close working relationship with HSNS
with respect to Summus, Ltd.s software, with HSNS acting
as a beta-version user of, providing prospective licensees of,
and providing references for or demonstrations of, such
software. However, Summus, Ltd. experienced delays in the
development and release of certain modules of MaxxSystem (most
notably, the MaxxServer streaming software) such that it failed
to deliver such modules to HSNS by the date specified in the
delivery schedule set forth in an exhibit to the software
license agreement. As a result, HSNS determined to license
streaming software, as well as the necessary infrastructure to
conduct its service bureau business, from another vendor.
Summus, Ltd. failed to generate any royalties or other revenues
under the terms of the February 2000 agreements with HSNS.




The HSNS Acquisition of
Summus, Ltd.s Assets and Operations







On February 16, 2001, HSNS acquired all the assets and
operations of Summus, Ltd. under the terms of an asset purchase
agreement, dated October 30, 2000, as amended (the
Asset Purchase Agreement).







From Summus, Ltd.s perspective, the primary business
purpose of entering into the transaction with HSNS was to
provide a vehicle for raising capital. Summus, Ltd. was at a
stage in its development where it required additional financing
or needed to combine with another entity in order to finance its
business and realize its other objectives. Entering into the
Asset Purchase Agreement became the most logical course of
action to provide financing to Summus, Ltd. and accomplish other
key objectives in view of, among other things, the following:









| |   |                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Summus, Ltd. already had a substantial equity interest in HSNS.
	In fact, the transaction provided both companies the opportunity
	to capitalize on investments they previously made in each other.
	Prior to the




47



---



##### 



| |   |                                                                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |   | combination, Summus, Ltd. owned approximately 27.6% of HSNS on a
	fully-diluted basis and HSNS owned approximately 14% of Summus,
	Ltd.                                                                                                                                                                                                                                
|
|
|
| |  | HSNS had had success in raising equity capital through private
	placements or other types of fund-raising, notwithstanding its
	own limited financial resources and unprofitable operations.
	This caused Summus, Ltd.s management to believe that the
	Company (that is, the post-transaction company) would be able to
	continue to have success in raising capital.
|
|
| |  | HSNS was in the process of seeking to register its common stock
	under Section  12 of the Securities Exchange Act of 1934
	for purposes of having its stock made eligible for quotation on
	the OTC Bulletin Board. This offered the potential for future
	liquidity in such stock.                                                                                    
|
|
| |  | The consideration to be received in connection with the
	transaction was deemed to represent the highest value among the
	options considered and, thus, in the best interests of Summus,
	Ltd. and its shareholders, and allowed Summus, Ltd. to maintain
	continuity in management and strategic direction; and                                                       
|
|
|
| |  | The transaction of the two companies offered the potential to
	create more growth opportunities for the Company based on the
	expected enhanced access to capital resources.                                                                                                                                                                                           
|




In addition, Summus, Ltd. evaluated potential financing
alternatives other than a transaction with HSNS. Nearly every
institutional investor contacted declined to make an investment
in Summus, Ltd. due to its significant ownership interest in
HSNS, a publicly-held company.




Based on the foregoing, Summus, Ltd. concluded that the
transaction with HSNS was the most practical solution to its
financing and growth needs.




Prior to the closing of the transaction, Summus, Ltd. was the
largest shareholder of HSNS. It owned 8,217,781 shares (33.2%)
of HSNSs common stock, approximately 27.6% on a fully
diluted basis. Immediately after the closing, Summus,
Ltd.s ownership interest in HSNS increased to
20,593,352 shares (55.5%) of HSNSs common stock on an
as-converted basis, approximately 53.1% on a fully-diluted basis.







The Asset Purchase Agreement contemplates that Summus, Ltd. will
liquidate following the completion of its distribution of
HSNSs securities received in the transaction to the
shareholders of Summus, Ltd. On March 13, 2001, Summus,
Ltd. distributed certain of the shares of HSNSs common
stock received in the transaction to the shareholders of Summus,
Ltd. in accordance with their pro rata interests; the balance of
such shares was distributed in mid-July 2001.







In legal form, the transaction was effected by HSNS issuing
shares of its common and Series B preferred stock, and
other equity interests, in exchange for the net assets of
Summus, Ltd. The consideration paid by HSNS to acquire the
assets of Summus, Ltd. is described below:






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | HSNS issued to Summus, Ltd. for distribution to the shareholders
	of Summus, Ltd. a total of 20,218,733 shares of HSNS common
	stock and 6,000 shares of Series B preferred stock. As a
	shareholder of Summus, Ltd., HSNS was entitled to receive
	3,604,445 of the total number of shares of common stock issued
	in the transaction. However, under the terms of the Asset
	Purchase Agreement these shares were canceled, resulting in a
	net issuance of 16,614,288 shares of HSNS common stock. In
	addition, the Asset Purchase Agreement provided for the
	cancellation of 8,217,781 shares of HSNS common stock owned by
	Summus, Ltd. prior to the parties execution of the
	agreement.
|
| |  | HSNS issued to Summus, Ltd. 6,000 shares of newly created
	Series B preferred stock, of which 2,000 shares were
	deposited with an escrow agent as security for any
	indemnification obligations of Summus, Ltd. and its shareholders
	under the Asset Purchase Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | HSNS issued to Summus, Ltd. warrants to purchase a total of 500
	shares of its Series B preferred stock, exercisable for a
	period of 5 years from February 16, 2001. The exercise
	price of the warrants is $5,500.00 per share of Series B
	preferred stock ($5.50 per share of the Companys common
	stock on an as-converted basis).                                                                                                                                                                                                                                                                                                                                                          




In addition to the items described above, the terms of the Asset
Purchase Agreement provided for HSNSs assumption of
approximately $2.8 million of liabilities of Summus, Ltd.
to third parties. All amounts owed by and between HSNS and
Summus, Ltd. were cancelled upon the closing of the transaction.




48



---



##### 






Initially, the transaction was recorded as a business
combination under the guidance of Accounting Principles Board
Opinion No. 16 (APB 16), Business Combinations
because, among other reasons:






| |   |                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------
|
| |  | HSNS acquired all the operating assets and liabilities of
	Summus, Ltd.;                                                             
|
|
|
| |  | each of HSNS and Summus, Ltd. were operating entities at the
	time of the closing of the transaction; and                            
|
|
|
| |  | Summus, Ltd. was (and is) to be liquidated following its
	distribution of the equity securities of HSNS received in the
	transaction.
|




Under APB 16, the transaction was also accounted for as a
reverse acquisition in which Summus, Ltd. was
treated as the accounting acquirer; HSNS, the acquired
corporation. Summus, Ltd. was considered the accounting acquirer
in the transaction because Summus, Ltd. received shares of
HSNSs common stock and other equity securities, to be
distributed to the Summus, Ltd. shareholders, representing the
largest portion of the voting interests in HSNS.







At the time the determination was made to account for the
transaction as a business combination, we considered an
alternative accounting treatment: accounting for the transaction
as a capital transaction, accompanied by a recapitalization. The
more typical type of transaction for which this accounting
treatment is deemed appropriate is the merger of a private
operating company into a non-operating public shell corporation
with nominal net assets, with the owners and management of the
private company having actual or effective operating control of
the combined company after the transaction. We did not believe
this was the most appropriate accounting treatment because HSNS
(including its wholly-owned subsidiary, Douglas May & Co.)
was an operating company, not a non-operating public shell
corporation.







We have since reassessed the appropriateness of accounting for
the transaction as a capital transaction, accompanied by a
recapitalization, in view of the particular facts and
circumstances of this transaction, including:






| |   |                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Summus, Ltd.s management evaluated the operating
	activities of HSNS, which, at the time the Asset Purchase
	Agreement was entered into, were primarily conducted through
	HSNSs wholly-owned subsidiary, Douglas May & Co.
	However, the operating activities of HSNS, from Summus,
	Ltd.s perspective, were an incidental consideration in its
	decision to enter into and consummate the transaction.
|
|
|
| |  | As noted above, Summus, Ltd.s primary purpose in entering
	into the transaction was to provide a vehicle for raising
	additional capital through the acquisition of a majority
	interest in an entity (i.e., HSNS) whose common stock is
	publicly traded.                                                                                                                                                
|




Considering these factors and the result of discussions with the
staff of Securities and Exchange Commission, we have concluded
that HSNSs status as an operating company does not
preclude accounting for the transaction as a capital
transaction, accompanied by a recapitalization. Accordingly, we
have determined that it is more appropriate to account for the
transaction in this manner.







By accounting for the transaction as a capital transaction, the
transaction is effectively viewed as the issuance of stock by
Summus, Ltd. in exchange for the cash of HSNS, accompanied by a
recapitalization of Summus, Ltd. The accounting for the
transaction is quite similar to that resulting from a reverse
acquisition, except that no goodwill or other intangible assets
are recorded.







Our change in the accounting for the transaction dictates a
restatement of our financial statements as of and for the three
month periods ended March 31, and June 30, 2001, as
well as for the six month period ended June 30, 2001, to
eliminate both the goodwill originally recorded in the
transaction (in the amount of $27.5 million), and the
amortization of the goodwill during the six months ended
June 30, 2001 (in the amount of $3.4 million).




49



---



##### 






As a result of the transaction, the historical financial
statements of Summus, Ltd., for accounting purposes, are deemed
to be those of the Company. The equity accounts of Summus, Ltd.
have been adjusted for a recapitalization to reflect the equity
structure of HSNS, the legal acquirer. Specifically:






| |   |                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | the historical shareholders equity of Summus, Ltd. prior
	to the transaction has been restated for the equivalent number
	of shares of HSNS common and Series B preferred stock, and
	other equity interests, received in the transaction after giving
	effect to any difference in par value of HSNSs and Summus,
	Ltd.s common stock, with an offset to additional paid-in
	capital;
|
|
|
| |  | the accumulated deficit of Summus, Ltd. has been carried forward
	after the transaction; and                                                                                                                                                                                                                                                                                             
|
|
|
| |  | loss per share for periods prior to the transaction have been
	restated to reflect the number of equivalent shares received by
	Summus, Ltd. in the transaction.                                                                                                                                                                                                                         
|




Divestiture of Rich Media
Direct Business







Upon the consummation of the Summus, Ltd. asset acquisition on
February 16, 2001, HSNS chose to focus primarily on Summus,
Ltd.s business plan at the time of the transaction because
management perceived it had the potential to create greater
shareholder value compared to the scope of HSNSs business
operations. In addition, the Company did not expect to have the
fund-raising capacity to continue to fund the business plans of
both Summus, Ltd. and HSNS, as previously envisioned. The
Companys management began a review to determine the
appropriate course of action for its rich media
direct business (including the operations of Douglas
May & Co.) in light of the existing and anticipated
funding constraints, but did not establish a plan to divest
itself of this business.







On September 19, 2001, the Company and Douglas May entered
into a stock purchase agreement under which the Company sold and
transferred to Mr. May all of the Companys equity
interest in Douglas May & Co. and related rich media
direct assets. The date of the transaction, September 19,
2001, represents the measurement date, as defined by Accounting
Principles Board Opinion No. 30 (APB 30),
for the disposition of the Companys rich media direct
business. Although the measurement date of the disposition
occurred in the third quarter of 2001, the results of operations
of Douglas May & Co. have been presented as
discontinued operations in the Companys statement of
operations for the six months ended June 30, 2001 in
accordance with the guidance of APB 30. For the period
February 16, 2001 through June 30, 2001, the
operations of Douglas May & Co. reflected approximately
$267,000 in revenues and a net loss of $49,988. The carrying
value of the assets of Douglas May & Co. was
approximately $81,000 on June 30, 2001. The Company has
recorded an estimated loss of $215,500 on this disposition for
the six months ended June 30, 2001.







Under the terms of the June 2000 share acquisition
agreement, HSNS acquired all of the issued and outstanding
shares of capital stock of Douglas May & Co. from
Mr. May on July 10, 2000. As partial consideration for
the sale of Douglas May & Co. back to Mr. May, the
Company has been released from its obligations with respect to
two allotments of shares of HSNSs common stock issued to
Mr. May under the terms of the share acquisition agreement,
specifically:






| |   |                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | the obligation to repurchase one allotment of 87,498 shares of
	HSNSs common stock for $576,000; and                                                                                                                                                         
|
|
|
| |  | the obligation to issue to Mr. May additional shares of
	HSNSs common stock, which when combined with an original
	50,000 share allotment, would provide a value of $500,000 as of
	the first anniversary of the date the Company acquired Douglas
	May & Co.
|

The release is expressly made conditional upon the Company not
filing (or having filed against it) a petition in bankruptcy for
a period of one year from the closing of the sale of Douglas
May & Co. to Mr. May.

50



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Under the terms of the stock purchase agreement, Mr. May
retains his option, issued under his now terminated employment
agreement with HSNS, to purchase 150,000 shares of the
Companys common stock at an exercise price of $2.50 per
share, such options being exercisable over a ten-year term.




In connection with the sale of the Companys entire equity
interest in Douglas May & Co., the Company transferred
certain technology to Douglas May & Co., including specific
applications of the Companys MaxxSystem suite of software
products developed in connection with the Companys
previously planned rich media direct service
offering.




The Company also entered into a technology license agreement
(and a related source code escrow agreement) with a newly formed
corporation and wholly-owned subsidiary of Douglas May & Co.
Under the technology license agreement, the Company has granted
to this company a perpetual, non-exclusive, non-transferable
license with respect to some of the Companys core software
technology for image, video compression and video streaming. The
technology license agreement provides for the licensees
payment to the Company of royalties, payable on a quarterly
basis, equal to the greater of: (1) a percentage of the
net revenues derived from the sale or license of
end-user products using or incorporating the licensed technology
or (2) specified minimum amounts. This royalty payment plan
will remain in effect each year the agreement remains in effect.
The agreement can be terminated by the licensee at any time
following the first to occur of: (1) payment of $400,000 in
royalty payments to the Company or (2) ninety days prior to
the second anniversary of the agreement, provided that $400,000
in royalty payments have been received by the Company.




The Companys Current
Business Focus

The core of the Companys business plan is to focus on the
emerging wireless and mobile market. We are in the process of
developing multimedia technology to address the bandwidth, error
constraints, contention with voice and data traffic, and power
challenges associated with multimedia content transmission over
existing and future wireless networks. Our technology is based
on certain key mathematical theories and tools, using advances
and results from the fields of wavelets, non-linear partial
differential equations and dynamical systems, and graph theory
and topology. We use these tools to create highly efficient
algorithms for different types of information processing with
low computational complexity and low memory usage.

Our strategy is to continue to work toward commercial release of
our BlueFuelTM product line currently under
development and to enter into business relationships and
alliances with device manufacturers, content providers and
cellular carriers to extend the reach of multimedia applications
to wireless and mobile devices. It is our intent to license our
technology and provide a framework to those with whom we enter
into such relationships and alliances that will increase usage,
sell devices and increase their customer base. A specific area
of focus will be to identify targeted applications to drive
market pull for our products. This will entail
working with select content providers to develop applications
that represent a high likelihood of early adoption by end-users.
These applications will be offered to wireless carriers and
mobile virtual network operators on a revenue-sharing basis. We
believe that this represents a significant opportunity for the
Company to develop an on-going service revenue model.

Although we are in the process of building relationships with
wireless and mobile device manufacturers, content providers and
cellular carriers, we have not, as yet, entered into any
revenue-generating contractual agreements with these parties,
and have not, to date, executed any product orders for the
BlueFuelTM product line currently under development.
We recognize that a concern for our corporate viability and the
related concerns regarding our lack of financial resources and
ability to meet specific applications demands and provide
product support may hamper our efforts to forge such business
relationships and alliances. Nevertheless, management believes
that the attributes of our technology will provide opportunities
to enhance our product awareness and profile through such
relationships and alliances.




We are currently focusing our product development resources on
adapting or porting BlueFuelTM to the
Qualcomm BREW wireless platform. This effort is expected to
consume a significant amount of the




51



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TM TM





The initial porting effort to Qualcomms BREW platform
should provide the foundation for future ports, with the
knowledge gained by porting our technology to the BREW platform
providing an increased knowledge base that can be used across
multiple wireless operating systems. The experience gained
should help reduce the time to market when porting to the
platforms of other industry participants. Regardless of our
porting efforts, however, we will still have to secure contracts
with carriers, content providers and device manufacturers to
generate revenue.




We anticipate that the first version of the
BlueFuelTM Efficiency EngineTM (a
multimedia operating system designed to efficiently route, store
and monitor multimedia traffic in a network) will be available
during the fourth quarter of 2001. We are targeting commercial
release of the BlueFuelTM Video solution, including
BlueFuelTM Player (player software),
BlueFuelTM Create (a content creation tool) and
BlueFuelTM Server (the server-side engine) in the
first quarter of 2002.

We anticipate that the various components of the
BlueFuelTMproduct line will be licensed separately or
in combination with one another, with pricing dependent on the
number of components licensed. Our present revenue model
contemplates that wireless carriers or service providers
licensing the BlueFuelTM product line would be
assessed a base fee plus a royalty for each subscriber that
signs up to use the service (e.g., by downloading
BlueFuelTM Player or accessing
BlueFuelTMServer). A further charge would be assessed
if the service provider requires additional servers. In some
cases, we may effectively subsidize the rollout of the
BlueFuelTM product line through a revenue sharing
arrangement entered into with a handset manufacturer, content
creator and service provider.




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




Results of Operations




As explained in the Explanatory Reference on
page 1 of this annual report on Form 10-K, the Summus,
Ltd. asset acquisition has been accounted for as a capital
transaction, accompanied by a recapitalization. As a result of
the transaction, the historical financial statements of Summus,
Ltd. prior to the transaction are restated to be those of the
Company.







The following discussion and analysis of the Companys
results of operations and financial condition should be read in
conjunction with the Companys financial statements and
related notes included in Item 8 of this registration
statement on Form 10.




52



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Year ended December 31, 2000 Compared to the Year ended
December 31, 1999

Revenues.Revenues for the fiscal year ended
December 31, 2000 were $1,068,658 compared to $515,216 for
the fiscal year ended December 31, 1999, an increase of
107%. The following provides a breakdown of revenues:

|                                      |  |              |         |      |  |   |         | 
|------------------------------------- |  | ------------ | ------- | ---- |  | - | ------- | 
|                                      |  |             
|                                      |  | Year ended  
|                                      |  | December 31,
|                                      |  |             
|                                      |  | 2000         |         | 1999
|                                      |  |              |         |     
|Government projects                   |  | $            | 636,349 |      |  | $ | 388,957 | 
|                                     
|                                     
|                                     
|                                     
|Licensing of software developers kits |  |              | 292,142 |      |  |   | 101,682 | 
|                                     
|                                     
|                                     
|                                     
|Contract Work                         |  |              | 138,196 |      |  |   | 19,029  | 
|                                     
|                                     
|                                     
|                                     
|Licensing of MaxxNote                 |  |              | 1,971   |      |  |   | 5,548   | 




The Company follows the provisions of AICPA Statement of
Position 97-2, Software Revenue Recognition, as
amended by AICPA Statement of Position 98-9 Modification
of SOP No. 97-2 Software Revenue Recognition with respect
to Certain Transactions. Revenues from software license
fees and hardware sales are generally recognized upon delivery
provided that a contract has been executed, the vendor fee is
fixed or determinable, no significant vendor obligations or
uncertainties surrounding customer acceptance remain, and
collection of the resulting receivable is deemed probable.




Cost of Revenues. Cost of revenues primarily represents
costs of providing contract services. The cost of software
license fee revenue is not separately maintained and
historically has not been significant. Costs of revenues for the
year ended December 31, 2000 were $398,326 compared to
$281,254 in the prior year.

Gross Profit. Gross profit for the year ended
December 31, 2000, was $670,332, representing an increase
of $436,370 over the prior year. The increase in revenues and
gross profit was primarily due to the expansion of government
research projects with the Office of Naval Research,
specifically Summus, Ltd.s side scan sonar project and
expanded sales efforts with respect to wavelet-based technology
licensing of the companys photo ID and wavelet-based
software development kit product lines.

Selling, General and Administrative Expenses.Selling,
general and administrative expenses consist primarily of
salaries, consulting fees, office operations, administrative and
general management activities, including legal, accounting and
other professional fees. Selling, general and administrative
expenses for the year ended December 31, 2000, were
$6,221,362 compared to $3,797,067 for the year ended
December 31, 1999. The increase was primarily due to
increased staffing in sales, marketing, business development,
product development and administrative personnel, in connection
with Summus, Ltd.s efforts to bring to market finished
products, including the photo ID and wavelet image software
development kits, the MaxxSystem suite of products, and customer
contract work.

Non-Cash Compensation. Non-cash compensation for the year
ended December 31, 2000 was $2,127,962 compared to $2,670,050
for the year ended December 31, 1999. During the year ended
December 31, 2000, stock options were granted to directors
and employees at prices below the estimated fair value of the
underlying common stock resulting in total compensation of
$3,106,472, of which $2,127,962 was charged to expense in 2000.
The remaining amount, $978,510, has been classified as deferred
compensation and will be charged to expense as future vesting of
the stock options occurs. Non-cash compensation for the year
ended December 31, 1999, resulted from the issuance of
53,401 shares of common stock for services performed by
employees.

Research and Development.Research and development costs
for the year ended December 31, 2000 were $1,119,333
compared to $1,356,686 for the year ended December 31,
1999. Such costs consist primarily of the salaries of employees
devoted to research and development activities. The decrease
resulted from a reduction of the research and development staff
that occurred in the second half of 2000. Given Summus,
Ltd.s financial condition, several research and
development personnel decided to pursue other opportunities.

53



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Gain on Sale of Stock of Equity Investee.Gain on the
sale of stock of equity investee for the year ended
December 31, 2000 was $3,680,065 compared to $2,314,390 for
the year ended December 31, 1999. In 1999, Summus, Ltd.
acquired 11,042,360 shares of common stock of HSNS. Summus, Ltd.
acquired 1,500,000 shares of HSNS common stock in connection
with HSNSs issuance of such shares in lieu of a cash
payment of $750,000 due from HSNS under the terms of the
February 1999 Marketing License Agreement. Summus, Ltd.
acquired an additional 9,542,360 shares of HSNS common stock
from Mr. Richdale and his affiliates in exchange for
132,888 shares of Summus, Ltd. common stock. The initial
carrying amount of the HSNS shares was recorded at the estimated
fair value of the shares, factoring in a discount associated
with the shares constituting restricted securities
that were not freely tradable. During the year ended
December 31, 2000, Summus, Ltd. sold 1,171,579 shares of
HSNS common stock for gross proceeds of $4,492,799 (representing
an average price per share of $3.83), resulting in a gain on
sale of $3,680,065. During the year ended December 31,
1999, Summus, Ltd. sold 1,653,000 shares of its HSNS common
stock for gross proceeds of $2,977,500 (representing an average
price per share of $1.80), resulting in a gain on sale of
$2,314,390.

Participation in Loss of Equity Investee.Participation
in loss of equity investee for the year ended December 31,
2000, was $6,356,932 compared to $3,447,110 for the year ended
December 31, 1999. As noted above, in 1999 Summus, Ltd.
acquired a majority ownership interest in HSNS. Summus, Ltd.
accounted for its investment in HSNS using the equity method of
accounting. Under the equity method of accounting, Summus, Ltd.
adjusted its investment in HSNS for its share of HSNSs
losses subsequent to the date of its initial investment. As of
December 31, 1999 and 2000, Summus, Ltd.s ownership
interest in HSNS decreased to approximately 44% and 33%,
respectively.

Loss on Disposal of Assets. Loss on disposal of assets
for the year ended December 31, 1999, was $119,180. The
loss for the year ended December 31, 1999 was primarily due
to the move of Summus, Ltd.s headquarters from Columbia,
South Carolina to Raleigh, North Carolina, and the resulting
abandonment of computers, software, furniture and equipment,
including telephone equipment and leasehold improvements.

Net Interest Income (Expense).Net interest income for
the year ended December 31, 2000 was $23,911 compared to
net interest expense of $5,239 for the year ended
December 31, 1999. The net increase in interest income
resulted from earnings on larger cash balances in 2000,
primarily generated by the sale of HSNS stock. Net interest
expense in 1999 relates to interest costs associated with
capital lease obligations and note payable agreements.

Net Loss. As a result of the factors discussed above,
Summus, Ltd.s net losses for the years ended
December 31, 2000 and 1999 were $11,451,281 and $8,846,980,
respectively.

Year ended December 31, 1999 Compared to the Year ended
December 31, 1998

Revenues.Revenues for the year ended December 31,
1999 were $515,216 compared to $556,638 for the year ended
December 31, 1998, a decrease of 7%. The following provides
a breakdown of revenues:

|                                      |  |              |         |      |  |   |         | 
|------------------------------------- |  | ------------ | ------- | ---- |  | - | ------- | 
|                                      |  |             
|                                      |  | Year ended  
|                                      |  | December 31,
|                                      |  |             
|                                      |  | 1999         |         | 1998
|                                      |  |              |         |     
|Government projects                   |  | $            | 388,957 |      |  | $ | 299,540 | 
|                                     
|                                     
|                                     
|                                     
|Licensing of software developers kits |  |              | 101,682 |      |  |   | 105,112 | 
|                                     
|                                     
|                                     
|                                     
|Contract Work                         |  |              | 19,029  |      |  |   | 10,615  | 
|                                     
|                                     
|                                     
|                                     
|Licensing of video e-mail product     |  |              |        |      |  |   | 135,000 | 
|                                     
|                                     
|                                     
|                                     
|Licensing of MaxxNote                 |  |              | 5,548   |      |  |   | 6,371   | 

54



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The decrease in revenues was primarily due to the decline in
licensing fees associated with the video e-mail product, the
result of a reduction in sales and marketing activities as part
of austerity measures taken to reduce expenses following the
combination of Summus, Ltd. and Summus Technologies, Inc., which
had functioned as Summus, Ltd.s marketing arm.

Costs of Revenues.Costs of revenues for the year ended
December 31, 1999 were $281,254 compared to $271,701 in the
prior year.

Gross Profit. Gross profit for the year ended
December 31, 1999, was $233,962, compared to $284,937 in
the prior year.

Selling, General and Administrative Expenses. Selling,
general and administrative expenses for the year ended
December 31, 1999, were $3,797,067 compared to $2,720,152
for the year ended December 31, 1998. The increase was due
to increased staffing in sales and administrative personnel, as
Summus, Ltd. positioned itself to bring to market finished
products for the application of its wavelet-based technology.
Specifically, Summus, Ltd. developed a product
roadmap, established customer relations and
communications, attended trade shows, established a website and
prepared marketing brochures to promote its commercial products.

Non-Cash Compensation.Non-cash compensation for the year
ended December 31, 1999 was $2,670,050, resulting from the
issuance of 53,401 share of common stock for services performed
by employees. There was no non-cash compensation cost in 1998.

Research and Development.Research and development costs
for the year ended December 31, 1999 were $1,356,686
compared to $421,685 for the year ended December 31, 1998.
The increase in these costs resulted from an increase in the
research and development staff in 1999. Technical expertise in
video, image and 3D was added to accelerate research with
respect to the above technologies.

Gain on Sale of Stock of Equity Investee.Gain on the
sale of stock of equity investee for the year ended
December 31, 1999 was $2,314,390. During 1999, Summus, Ltd.
acquired 11,042,360 shares of HSNS stock which it later sold to
third parties. During the year ended December 31, 1999,
Summus, Ltd. sold 1,653,000 shares of its HSNS common stock for
gross proceeds of $2,977,500, resulting in a gain on sale of
$2,314,390. During 1998, Summus, Ltd. had no ownership interest
in HSNS.

Participation in Loss of Equity Investee.Participation
in loss of equity investee for the fiscal year ended
December 31, 1999 was $3,447,110. During 1999, Summus, Ltd.
acquired a majority ownership interest in HSNS. Summus, Ltd.
accounted for its investment in HSNS using the equity method of
accounting. Under the equity method of accounting, Summus, Ltd.
adjusted its investment in HSNS for its share of HSNSs
losses subsequent to the date of its initial investment. As of
December 31, 1999 and 2000, Summus, Ltd.s ownership
interest in HSNS decreased to approximately 44% and 33%,
respectively.

Loss on Disposal of Assets. Loss on disposal of assets
for the year ended December 31, 1999 was $119,180 compared
to $9,869 for the year ended December 31, 1998. The loss for the
year ended December 31, 1999 was primarily due to the move
of Summus, Ltd.s headquarters from Columbia, South
Carolina to Raleigh, North Carolina, and the resulting
abandonment of computers, software, furniture and equipment,
including telephone equipment and leasehold improvements.

Net Interest Income (Expense).Net interest expense for
the year ended December 31, 1999 was $5,239 compared to
$14,455 for the year ended December 31, 1998. The decrease in
expense was due to interest earning cash balances generated by
the sale of HSNS stock in the last two months of 1999. Net
interest expense in 1998 relates to interest costs associated
with capital lease obligations and note payable agreements.

Net Loss. As a result of the factors discussed above,
Summus, Ltd.s net losses for the years ended
December 31, 1999 and 1998 were $8,846,980 and $2,881,224,
respectively.

55



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Liquidity and Capital Resources




As of June 30, 2001, the Company had $143,567 of cash on
hand and negative working capital of approximately
$5.1 million. As of such date, the Company had
approximately $5.2 million of accounts payable, accrued
expenses, notes payable and capital lease obligations and was in
default in the aggregate amount of $1.1 million with
several of its vendors. As of September 30, 2001, the
Company had entered into settlement agreements or arrangements
with approximately 30 of its vendors, to which the Company owed
roughly $1.5 million, under which such vendors have agreed
to the Companys payment of less than the amounts due, the
extensions of payment terms by between 9-18 months and/or the
satisfaction of the amounts due through a combination of cash
and stock. The vendor to which the Company owed the largest
amount is Analysts International Corporation (AIC),
which provided the Company with computer programming services
during the 1999-2000 period. The Company entered into a
settlement agreement and release, dated August 7, 2001,
with AIC. Under the terms of the settlement agreement, the
Company has agreed to pay the sum of $358,426, plus interest
accruing at the rate of 8% per annum from March 31, 2000
(the Indebtedness) according to the following
payment schedule: (i) $20,000 upon execution of the
settlement agreement, (ii) $5,000 per month for a period of
six months, commencing one month after execution of the
agreement, and (iii) $10,000 per month until the balance of
the Indebtedness is paid in full.







The Companys principal sources of liquidity for operating
activities and capital expenditures for the past three years has
consisted of capital contributed and borrowings from certain
principal shareholders and their affiliates, the sale of shares
of common stock of its equity investee, HSNS, the licensing of
software products to HSNS under the February 1999 Marketing
License Agreement and loans from HSNS under the Asset Purchase
Agreement.







As of December 31, 2000, the Company anticipated that the
sale of its equity securities would represent the primary source
of the Companys funding, as the Company has no credit
facilities. We cannot guarantee that we will continue to be able
to raise capital or that if we do so it will be on favorable
terms. We may have to sell equity at below market rates, and any
future sales of our capital stock to finance our business plan
will dilute our existing shareholders ownership. The
Companys continuation as a going concern depends on its
ability to generate sufficient cash flow to meet its obligations
on a timely basis, to obtain additional financing as may be
required and ultimately to attain profitability.







The success and growth of the Companys business, following
the Summus, Ltd. asset acquisition, is dependent in large part
on our ability to partner and develop relationships within the
wireless industry. In order for the Company to execute on its
business plan, the Company anticipates that it will require
approximately $15 million in working capital within the next
twelve months, in part to expand its operations to Europe and
Asia, where the wireless network infrastructure is currently
more developed than it is in North America. It is imperative
that the Company market and sell or license its products where
the infrastructure is capable of supporting our technology. This
will represent a significant cost to the Company but is critical
to its future success. By establishing operations in targeted
areas around the world, supported by the necessary marketing
resources, the Company will be able to work with local carriers,
device manufacturers and content providers and seek to shorten
sales cycles established with its targeted customer base.







Cash Flow used in Operating Activities.Net cash used in
operating activities was $5,971,072, $4,394,770 and $2,794,972
during the years ended December 31, 2000, 1999, and 1998,
respectively. The key factors affecting cash flow used in
operating activities were greater salaries due to increased
staffing in sales, marketing, business development, product
development, research and development and administrative
personnel. Operating costs also increased during the year ended
December 31, 1999, in connection with Summus, Ltd.s
move from Columbia, South Carolina to Raleigh, North Carolina
during 1999.




56



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Cash Flow from Investing Activities.Net cash flow
provided by investing activities of $4,360,566 during the year
ended December 31, 2000, represented cash proceeds of
$4,492,799 from the sale of 1,171,579 shares of HSNS common
stock that Summus, Ltd. acquired in 1999, less capital
expenditures of $132,233 for office furniture and equipment.




Net cash flow provided by investing activities of $4,909,211
during the year ended December 31, 1999, represented cash
proceeds of $2,977,500 from the sale of 1,653,000 shares of HSNS
common stock that Summus, Ltd. acquired in 1999, less capital
expenditures of $318,289 for office furniture and equipment,
plus $2,250,000 in cash payments it received under the terms of
the February 1999 Marketing License Agreement Summus, Ltd.
entered into with HSNS. Under the terms of that agreement,
Summus, Ltd. was to have received four payments of $750,000 each
over the course of the first several months of the three-year
agreement. Mr. Richdale paid in cash all but $60,000 of the
first three payments under the agreement on HSNSs behalf.
The fourth and final payment due under the MLA was paid by HSNS
to Summus, Ltd. through the issuance of 1.5 million shares
of HSNS common stock.

Net cash flow used in investing activities of $512,590 during
the year ended December 31, 1998, represented capital
expenditures of $205,100 for office furniture and equipment and
salary costs of $307,490 capitalized as software development
costs.




Cash Flow from Financing Activities.Net cash flow
provided by financing activities of $1,171,297 during the year
ended December 31, 2000, represented $1,435,000 in proceeds
from a loan from HSNS extended under the terms of the Asset
Purchase Agreement. Under that agreement, Summus, Ltd. received
cash payments of $235,000 beginning October 30, 2000 and every
two weeks thereafter. Summus, Ltd. collateralized these payments
with shares of HSNS common stock it owned. Upon the closing the
asset acquisition on February 16, 2001, the loan agreement
between the companies was cancelled in its entirety. Net cash
flow from financing activities during the year ended
December 31, 2000, also reflected payments made on capital
lease and note agreements of $263,726, plus the proceeds from
the exercise of stock options of $23.




Net cash flow used in financing activities of $3,775 during the
year ended December 31, 1999, represented proceeds from
note agreements of $268,075, less cash payments on capital lease
and note agreements of $271,850.

Net cash flow provided by financing activities of $3,432,781
during the year ended December 31, 1998, represented cash
proceeds of $3,500,083 from the sale of 831,000 shares of
Summus, Ltd. common stock, less payments on capital lease and
note agreements of $92,302, less proceeds from note agreements
of $25,000.

New Accounting Pronouncements

In June 1998, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging
Activities. SFAS 133 requires that derivative instruments
be recognized as either assets or liabilities in the
consolidated balance sheet based on their fair values. Changes
in the fair values of such derivative instruments will be
recorded either in results of operations or in other
comprehensive income, depending on the intended use of the
derivative instrument. The initial application of SFAS 133 will
be reported as the effect of a change in accounting principle.
SFAS 133 is effective for all fiscal years beginning after
June 15, 2000. Because the Company has not historically
used derivative financial instruments, the Company does not
anticipate that SFAS 133 will have a material impact on its
consolidated financial statements.

On June 29, 2001, the Financial Accounting Standards Board
(FASB) unanimously approved the issuance of
Statements of Financial Accounting Standards (SFAS)
No. 141, Business Combinations and
No. 142, Goodwill and Other Intangible
Assets. SFAS 141 eliminates the pooling-of-interests
method of accounting for business combinations except for
qualifying business combinations that were initiated prior to
July 1, 2001. SFAS 141 also includes new criteria to
recognize intangible assets separately from goodwill. The
requirements of SFAS 141 are effective for any business
combination accounted for by the purchase method that is
completed after June 30, 2001. Under SFAS 142, goodwill and
intangible assets with indefinite lives are

57



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Item 7A.  Quantitative and Qualitative
Disclosures about Market Risk.




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

Item 8.  Financial Statements and Supplementary
Data.

The financial statements and supplementary data filed with this
report are set forth in the Index to Consolidated
Financial Statements and Schedule following Part IV hereof.

Item 9.  Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure.




On November 1999, HSNS engaged Ernst & Young LLP
as its independent auditors for the year ended December 31,
1999, to replace Barry L. Friedman, P.C. (Friedman),
whom HSNS dismissed as its independent auditors on the date
Ernst & Young LLP was engaged. The decision to change
independent auditors was approved by HSNSs Board of
Directors.




The reports of Friedman on HSNSs financial statements for
fiscal years 1996 and 1997 and for the period commencing
January 1, 1998 and ending July 22, 1998 did not
contain an adverse opinion or disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or
accounting principles. The reports of Friedman on HSNSs
financial statements for the period January 1, 1998 to
July 22, 1998 and for the two years in the period ended
December 31, 1997 included an explanatory paragraph about
HSNSs ability to continue as a going concern. In
connection with the audits of HSNSs financial statements
for the years ended December 31, 1996 and 1997, and in the
subsequent interim period preceding the dismissal of Friedman,
there were no disagreements with Friedman on any matters of
accounting principles or practices, financial statement
disclosure, or auditing scope or procedure which, if not
resolved to the satisfaction of Friedman, would have caused
Friedman to make a reference to the matter in their report.
During the time period Friedman performed its audits and through
the date of dismissal, there were no reportable
events, as that term is defined in Item 304(a)(1)(v)
of Regulation S-K, with respect to the services provided by
Friedman.

HSNS requested and received from Friedman a letter addressed to
the Commission stating that Friedman agrees with the above
statements.

During 1996 and 1997 and through the date that HSNS engaged
Ernst & Young LLP, HSNS did not consult with Ernst &
Young LLP on matters relating to the application of accounting
principles to a specified transaction or the type of audit
opinion that might be rendered on HSNSs financial
statements, or which concerned the subject matter of a
disagreement or reportable event with the former auditor (as
described in Regulation S-K, Item 304).

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PART III

Item 10.  Directors and Executive Officers of
the Registrant.

Board of Directors

The following table provides information regarding the members
of our Board of Directors including their ages, the year they
were first elected as directors and the expiration of their
terms as directors:

|                   |  |     |    |            |  |         |      |  |  |  |      | 
|------------------ |  | --- | -- | ---------- |  | ------- | ---- |  |  |  | ---- | 
|                   |  |     |    | First Year |  |        
|                   |  |     |    | Elected    |  |        
|                   |  |     |    | as         |  | Term   
|Name               |  | Age |    | Director   |  | Expires
|                   |  |     |    |            |  |        
|Dr. Bjorn Jawerth  |  |     | 48 |            |  |         | 2000 |  |  |  | 2002 | 
|                  
|                  
|                  
|                  
|Andrew L. Fox      |  |     | 37 |            |  |         | 2000 |  |  |  | 2002 | 
|                  
|                  
|                  
|                  
|Richard F. Seifert |  |     | 50 |            |  |         | 1999 |  |  |  | 2002 | 
|                  
|                  
|                  
|                  
|Herman Rush        |  |     | 71 |            |  |         | 2000 |  |  |  | 2002 | 




By the terms of the Asset Purchase Agreement the size of the
Companys Board of Directors was to be increased to ten
members immediately following the closing of the transaction.
Post-closing, the Board was to consist of four members from each
of HSNS and Summus, Ltd. Upon the selection of a ninth director
by the 4 representatives of HSNS, Ms. Wendi Tush was
to be appointed to the Board as the tenth member. However,
Ms. C. Cristine Wittress (a HSNS member), Mr. Kenneth
Marks (a Summus, Ltd. member), Stuart Diamond (a Summus, Ltd.
member) and Ms. Wendi Tush (a Summus, Ltd. member) have
since resigned as directors of the Companys Board and the
Board now consists of four directors.




Executive Officers

The following table provides information regarding our executive
officers, the capacity in which they serve the Company, when
they assumed office and their ages.

|                   |  |                                                         |  |               |      |     |  |  |    | 
|------------------ |  | ------------------------------------------------------- |  | ------------- | ---- | --- |  |  | -- | 
|Name               |  | Office                                                  |  | Officer Since |      | Age
|                   |  |                                                         |  |               |      |    
|Richard F. Seifert |  | Co-Chief Executive Officer                              |  |               | 2001 |     |  |  | 50 | 
|Dr. Bjorn Jawerth  |  | Co-Chief Executive Officer, Chief Scientist,
	President |  |               | 2001 |     |  |  | 48 | 
|Gary E. Ban        |  | Chief Operating Officer                                 |  |               | 2001 |     |  |  | 37 | 
|Robert S. Lowrey   |  | Chief Financial Officer, Treasurer                      |  |               | 2000 |     |  |  | 41 | 

Business Experience of Directors, Officers and Other Key
Employees

Dr. Bjorn Jawerthhas been on our Board of Directors
since February 2000 and has served as Co-Chief Executive
Officer, Chief Scientist and President since February 2001.
Dr. Jawerth founded Summus, Ltd. in 1991 and was its
Chairman and President until its acquisition by the Company.
Dr. Jawerth received a Masters of Science in mathematics
and statistics, as well as an M.Sc. in technical physics and
electrical engineering in 1974 from Lund Institute of
Technology, Lund, Sweden. He also received his Ph.D. in
mathematics from Lund Institute in 1977. Dr. Jawerth is the
David W. Robinson Palmetto Professor, Professor of Mathematics
and Adjunct Professor of computer science at the University of
South Carolina. He directs a group of approximately 50
researchers in mathematics, computer science, mechanical
engineering and chemistry at the University of South Carolina
and Chalmers University of Technology in Gothenburg, Sweden.
Dr. Jawerth has more than 30 years of experience as a
consultant in the areas of image processing and finite element
analysis. He has more than 90 publications to his credit in
books and journals.

Andrew L. Foxwas our Chief Executive Officer from
August 2000 through February 2001 and our acting
President and Chief Executive Officer from August 1999 through
August 2000. Mr. Fox has also been a director since
January 2000. Mr. Fox was Executive Vice President of
Sales and Marketing for Summus, Ltd. from August 1999
through January 2000. Although Mr. Fox ceased to be an
executive officer of the Company following the acquisition of
Summus, Ltd.s assets in February 2001, he remains an
employee of the Company, working primarily in the area of sales
and marketing. From December 1996 through June 1999,
Mr. Fox was

59



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Richard F. Seiferthas been a member of our Board of
Directors since February 1999 and has been our Co-Chief
Executive Officer since February 2001. He was our Vice
President of Operations from March through November 1999.
From 1995 through February 1999, Mr. Seifert was a
self-employed marketing consultant. Mr. Seifert has a
degree in business administration from Montgomery County College
and Penn State University.

Herman Rushhas been a member of our Board of Directors
since March 2000. Since 1999, Mr. Rush has been
Chairman of the Board and Chief Executive Officer of
Infotainment International, Inc. and related companies that
develop and produce content for the Internet. Since 1998,
Mr. Rush is a partner in Rush Cooperman Associates, LLC, an
Internet development and production company. In
November 2000, he became the CEO of Internet Program
Providers, Inc., an Internet distribution/syndication company.
Mr. Rush served as Executive Producer of The Montel
Williams television programs from 1990 through 1997 and
currently is a consultant to the program. Mr. Rush is a
former President and CEO of the Columbia Pictures Television
Group (1980-1988) and a former CEO of Coca-Cola
Telecommunications, Inc. (1988-89).

Gary E. Banjoined the Company as our Chief Operating
Officer in February 2001. In his past role as Chief Operating
Officer/ Chief Information Officer of Summus, Ltd., Mr. Ban
had supervisory responsibility over company operations,
information technology and human resources. Prior to joining
Summus, Ltd. in September 1999, Mr. Ban held a variety
of executive-level management positions establishing direction
and operational implementation for business, financial and
engineering systems integration. From November 1996 through
August 1999, Mr. Ban served as Director of Customer
Integration for ABB Power T&D Inc.s Electricity
Metering group, where he was responsible for global systems
integration for large-scale information management solutions.
From June to November 1996, Mr. Ban served as Director
of Re-engineering Services for the Pinnacle Group, a consulting
company, where he was instrumental in establishing a consulting
business offering re-engineering process management focused on
enterprise resource planning. Mr. Ban holds an M.B.A. from
Duke University, a bachelors degree in industrial
management and an associate applied science degree in computer
engineering from the Milwaukee School of Engineering.

Robert S. Lowreyhas been our Chief Financial Officer and
Vice President of Finance since June 2000. Prior to joining
the Company, Mr. Lowrey served as a senior audit manager
for Ernst & Young LLP in Raleigh, North Carolina from
November 1993 to May 2000. Mr. Lowrey is a
graduate of Grove City College in Grove City, Pennsylvania.

Dr. Jiangying Zhourecently was appointed our Vice
President of Research; she had previously served as Director of
Research and Development at the Company and, before that, at
Summus, Ltd. Prior to joining Summus, Ltd. in March 1998,
Dr. Zhou was a research scientist at Panasonic Information
and Networking Technologies Laboratories, Princeton, New Jersey,
where she conducted research in the areas of image analysis,
information retrieval, and document processing. Dr. Zhou
received her Ph.D. in Electrical Engineering from the University
of New York at Stony Brook in 1993. She received her M.S. degree
(1985) and B.S. degree (1982), both in computer science,
from Fudan University, Shanghai, China. Dr. Zhou has taught
in the Computer Science Department of Fudan University. She has
published 30 papers in international journals and conferences
and has given many talks at international conferences. She is
also the owner of five U.S. patents. Dr. Zhou is currently
the co-chair for the PSIE/ IS&T Document Recognition
Conference. She also served as session chair and as referee for
several international conferences and journals, including the
SPIE Document Recognition Conference, the Fifth International
Conference on Document Analysis and Information Retrieval, IEEE
Transaction on Pattern Recognition and Machine Intelligence,
Journal of Computer Vision, Graphics, and Image Processing, and
Journal of Electronic Imaging. Dr. Zhous

60



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Leonard Mygatt IIIhas been our Executive Vice President,
Advanced Technology, since the Companys acquisition of
Summus, Ltd.s assets in February 2001. In that
position, Mr. Mygatt is responsible for management of
technical and product development, contracts and proposals and
business development. Mr. Mygatt served in the same
capacity with Summus, Ltd. beginning in December 1995.
Prior to his association with Summus, Ltd., Mr. Mygatt was
employed by Magnavox Electronic Systems Company, where he served
as a project leader for the design, development and production
of advanced tactical data link systems and as a project manager
and leader for a research and development project investigating
image and video compression. Mr. Mygatt received a
bachelors degree in electrical engineering degree from the
University of California at San Diego in 1983.







Barry J. Johnsonwas hired as Vice President 
Products in June 2001. Mr. Johnsons primary
responsibilities will be to prioritize the Companys
product development efforts and to position the Companys
new product line to maximize revenue generation.
Mr. Johnson most recently served as Vice President of
Operations at Dial2Go, Inc., where he was responsible for
developing new business for this start-up company. From
May 1998 to February 2001, Mr. Johnson served as
director of program management within Motorola, Inc.s
personal communications sector, where he managed the team
responsible for Motorolas digital phone programs. From
August 1997 to April 1998, Mr. Johnson served as a
marketing director for Motorolas transmission products
division. Mr. Johnson has also served in various product
marketing capacities at Gateway, Zenith Data Systems and NCR.
Mr. Johnson earned a B.A. in economics from Hanover College
and an M.B.A. in finance from Indiana University.







Christopher E. Kremer was hired as Executive Vice
President of Sales and Marketing in October 2001.
Mr. Kremer will lead the Companys sales and marketing
functions. Prior to his association with the Company,
Mr. Kremer held various senior level executive positions
with Motorola, Inc., including Senior Director, Program
Management, Cellular Technology and Product Realization Group
(March 1999 to February 2001); Senior Director,
Business Operations, CDMA Division (February 1998 to
March 1999); and Vice President of Sales and Marketing for
the Transmission Products Division (August 1996 to
February 1998). Mr. Kremer is a graduate of Eastern
Kentucky University, where he received a bachelors degree
in business administration in 1980.







John W. Maxwell was recently hired as Vice President of
Marketing. Prior to joining the Company, Mr. Maxwell served
as director of business management within Motorola, Inc.s
personal communications sector from October 1998February
2001. From October 1997 to October 1998, Mr. Maxwell served
as director of marketing for Motorolas Xtreme Worx, which
involved the development of new business opportunities. From
October 1996 to October 1997, Mr. Maxwell served as a
director of marketing for Motorolas transmission products
division. Mr. Maxwell holds a bachelors degree in
psychology from the University of Michigan and a M.B.A. in
marketing from Michigan State University.




Family Relationships

There are no family relationships between or among any of our
directors and executive officers.

Committees of the Board of Directors

Our Board of Directors is responsible for establishing broad
corporate policies and for our overall performance. On
February 27, 2001 our Board of Directors constituted the
following committees:

Employment and Compensation Committee.The
Employment and Compensation Committee reviews and approves the
Companys compensation plans covering executive officers
and other key management employees, reviews the competitiveness
of the Companys total compensation practices, determines
the annual base salaries and incentive awards to be paid to
executive officers, and reviews and approves special hiring and

61



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Audit Committee.The Audit Committee
recommends to the Board for appointment the independent auditors
to be selected to audit the financial statements of the Company.
The Audit Committee discusses with the auditors their
independence and obtains at least annually the auditors
written statement describing their independent status. The Audit
Committee reviews with management and the independent auditors
the Companys financial statements and any financial
reports submitted to the public. The Audit Committee also has
periodic discussions with management and the independent
auditors regarding the quality and adequacy of the
Companys internal controls. The Audit Committee currently
consists of Mr. Rush.

Section 16(a) Beneficial Ownership Reporting
Compliance

Section 16(a) of the Exchange Act of 1934, as amended (the
Exchange Act), and related regulations of the
Securities and Exchange Commission, requires the Companys
directors, officers and beneficial owners of more than 10% of
the Companys common stock (collectively, reporting
persons) to file with the SEC initial reports of ownership
and reports of changes in ownership of any and all classes of
equity securities of the Company. The reporting persons are
required by SEC regulations to furnish the Company with copies
of all such filings. Specific due dates for these reports have
been established and the Company is required to identify in this
annual report on Form 10-K those persons who failed to
timely file these reports.

Based on its review of the copies of filings received by the
Company with respect to the year ended December 31, 2000,
the Company believes that all reporting persons complied with
the Section 16(a) filing requirements in the year ended
December 31, 2000, other than as follows:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Herman Rush, who was appointed a director on March 15,
	2000, failed to file a Form 3 (Initial Statement of
	Beneficial Ownership of Securities) within ten days of the
	Companys being deemed to have a class of equity securities
	registered pursuant to Section 12 of the Exchange Act
	following its acquisition of J.S.J Capital in April 2000.
	Mr. Rush also, on two occasions, failed to file a
	Form 4 (Statement of Changes of Beneficial Ownership
	of Securities) within ten days after the end of each of
	the months of May and October 2000 upon his receipt in such
	months of option grants exercisable for 20,000 and 30,000 shares
	of common stock, respectively.
|
| |  | Dr. Bjorn Jawerth failed to file a Form 3 within ten
	days of the Companys being deemed to have a class of
	equity securities registered pursuant to Section 12 of the
	Exchange Act following its acquisition of J.S.J. Capital in
	April 2000. Dr. Jawerth also failed to file a
	Form 4 within ten days after the end of the months of June
	(100,000), September (216,579) and October (40,000), 2000, in
	connection with the sale by Summus, Ltd. of 356,579 shares of
	the Companys common stock.                                                                                                                                                                                 
|
| |  | Richard F. Seifert failed to file a Form 3 within ten days
	of the Companys being deemed to have a class of equity
	securities registered pursuant to Section 12 of the
	Exchange Act following its acquisition of J.S.J. Capital in
	April 2000. In addition, Mr. Seifert failed to file a
	Form 4 within ten days after the end of the month of
	October 2000 upon his receipt in October 2000 of an
	option grant exercisable for 30,000 shares of common stock.                                                                                                                                                                                                                       
|
| |  | Andrew L. Fox failed to file a Form 3 within ten days of
	the Companys being deemed to have a class of equity
	securities registered pursuant to Section 12 of the
	Exchange Act following its acquisition of J.S.J. Capital in
	April 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | C. Cristine Wittriss, a former director of the Company, failed
	to file a Form 3 within ten days of the Companys
	being deemed to have a class of equity securities registered
	pursuant to Section 12 of the Exchange Act following its
	acquisition of J.S.J. Capital in April  2000.                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | William B. Silvernail, a former director of the Company, failed
	to file a Form  3 within ten days of the Companys
	being deemed to have a class of equity securities registered
	pursuant to Section 12 of the Exchange Act following its
	acquisition of J.S.J. Capital in April  2000.                                                                                                                                                                                                                                                                                                                                                                                                 

62



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Alan R. Kleinmaier, a former officer of the Company, failed to
	file a Form 3 within ten days of the Companys being
	deemed to have a class of equity securities registered pursuant
	to Section 12 of the Exchange Act following its acquisition
	of J.S.J. Capital in April  2000.                                                                                                                          
|
| |  | Robert S. Lowrey, who was appointed an officer on June 1,
	2000, failed to file a Form 3 within ten days of such
	appointment on June 1, 2000. In addition, Mr. Lowrey
	failed to file a Form 4 within ten days after the end of
	the month of June 2000 upon his receipt in June  2000
	of an option grant exercisable for 100,000 shares of common
	stock.                                                   
|
| |  | Douglas D. May, who was appointed an officer on July 10,
	2000, failed to file a Form 3 within ten days of such
	appointment. In addition, Mr. May failed to file a
	Form 4 within ten days after the end of the month of
	January 2001 when the Company repurchased 45,572 shares of
	common stock (issued to Mr. May in connection with the
	Companys acquisition of Douglas May & Co., Inc. in
	July 2000).
|
| |  | Gregory S. Gush, who was appointed an officer on June 21,
	2000, failed to file a Form 3 within ten days of such
	appointment.                                                                                                                                                                                                                                                                                 

All of the above deficiencies relating to the Companys
current officers and directors have been cured.



Item 11.  Executive Compensation.


The following table provides certain summary information
concerning all compensation earned by the Named Executive
Officer. No other executive officer or persons annual
salary and bonus for the year ended December 31, 2000
exceeded $100,000 in the aggregate.

Summary Compensation Table(1)

|                   |                    |      |      |        |  |          |         |                  |  |               |        |              |  |  |     |     |  |  |     |         |  |  |     |     | 
|------------------ | ------------------ | ---- | ---- | ------ |  | -------- | ------- | ---------------- |  | ------------- | ------ | ------------ |  |  | --- | --- |  |  | --- | ------- |  |  | --- | --- | 
|                   |                    |      |      |        |  |          |         |                  |  | Long-Term     |        |             
|                   |                    |      |      |        |  |          |         |                  |  | Compensation/ |        |             
|                   |                    |      |      |        |  |          |         |                  |  | Securities    |        |             
|Name and           |                    |      |      |        |  |          |         | Restricted Stock |  | Underlying    |        | All Other   
|Principal Position |                    | Year |      | Salary |  | Bonus(2) |         | Awards(3)        |  | Options(4)    |        | Compensation
|                   |                    |      |      |        |  |          |         |                  |  |               |        |             
|Andrew L. Fox      |                    |      | 2000 |        |  | $        | 146,314 |                  |  | $             | 28,500 |              |  |  | N/A |     |  |  | N/A |         |  |  | N/A |    
|                   | Director and Chief |      |      | 1999   |  |          |         | 66,100           |  |               |        | 85,891       |  |  |     | N/A |  |  |     | 240,000 |  |  |     | N/A | 
|                   | Executive Officer  |      |      | 1998   |  |          |         | N/A              |  |               |        | N/A          |  |  |     | N/A |  |  |     | N/A     |  |  |     | N/A | 




|    |                                                                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The aggregate amount of prerequisites and other personal
	benefits, if any, did not exceed the lesser of $50,000 or 10% of
	the total amount of salary and bonus for any year for the Named
	Executive Officer and has therefore been omitted.
|   
|(2) | Bonuses are reported in the year earned, even if actually paid
	in a subsequent year.                                                                                                                                                         
|   
|(3) | We did not grant any restricted stock awards to the Named
	Executive Officer.                                                                                                                                                                 
|   
|(4) | The options granted are without tandem stock appreciation rights
	and we did not grant any other stock appreciation rights to the
	Named Executive Officer.                                                                                   

Option Grants During Last Fiscal Year

We did not grant any options to purchase shares of our common
stock to our Named Executive Officer during the year ended
December 31, 2000.

Aggregated Options Exercised During Last Fiscal Year and
Fiscal Year End Option Values

Our Named Executive Officer did not exercise any of his options
to purchase any of our equity securities during 2000. The
Company does not have any outstanding stock appreciation rights.
The following table

63



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|              |  |          |     |                |  |                     |     |                     |  |                      |        |  |  |  |           |   |  |  |     | 
|------------- |  | -------- | --- | -------------- |  | ------------------- | --- | ------------------- |  | -------------------- | ------ |  |  |  | --------- | - |  |  | --- | 
|              |  |          |     |                |  | Number of           |     | Number of           |  |                     
|              |  |          |     |                |  | Securities          |     | Securities          |  | Value of Unexercised
|              |  | Shares   |     |                |  | Underlying          |     | Underlying          |  | In-the Money        
|              |  | Acquired |     | Value Realized |  | Unexercised Options |     | Unexercised Options |  | Options at Fiscal   
|              |  | on       |     | on Exercise    |  | at Fiscal Year-End  |     | at Fiscal Year-End  |  | Year-End ($)        
|Name          |  | Exercise |     | ($)(1)         |  | Exercisable         |     | Unexercisable       |  | Exercisable(1)      
|              |  |          |     |                |  |                     |     |                     |  |                     
|Andrew L. Fox |  |          | N/A |                |  |                     | N/A |                     |  |                      | 80,000 |  |  |  | 160,000(2 | ) |  |  | N/A | 

[Additional columns below]

[Continued from above table, first column(s) repeated]

|              |  |                      |     | 
|------------- |  | -------------------- | --- | 
|              |  | Value of Unexercised
|              |  | In-the Money        
|              |  | Options at Fiscal   
|              |  | Year-End            
|Name          |  | Unexercisable(1)    
|              |  |                     
|Andrew L. Fox |  |                      | N/A | 




|    |                                                                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The closing price of our common stock as reported on the Pink
	Sheets® on December 29, 2000 was lower than the
	exercise price of the options and, therefore, none of the
	options were in the money.
|   
|   
|(2) | Mr. Fox was issued options to purchase an additional
	197,500 shares of our common stock during 2001, of which options
	to purchase 190,000 shares of common stock have vested.                      
|   

Employment Agreements

Employment Agreement with Dr. Bjorn
Jawerth




Upon the closing of the Summus, Ltd. asset acquisition, the
Company entered into a three-year employment agreement with
Dr. Bjorn Jawerth. The employment agreement provides that
Dr. Jawerth will serve as the Companys co-Chief Executive
Officer (on a temporary basis until a new chief executive
officer is hired) and Chief Scientist.




The terms of Dr. Jawerths employment agreement
provided him with the right to request that he be elected the
Chairman of the Board of the Companys Board of Directors
upon the Companys hiring of a new chief executive officer.
Effective immediately following the resignations of Stuart
Diamond (who served as Chairman of the Board) and Wendi Tush as
members of the Companys Board, the remaining members of
the Board appointed Dr. Jawerth to serve as the Chairman.
Dr. Jawerth is expected to continue to serve in that
capacity through the date of the Companys annual meeting
of shareholders, which is to be held as soon as reasonably
practicable, at which time all of the Companys director
nominees will be subject to election by the Companys
shareholders. Given Dr. Jawerths substantial equity
interest in the Company, his re-election as a director is
virtually assured.

Under the employment agreement, Dr. Jawerth is to receive:



| |   |                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an initial base salary of $350,000 (which is subject to increase
	on an annual basis by at least 10%);                                                                                                                                                                                                                                                               
|
| |  | performance bonuses and options as are generally available to
	other senior management and Board members of the Company
	(including awards under the Companys 2000 Equity
	Compensation Plan), as determined by the Employment and
	Compensation Committee of the Board, and options awarded by
	resolution of the Board outside the Plan for service on the
	Board;
|
| |  | a car allowance of $750/month;                                                                                                                                                                                                                                                                                                                                       
|
| |  | a corporate apartment for a period of 6 months and expenses
	of up to $2,500/month in connection with apartment expenses; and                                                                                                                                                                                                                                        
|
| |  | the Companys health and other benefits.                                                                                                                                                                                                                                                                                                                             

In addition to the foregoing, Dr. Jawerth was to have been
paid $500,000 in cash as compensation for his non-competition
covenants (which have an 18 month term). In lieu of such
cash payment, we issued to Dr. Jawerth options to purchase
166,667 shares of our common stock exercisable for $0.50 per
share and options to purchase 333,333 shares of our common stock
exercisable for $3.75 per share.




Under the terms of the employment agreement, we also granted to
Dr. Jawerth a personal, non-exclusive, non-transferable
worldwide license, without the right to sublicense, to make and
use new technology that is developed during the twelve months
following the closing of the Summus, Ltd. asset acquisition. Any
of




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Under the terms of the Asset Purchase Agreement, the Company
agreed to use reasonable commercial efforts to assist
Dr. Jawerth in the private sale of up to 1,666,667 shares
of the Companys common stock held by Dr. Jawerth
(representing $2.5 million in value) at a per share price
of not less than $1.50 per share. The agreement does not
stipulate a date or time period by which such sale is to occur.
Any such sale would be subject to applicable federal and state
securities laws, and the shares of stock, in the hands of the
purchaser or purchasers, would constitute restricted
securities within the meaning of Rule 144(a)(3) under
the Securities Act of 1933 on the basis of having been acquired
from an affiliate of the Company in a transaction not involving
any public offering. Accordingly, the certificate(s) for such
shares would require appropriate legending as to the
restrictions on transfer. The Company envisions that the most
likely scenario in which it will be able to assist with such a
sale would be in connection with an investment in the Company by
one or more institutional investors, perhaps a company or
companies with whom the Company is seeking to enter into a
strategic commercial alliance. No assurance can be provided that
the Company will be able to attract such an investment or that
the Company will be able to provide assistance to
Dr. Jawerth to effect a private sale of his shares. The
agreement does not provide any right or remedy to
Dr. Jawerth if such sale is not effected.




In addition, under the terms of Dr. Jawerths employment
agreement, the Company is obligated to issue to him options,
with an exercise price of $1.50 per share, exercisable for three
times the number of shares of common stock sold in the private
sale. The options will be exercisable during the second through
fifth year after issuance. The Company has agreed to assist
Dr. Jawerth in the private sale of his shares of our common
stock to generate net proceeds of $2,500,000. In addition, the
Company is obligated to issue to him options, with an exercise
price of $1.50 per share, exercisable for three times the number
of shares of common stock sold in such private sale. The options
will be exercisable during the second through the fifth year
after issuance.

If the Company terminates Dr. Jawerths employment
without cause or Dr. Jawerth terminates his employment for good
reason, he is entitled to a severance payment equal to two years
of his then current base annual salary, to be paid in a lump sum
at the time of termination. Further, all options issued to him
shall immediately vest

Employment Agreement with Andrew L. Fox

Under an employment letter agreement, effective August 25,
1999, we employed Andrew L. Fox as our acting President and
Chief Executive Officer and Executive Vice President and
appointed him a director of the Company. In August 2000,
Mr. Fox was appointed Chief Executive Officer. Under the
letter agreement, Mr. Fox receives an annual salary of
$135,000 and is eligible to receive a bonus of up to an amount
equal to his base annual salary. The bonus is based upon goals
and objectives to be established by the Board of Directors
annually following our year-end. While employed as acting Chief
Executive Officer, Mr. Fox received an additional bonus of
$2,500 per month. Mr. Fox receives a $600 per month car
allowance.

Under the letter agreement, the Company confirmed its prior
grant to Mr. Fox of options to purchase 240,000 shares of our
common stock that vest on August 25, 2006, if Mr. Fox
remains in the Companys employment on such date. The
letter agreement provides that the vesting period may be
accelerated if the Company attains certain performance goals
tied to revenue, EBITDA or other metrics to be determined by the
Companys Board of Directors. The Board has determined that
these performance goals have been met. Accordingly, options
exercisable for 80,000 shares (at an exercise price of $4.38 per
share) vested on August 25, 2000, and options exercisable
for 80,000 shares each (at an exercise price of $13.00 per
share) will vest on the first and second anniversaries of that
date. Under the terms of an addendum to the letter

65



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If we terminate Mr. Foxs employment we are obligated
to pay him six months of salary, to be paid monthly or in a lump
sum at the discretion of the Company. The Company and
Mr. Fox are currently in discussions regarding the
termination of Mr. Foxs employment with the Company.
In connection with such termination, it is expected that the
Company will enter into a consulting agreement with Mr. Fox.

Stock Option Plan

The following summary description of our 2000 Equity
Compensation Plan is not intended to be complete, and is
qualified by reference to the copy of the Equity Compensation
Plan, filed as an exhibit to this report.

The 2000 Equity Compensation Plan, adopted by the Board of
Directors on January 27, 2000, and approved by our
shareholders on February 11, 2000 (the Plan),
is intended to provide incentives:

(a)  to the officers and other employees in the Company and
its subsidiaries by providing them with opportunities to
purchase shares of common stock in the Company pursuant to
options granted under the Plan which qualify as incentive
stock options (ISOs) under Section 422(b)
of the Internal Revenue Code of 1986, as amended (the
Code);

(b)  to directors, officers, employees and consultants of
the Company and its subsidiaries by providing them with
opportunities to purchase shares of common stock in the Company
pursuant to options granted under the Plan which do not qualify
as ISOs (non-qualified options) (ISOs and
non-qualified options being referred to as options);
and

(c)  to directors, officers, employees and consultants of
the Company and its subsidiaries by providing them with stock
appreciation rights, awards of restricted stock or deferred
stock, stock awards, performance shares or other stock-based
awards.

The Equity Compensation Plan is administered by the Employment
and Compensation Committee (the Committee)
consisting of two or more members of the Board of Directors. The
Committee has the exclusive right to interpret, construe and
administer the Plan, to determine the individuals associated
with the Company and its subsidiaries from among the class of
individuals eligible to whom options, awards and authorizations
to make purchases may be granted in accordance with the terms of
the Plan, and to determine the number, form, terms, conditions
and duration of any such grant.

ISOs. ISOs may be granted at any time through the tenth
anniversary of the effective date of the Plan (which was
January 31, 2000). The ISO exercise price is to be no less
than 100% of the Fair Market Value (as defined in
the Plan) of the common stock on the grant date. No ISO may be
granted to an individual owning more than 10% of the total
combined voting power of all classes of stock issued by the
Company unless the purchase price of the underlying shares of
common stock is at least 110% of the Fair Market Value of the
shares issuable on exercise of the ISO determined as of the date
the ISO is granted. ISOs granted under the Plan may have maximum
terms of not more than ten years (five years in the case of an
individual that owns more than 10% of the total combined voting
power of all classes of the Companys stock), or such
shorter period as the Committee specifies in an individual
award. Generally, ISOs granted under the Plan may remain
outstanding and may be exercised at any time up to three months
after the person to whom such ISO was granted is no longer
employed. ISOs granted under the Plan are subject to the
restriction that the aggregate Fair Market Value (determined as
of the date of grant) of ISOs which first become exercisable in
any calendar year cannot exceed $100,000.

Stock Appreciation Rights. Stock appreciation rights may
be granted to eligible participants in tandem with an ISO or
non-qualified option, or may be granted independent of any
related option. A tandem stock

66



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##### 





With respect to non-tandem stock appreciation rights, the
Committee is to specify the number of shares of common stock
covered by such right and the base price of a share of common
stock (the Base Price), which is to be no less than
100% of the Fair Market Value of a share of common stock on the
date of grant. Upon exercise of a non-tandem stock appreciation
right, the participant is entitled to receive from the Company
cash and/or common stock having an aggregate Fair Market Value
equal to (i) the excess of (A) the Fair Market Value
of one share of common stock at the time of exercise, over
(B) the Base Price, multiplied by (ii) the number of
shares of common stock covered by the non-tandem stock
appreciation right. The Committee has the sole discretion to
determine in each case whether the payment is to be made in the
form of cash or shares of common stock.

The maximum number of shares of common stock that may be covered
by an option and stock appreciation rights granted to any one
individual during any calendar year is 500,000 shares.

Options and stock appreciation rights granted under the Plan are
generally not transferable, except by will or the laws of
descent and distribution, or under the terms of a qualified
domestic relations order as defined by the Code or ERISA.
However, non-qualified options (including a related tandem stock
appreciation right) may be transferred to the extent determined
by the Committee to be consistent with securities and other
applicable laws and with Company policy.

Restricted Stock. The Committee may make restricted stock
awards to participants in the Plan as an incentive for the
performance of future services that will contribute materially
to the successful operation of the Company. Awards of restricted
stock may be made alone or in addition to or in tandem with
other awards made under the Plan. The Committee is to determine
the purchase price, if any, to be paid for the restricted stock,
the length of the restriction period, the nature of the
restrictions (e.g., in terms of the participants service
or performance), whether the restrictions are to lapse at the
end of the restriction period as to any or all of the shares
covered by the award, and whether dividends and other
distributions on the restricted stock are to be paid currently
to the participant or to the Company for the account of the
participant.

Deferred Stock. The Committee may make deferred stock
awards, together with cash dividend equivalents, to participants
in the Plan, conditioned upon the attainment of specified
performance goals or other factors or criteria as the Committee
determines. Deferred stock awards may not be sold, transferred,
pledged, assigned or encumbered during the deferral period, as
specified by the Committee. At the expiration of the deferral
period, share certificates are to be delivered to the
participant in a number equal to the shares of common stock
covered by the award. Upon termination of employment during the
deferral period, the deferred stock shall be forfeited by the
participant. However, the Committee may accelerate the vesting
of the award in the event of termination of employment due to
death, disability or retirement, or in the event of hardship or
other special circumstances.

Stock Awards. Stock awards are to be granted only in
payment of compensation that has been earned or as compensation
to be earned. All shares of common stock subject to a stock
award are to be valued at no less than 100% of the Fair Market
Value of such shares on the date of the stock awards
grant. Shares of common stock subject to a stock award may be
issued or transferred to the participant at the time of grant or
at a subsequent time, or in installments, as the Committee
determines. A stock award will be subject to the terms and
conditions the Committee determines. However, upon issuance of
the shares, the participant shall be entitled to receive
dividends, exercise voting rights and exercise all other rights
of a shareholder except as otherwise provided in the stock award.

67



---



##### 



Performance Shares. Performance shares may be made to
participants as an incentive for the performance of future
services to the Company. Awards of performance shares may be
made either alone or in addition to or in tandem with other
awards granted under the Plan. The Committee is to determine and
designate those participants to whom performance shares are to
be awarded, the performance period and/or performance objectives
(e.g., minimum earnings per share or return on equity), and any
adjustments to be made to such objectives, applicable to such
awards, the form of settlement of a performance share, and the
other terms and conditions of such awards.

Other Stock-Based Awards. The Committee may grant other
awards that are valued in whole or in part by reference to, or
are based on, the common stock, including convertible preferred
stock, convertible debentures, exchangeable securities, phantom
stock and stock awards or options valued by reference to book
value or performance.

Administration. The Plan provides that the Committee may
make equitable adjustments in the aggregate number of shares of
common stock that may be awarded under the Plan, the number of
shares and class of stock that may be subject to an award, the
purchase price to be paid per share under outstanding options,
and the terms, conditions or restrictions of any award in the
event of any reorganization, recapitalization, reclassification,
stock split, stock dividend, merger or consolidation or
separation, including a spin-off, of the Company, the sale or
other disposition of all or a portion of its assets and certain
other transactions involving the Company. However, the Plan
requires that all such adjustments shall be made such that ISOs
granted under the Plan shall continue to constitute ISOs within
the meaning of Section 422 of the Code.

Authorized but unissued shares of common stock of the Company,
shares of common stock that are not delivered or purchased under
the Plan, and shares reacquired by the Company for reasons
including a forfeiture, termination of employment, expiration or
cancellation of an option, can be issued under the Plan. Under
the Plan, 2,000,000 shares of common stock were initially
reserved for issuance. On February 13, 2001 the Board
adopted resolutions to amend the Plan to increase that number to
6,500,000 shares, such amendment being subject to shareholder
approval. Shareholders representing a majority of the
outstanding voting shares of the Companys capital stock,
by a written consent dated June 13, 2001, adopted such
amendment. As of May 31, 2001, the Company had outstanding
options exercisable for 3,819,176 shares of common stock. As of
that date, options to purchase 1,825,000 shares had been
exercised.

Amendment of the Plan. The Plan provides that our Board
of Directors may amend or terminate the Plan at any time,
provided, however, that specific types of amendments require
approval of our shareholders and no such action may be taken
which adversely affects any award previously granted to a
participant under the Plan without the written consent of the
Participant.

The Board of Directors amended the Plan, effective May 1,
2000. The amendment adds a provision that, in connection with
any underwritten public offering of our equity securities
covered by an effective registration statement filed under the
Securities Act of 1933, as amended, including an initial public
offering, a participant in the Plan may not sell, make any short
sale of, loan, hypothecate, pledge, grant any option for the
purchase of, or otherwise dispose or transfer for value or
otherwise agree to engage in any of the foregoing transactions
with respect to any stock acquired under the Plan without the
prior written consent of the Company or its underwriters. This
market stand-off  restriction will be in effect
for whatever period of time from and after the effective date of
the final prospectus for the offering that the Company or its
underwriters request.

Compensation of Directors

Prior to February 27, 2001, each member of the Board of
Directors not employed with us full-time was:
(i) reimbursed for reasonable travel expenses incurred in
attending meetings of the Board of Directors or committees of
the Board of Directors; (ii) paid a fee of $1,000 for each
day on which the Board and/or committee met or was in
conference, at which such director attended, except for
committee meetings held on the same date as a Board of Directors
meeting or conference; and (iii) was eligible for stock
option grants

68



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##### 





|                      |  |                |        |                        |  |  |                           | 
|--------------------- |  | -------------- | ------ | ---------------------- |  |  | ------------------------- | 
|Name                  |  | Options Issued |        | Exercise Price/Vesting
|                      |  |                |        |                       
|Herman Rush           |  |                | 50,000 |                        |  |  | Fair Market Value/3 years | 
|                     
|                     
|                     
|                     
|Richard F. Seifert    |  |                | 30,000 |                        |  |  | Fair Market Value/3 years | 
|                     
|                     
|                     
|                     
|C. Cristine Wittress* |  |                | 50,000 |                        |  |  | Fair Market Value/3 years | 




|  |                                                                                                        
|- | -------------------------------------------------------------------------------------------------------
|* | C. Cristine Wittress forfeited her options upon her resignation
	as a member of the Board of Directors.

On February 27, 2001, our Board of Directors, by
resolution, revised our Board of Directors compensation
for 2001. As of such date, each member of our Board of Directors
is entitled to:



| |   |                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------
| |  | options to purchase 10,000 shares of our common stock at a
	strike price of $3.00;                    
|
| |  | an attendance fee of $2,500 per regular meeting attended, four
	of which are scheduled per annum;     
|
| |  | an attendance fee of $1,000 for each special meeting attended in
	excess of two meetings each quarter;
|
| |  | $2,500 for each assignment as a member of a committee; and                                            
|
| |  | $1,000 for each assignment as a committee chair.                                                      

In addition, each officer of the Board of Directors is entitled
to an option to purchase 2,000 shares of our common stock at a
strike price of $3.00 per share.

Compensation Committee Interlocks and Insider
Participation

On February 27, 2001, we formed, by action of our Board of
Directors, an Employment and Compensation Committee consisting
of Herman Rush, as Chair, and C. Cristine Wittress (who has
since resigned as a director and as a member of such committee)
and Dr. Bjorn Jawerth, as committee members. Prior to such
date and during the year ended 2000, all matters were addressed
by the full Board of Directors which consisted of Herman Rush,
Richard Seifert, Andrew L. Fox and as of March 2000, C.
Cristine Wittress. However, Mr. Fox, then our Chief
Executive Officer and a director, did not participate in
deliberations and abstained from voting in connection with his
own compensation.

Item 12.  Security Ownership of Certain
Beneficial Owners and Management.




The following table sets forth certain information regarding
beneficial ownership of our common stock and our Series B
preferred stock as of September 30, 2001, by (i) each
of our directors, (ii) our Chief Executive Officer as of
December 31, 2000 (the Named Executive
Officer), (iii) all directors and executive officers
as a group, and (iv) each person who is known by the
Company to own beneficially more than 5% of the outstanding
shares of our common stock. As of September 30, 2001, we
had 36,056,030 shares of common stock issued and outstanding and
6,000 shares of Series B preferred stock issued and
outstanding (of which 2,000 shares are held in escrow under the
terms of the Asset Purchase Agreement. As of that date, we also
had 2,000 shares of non-voting Series A preferred stock
issued and outstanding.







Beneficial ownership is determined in accordance with rules of
the Securities and Exchange Commission and includes generally
voting power and/or investment power with respect to securities.
Shares of common stock subject to options, and shares of
Series B preferred stock subject to warrants, currently
exercisable or exercisable within 60 days of
September 30, 2001 are deemed outstanding for purposes of
computing the percentage beneficially owned by the person
holding the options but are not deemed outstanding for purposes
of computing the percentage beneficially owned by any other
person. The persons and entities named in the table have sole
voting power and sole investment power of the shares reflected
by their names, except as otherwise noted.




69



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##### 



Unless otherwise specified, the address for each beneficial
owner is c/o High Speed Net Solutions, Inc., 434 Fayetteville
Street Mall, Suite 600, Raleigh, North Carolina 27601.




|                                                                                                   |  |                                            |  |                      |       |                      |  |  |       |  
|-------------------------------------------------------------------------------------------------- |  | ------------------------------------------ |  | -------------------- | ----- | -------------------- |  |  | ----- | -
|                                                                                                   |  |                                            |  | Percent of Shares of |       | Percent of Shares of
|Name and Address of                                                                                |  | Shares Beneficially                        |  | Common Stock         |       | Class B Preferred   
|Beneficial Owner(1)                                                                                |  | Owned(2)                                   |  | Outstanding          |       | Stock Outstanding   
|                                                                                                   |  |                                            |  |                      |       |                     
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Dr. Bjorn Jawerth                                                                                  |  | 14,204,652
	2000 (Series B Preferred)(3)   |  |                      | 33.78 | %                    |  |  | 33.33 | %
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Kerstin Jawerth                                                                                    |  | 3,912,859(4)                               |  |                      | 9.30  | %                    |  |  | N/A   |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Andrew L. Fox                                                                                      |  | 275,000(5)                                 |  |                      | *     |                      |  |  | N/A   |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Richard F. Seifert                                                                                 |  | 578,056(6)                                 |  |                      | 1.37  | %                    |  |  | N/A   |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Herman Rush                                                                                        |  | 14,167(7)                                  |  |                      | *     |                      |  |  | N/A   |  
|Rush & Associates
	3340 Ocean Park Blvd.,
	Suite 3045
	Santa Monica, CA 90405                      |  |                                            |  |                      |       |                      |  |  |       |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Summus, Ltd.                                                                                       |  | 4,500 (Series B Preferred)(8)              |  |                      |       |                      |  |  | 75.00 | %
|Branch Banking And Trust                                                                           |  |                                            |  |                      |       |                      |  |  |       |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Company                                                                                            |  | 2,000 (Series B Preferred)(9)              |  |                      | N/A   |                      |  |  | 33.33 | %
|Corporate Trust
	223 West Nash Street
	Wilson, North Carolina 27893                                |  |                                            |  |                      |       |                      |  |  |       |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|William R. Dunavant and Lucille H. Dunavant, as
	joint tenants                                     |  | 2,275,000(10)                              |  |                      | 5.41  | %                    |  |  | N/A   |  
|c/o Richard E. Brodsky, P.A.
	25 Southeast Second Avenue
	Suite 919
	Miami, Florida 33131          |  |                                            |  |                      |       |                      |  |  |       |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Bradford Richdale                                                                                  |  | 2,140,452(11)                              |  |                      | 5.09  | %                    |  |  | N/A   |  
|c/o Alexander Dewar
	Alexander Westcott Securities
	400 Wall Street, 31stFloor
	New York, NY 10005 |  |                                            |  |                      |       |                      |  |  |       |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|All Executive Officers and Directors as a Group                                                    |  | 15,658,872
	2,000 (Series B Preferred)(12) |  |                      | 37.23 | %                    |  |  | 33.33 | %







| |   |                                                                                
| | - | -------------------------------------------------------------------------------
| | * | Represents beneficial ownership of less than one percent (1%) of
	common stock.



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Based upon information supplied by officers and directors and
	filings under Section 13 of the Securities and Exchange Act
	of 1934, as amended (the Exchange Act).                                                                                                                                                                                                                                                                                                               
|
| | (2) | Unless otherwise indicated, refers to the Companys shares
	of common stock.                                                                                                                                                                                                                                                                                                                                                                                                        
|
|
| | (3) | Includes (i) 3,912,859 shares of common stock owned by
	Kerstin Jawerth with respect to which Dr. Jawerth has sole
	voting power and (ii) 2,000 shares of Series B
	preferred stock for which Dr. Jawerth has shared
	dispositive and voting power in his capacity as Representative
	under an escrow agreement entered into in connection with the
	Asset Purchase Agreement. Also includes 509,500 shares of common
	stock underlying options that are exercisable within 60 days.
|
|
| | (4) | Dr. Bjorn Jawerth has sole voting power over such shares.                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | (5) | Represents shares of common stock underlying options that are
	exercisable within 60 days.                                                                                                                                                                                                                                                                                                                                                                                          

70



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##### 





| |     |                                                                                                                                                                                                                                                                                                                                                  
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (6) | Includes 125,000 shares held by the Richard J. Seifert Trust and
	125,000 shares held by the Rita Seifert Trust established by
	Mr.  Seiferts parents and an additional 55,556 shares
	held jointly by Mr. Seiferts parents. Also includes
	72,500 shares of common stock underlying options that are
	exercisable within 60 days.             
|
|
| | (7) | Represents shares of common stock underlying options that are
	exercisable within 60 days.                                                                                                                                                                                                                                                       
|
| | (8) | Represents (i) 4,000 shares of Series B preferred
	stock, and (ii) 500 shares of Series B preferred stock
	underlying a warrant that is exercisable within 60 days,
	held by Summus, Ltd. on behalf of Summus, Ltd. shareholders
	pending distribution to such shareholders on a pro rata basis in
	accordance with the Asset Purchase Agreement.
|
| | (9) | Represents shares held in escrow on behalf of Summus,
	Ltd.s shareholders pending distribution to such
	shareholders on a pro rata basis in accordance with the Asset
	Purchase Agreement.                                                                                                                                                      



|     |                                                                                                                                                                                                                                                                                                                                                                  
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Includes shares of common stock issued to Mr. Dunavant in
	connection with our acquisition of shares of common stock of
	Summus Technologies, Inc. and shares of our common stock issued
	under various settlement agreements entered into with Mr.
	Dunavant. Also includes 175,000 shares with respect to which
	Richard E. Brodsky has sole dispositive power.
|    
|    
|(11) | Includes shares held by each of StoneLeigh, Ltd. StoneLeigh
	Corporation, Ormond Trust and EuroPlan Trust Company TTEE, each
	an affiliate of Mr. Richdale.                                                                                                                                                                                                      
|    
|    
|(12) | Includes shares beneficially owned by all current directors and
	executive officers.                                                                                                                                                                                                                                                                             

Item 13.  Certain Relationships and Related
Transactions.




The HSNS Acquisition of Summus, Ltd.s Assets and
Operations







On February 16, 2001, pursuant to the terms of the Asset
Purchase Agreement, HSNS purchased all the assets and operations
of Summus. Ltd.




Prior to the closing of the transaction, Summus, Ltd. was the
largest shareholder of HSNS. It owned 8,217,781 shares (33.2%)
of HSNSs common stock, approximately 27.6% on a fully
diluted basis. Immediately after the closing,
Summus, Ltd.s ownership interest in HSNS increased to
20,593,352 shares (55.5%) of the Companys (i.e., the
combined companys) common stock on an as-converted basis,
approximately 53.1% on a fully-diluted basis as a result of
HSNSs issuance to Summus, Ltd. of:



| |   |                                                                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 20,218,733 shares of the Companys common stock (less
	3,604,445 shares of common stock to which HSNS itself was
	entitled to receive as a shareholder of Summus, Ltd., such
	shares being cancelled along with the 8,217,781 shares of HSNS
	common stock held by Summus, Ltd. prior to the parties
	execution of the Asset Purchase Agreement.);
|
| |  | 6,000 shares of Series B preferred stock (each share
	convertible into 1,000 shares of common stock), of which 2,000
	shares were deposited with and are to be held for 12 months
	by an escrow agent as security for any indemnification
	obligations of Summus, Ltd. and its shareholders under the
	agreement; and                              
|
|
| |  | warrants to purchase 500 shares of the Companys
	Series B convertible preferred stock, exercisable for a
	period of five years from the closing date (i.e.,
	February 16, 2001), at an exercise price, subject to
	adjustment, of $5.50 per share of common stock on an
	as-converted basis.                                                      
|

On March 13, 2001, Summus, Ltd. distributed certain of the
shares of the Companys common stock received in the
transaction to the shareholders of Summus, Ltd. in accordance
with their pro rata interests; the balance of such shares was
distributed in mid-July 2001. There remain 4,000 shares of
Series B Convertible Preferred Stock held in the name of
Summus, Ltd. In connection with the holding of its annual
meeting of shareholders, the Company intends to solicit
shareholder approval to increase the number of authorized shares
of its common stock so that there are a sufficient number of
shares of common stock reserved for issuance upon conversion of
the preferred shares. Further, the warrants are to be
distributed on a pro rata basis to the shareholders of Summus,
Ltd. other than the Company and Dr. Bjorn Jawerth. Both the
Company and

71



---



##### 





Satisfaction of Indebtedness to Bradford Richdale
Affiliates

Effective as of June 25, 2001, we entered into an agreement
of settlement and compromise with HealthTec, Inc. and Brad
Richdale Direct Inc., affiliates of Mr. Richdale. Under the
terms of that agreement:



| |   |                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we issued 250,000 shares of our common stock in satisfaction of
	our indebtedness to such entities in the aggregate amount of
	$435,301 (representing an effective value per share of $1.74);                                                          
|
| |  | we agreed to register the resale of such shares upon our filing
	of a registration statement under the Securities Act of 1933;                                                                                                                         
|
| |  | we agreed to provide a release by Summus, Ltd. of Summus,
	Ltd.s claim for additional shares of the Companys
	common stock under the terms of a stock purchase agreement,
	dated August 25, 1999, between Brad Richdale Direct and
	Summus, Ltd.; and
|
| |  | the Richdale affiliates agreed, for a two-year period from the
	date of the agreement, to vote the shares received under the
	agreement in favor of and for the election of the Board nominees
	nominated by the Company.                              

Settlement of the William R. Dunavant Litigation and
Post-Litigation Disputes

In August 1999, HSNS issued to Mr. William R. Dunavant
350,000 shares of its common stock (and made a cash payment of
$100,000 to Mr. Dunavant) in exchange for 250,000 shares of
common stock of Summus Technologies, Inc. held by
Mr. Dunavant. The agreement providing for this exchange of
stock contemplated HSNSs filing, as expeditiously as
possible (and in any event within 60 days of the date of
the agreement), a registration statement with the SEC covering
the resale of HSNSs shares issued to Mr. Dunavant. If
such a registration statement was not declared effective within
120 days of the date of the parties execution of the
agreement (i.e., by December 11, 1999) HSNS was obligated
to issue an additional 25,000 shares of its common stock to Mr.
Dunavant 135 days after the date of the parties
execution of the agreement and an additional 25,000 shares for
each 30-day period thereafter during which a registration
statement covering all of Mr. Dunavants shares of
HSNSs common stock had not been declared effective.

HSNS failed to file a registration statement covering the resale
of Mr. Dunavants shares by December 11, 1999.
Mr. Dunavant initiated litigation against HSNS in the
Circuit Court of the Eleventh Judicial Circuit, Miami-Dade
County, Florida on January 26, 2000.
Mr. Dunavants complaint alleged that HSNS failed to
register the shares of HSNS common stock issued to him in breach
of an agreement to do so. HSNS entered into a settlement
agreement, dated May 4, 2000, with Mr. Dunavant. By
the terms of an amended and restated settlement agreement, dated
June 6, 2000 (which superseded the May agreement in its
entirety), HSNS agreed, among other things, to:



| |   |                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | register the 350,000 shares of our common stock then held by Mr.
	Dunavant;                                                                                                                                                                                                                     
|
| |  | issue to Mr. Dunavant, within five business days of the
	date of the agreement, 150,000 shares of HSNS common stock, with
	registration rights; and                                                                                                                                             
|
| |  | issue to Mr. Dunavant 25,000 shares of HSNSs common
	stock each month for the six month period ending
	December 31, 2000, and 50,000 shares a month thereafter,
	and pay $12,750 per month in cash, until HSNS had an effective
	registration statement covering all of Mr. Dunavants
	shares.

In addition to the foregoing, HSNS agreed that if, on the
effective date of the registration statement covering
Mr. Dunavants shares, the closing price of its common
stock was less than $23 per share, HSNS would issue to
Mr. Dunavant additional shares pursuant to a formula based
on the difference between $23 and the closing price of the
common stock.

72



---



##### 



HSNS entered into a second amended and restated settlement
agreement, dated October 26, 2000, supplemented in
December 2000, which was to supersede the June 2000
agreement in its entirety. Under the terms of the second amended
and restated settlement agreement, HSNS agreed to:



| |   |                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | issue to Mr. Dunavant, within five business days of the
	agreement an additional number of shares of HSNS common stock
	such that Mr. Dunavant would hold, in the aggregate,
	1,000,000 shares of such stock;      
|
| |  | issue to Mr. Dunavant 25,000 shares of HSNS common stock
	each month, such obligation to continue until the closing of the
	capital-raising transaction provided for in the Asset Purchase
	Agreement;             
|
| |  | issue to Mr. Dunavant within five business days of the
	agreement an additional 1,000,000 shares of HSNS common stock
	(with Mr. Dunavant agreeing not to sell any of these shares
	for a period of 12 months); and
|
| |  | pay $25,000 in cash each month until a registration statement
	covering Mr.  Dunavants shares was declared effective.                                                                                             

The second amended and restated settlement agreement also
provided Mr. Dunavant with the right to require HSNS, on or
before March 31, 2001, to file a registration statement
with the SEC covering 2,000,000 of his shares. If such
registration statement was not declared effective by
July 15, 2001, Mr. Dunavant had the right to
immediately commence arbitration proceedings against HSNS.

As of May 31, 2000, HSNS had issued an aggregate of
2,150,000 shares of its common stock to Mr. Dunavant and
agreed to register for resale all of his shares and any future
issuances of shares to Mr. Dunavant until a registration
statement covering all of his shares was declared effective by
the SEC.

As of June 29, 2001, the Company entered into a settlement
agreement and a voting agreement with Mr. Dunavant and his
counsel. Under the terms of such agreements:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we issued an aggregate of 475,000 shares of our common stock to
	Mr. Dunavant and his counsel (300,000 shares to
	Mr. Dunavant; 175,000 shares to his counsel);                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Mr. Dunavant agreed to certain resale restrictions with
	respect to all but 350,000 shares of the shares of common stock
	held by him (an aggregate of 2,450,000 shares), specifically,
	to, in general, limit his public resale of such shares to 30,000
	shares per calendar month until February 15, 2002;                                                                                                                                                                                                                                                         
|
| |  | we agreed to prepare and proceed diligently to complete and file
	a registration statement with the SEC registering the resale of
	all the shares held by Mr. Dunavant, his spouse and his
	attorney, with Mr.  Dunavant and his counsel having a right
	to seek an immediate hearing for emergency injunctive relief if
	such registration statement is not filed before July 31,
	2001, unless counsel to the Company advises the Company that it
	is in the best interests of the Company and its shareholders to
	delay the filing of such registration statement;
|
| |  | Mr. Dunavant, his spouse and his counsel agreed, for a
	two-year period from the date of the agreements, to vote the
	shares held by them in favor of and for the election of Board
	nominees nominated by the Company and to vote such shares in a
	manner consistent with the recommendation of the Board with
	respect to certain extraordinary transactions (such as a tender
	offer, an exchange offer, merger or other business combination);
	and                                                                                                              
|
| |  | the Company, on the one hand, and Mr. Dunavant and his
	counsel, on the other, executed mutual general releases with
	respect to any and all claims against each other, except with
	respect to the obligations and liabilities under such agreements.                                                                                                                                                                                                                                                                                                                

At the meeting of the Companys Board of Directors held on
July 20, 2001, counsel to the Company advised the Board
that, in counsels opinion, it was in the best interests of
the Company and its shareholders to delay the filing of a
registration statement with the SEC to register the resale of
all the shares of common

73



---



##### 







| |   |                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | becoming timely in its reporting obligations under the
	Securities Exchange Act of 1934, as amended (at the time the
	Companys quarterly report on Form 10-Q for the first
	quarter of 2001, to have been filed on or before May 15,
	2001, had not yet been filed); and                                  
|
| |  | clearing its Form 10 at the earliest opportunity possible,
	since the clearance of the Form 10 is a prerequisite to
	having the Companys common stock made eligible for
	quotation on the OTC Bulletin Board® and thereby
	potentially opening up greater opportunities for the Company to
	raise capital.

The Company and its counsel, in accordance with the
June 29, 2001 settlement agreement, have kept
Mr. Dunavant and his counsel apprised of the Companys
contemplated timing with respect to the filing of the
registration statement in view of these considerations. Further,
the Company has initiated the process by which all of its
shareholders with registration rights, including
Mr. Dunavant, have been sent a notice seeking an indication
from such shareholders of their desire to have their shares
subject to such registration rights covered by the registration
statement, the number of such shares and their intended plan of
distribution. The Company currently anticipates that it will
file the registration statement with the SEC within a matter of
days after clearing the Form 10.

Item 14.  Exhibits, Financial Statement
Schedules, and Reports on Form 8-K.



| |        |                                                                                                                                                                                                                                                                                                                      
| | ------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a)(1) | Financial Statements and Financial Statement Schedules. See
	Index to Financial Statements on page F-1. Financial Statement
	Schedules have been omitted because of the absence of conditions
	under which they would be required or because the required
	information has been included in the financial statements.
|
| | (a)(3) | The following Exhibits are filed as part of this Report as
	required by Regulation S-K. The Exhibits designated by (*)
	are management contracts and compensation plans and arrangements
	required to be filed as Exhibits to this Report.                                                                           

|        |      |                     |  |                                                                                                                                                                                                                                                                     
|------- | ---- | ------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |                    
|Number  |      | Exhibit Description
|        |      |                    
|        | 3.1  |                     |  | Restated Articles of Incorporation, filed
	February 28, 2000 (incorporated by reference to
	Exhibit 3.01 to our Quarterly Report on Form 10-Q
	filed for the quarter ended March 31, 2000)**                                                                        
|        | 3.2  |                     |  | Second Amended and Restated Bylaws**                                                                                                                                                                                                                                
|        | 3.3  |                     |  | Articles of Amendment and Statement of Rights and
	Preferences of the 8% Series A Convertible Preferred Stock,
	filed March 3, 2000 (incorporated by reference to
	Exhibit  3.03 to our Quarterly Report on Form 10-Q
	filed for the quarter ended March 31, 2000)**
|        | 3.4  |                     |  | Articles of Correction filed June 23, 2000
	to Articles of Amendment, filed March 2, 2000**                                                                                                                                                                         
|        | 3.5  |                     |  | Amendment to Articles of Incorporation and
	Statement of Rights and Preferences of the Series B
	Convertible Preferred Stock (incorporated by reference to
	Exhibit 3.01 to our Current Report on Form 8-K dated
	February 16, 2001)**                              
|        | 4.1  |                     |  | Specimen Common Stock Certificate**                                                                                                                                                                                                                                 
|        | 9.1  |                     |  | Voting Trust Agreement, dated as of
	February 16,2001, among Dr. Bjorn Jawerth, High Speed
	Net Solutions, Inc. and Stuart Diamond (incorporated by
	reference to Exhibit 10.07 to our Current Report on
	Form 8-K dated February 16, 2001)**                       
|        | 10.1 |                     |  | Acquisition Agreement and Plan of Merger, dated
	as of April  19, 2000, between J.S.J. Capital Corp. and
	High Speed Net Solutions, Inc. (incorporated by reference to
	Exhibit 1.1 to our Current Report on Form 8-K dated
	April 21, 2000)**                      
|        | 10.2 |                     |  | Share Acquisition Agreement, dated as of
	June 30, 2000, between High Speed Net Solutions, Inc. and
	Douglas May**                                                                                                                                                  

74



---



##### 



|        |       |                     |  |                                                                                                                                                                                                                                                                                  
|------- | ----- | ------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |                    
|Number  |       | Exhibit Description
|        |       |                    
|        | 10.3  |                     |  | License Agreement, effective July 10, 2000,
	among Douglas May & Co., Inc., High Speed Net Solutions,
	Inc. and Douglas May (incorporated by reference to
	Exhibit 10.42 to our Current Report on Form 8-K dated
	July 25, 2000)**                                               
|        | 10.4  |                     |  | Escrow Agreement, effective July 10, 2000,
	among Douglas May & Co., Inc., High Speed Net Solutions,
	Inc. and Douglas May (incorporated by reference to
	Exhibit 10.43 to our Current Report on Form 8-K dated
	July 25, 2000)**                                                
|        | 10.5  |                     |  | Asset Purchase Agreement, dated October 30,
	2000, among High Speed Net Solutions, Inc., Summus, Ltd. and the
	stockholders named therein (incorporated by reference to
	Exhibit 10.01 to our Current Report on Form 8-K dated
	February 16, 2001)**                             
|        | 10.6  |                     |  | Amendment Number 1 to Asset Purchase Agreement,
	dated as of December 30, 2000, among High Speed Net
	Solutions, Inc., Summus, Ltd. and the stockholders named therein
	(incorporated by reference to Exhibit 10.02 to our Current
	Report on Form 8-K dated February 16, 2001)**
|        | 10.7  |                     |  | Amendment to Asset Purchase Agreement, dated as
	of January  30, 2001, among High Speed Net Solutions, Inc.,
	Summus, Ltd. and the stockholders named therein (incorporated by
	reference to Exhibit 10.03 to our Current Report on
	Form  8-K dated February 16, 2001)**        
|        | 10.8  |                     |  | Escrow Agreement, dated as of February 16,
	2001, by and among High Speed Net Solutions, Inc., Summus, Ltd.
	and Branch Banking Trust Company (incorporated by reference to
	Exhibit 10.05 to our Current Report on Form 8-K dated
	February 16, 2001)**                         
|        | 10.9  |                     |  | Agreement for Transfer of All Rights and
	Reservation of License in Software, dated September 4,
	2000, between PlusStation, LLC, Niksa Radovic and Summus, Ltd.**                                                                                                               
|        | 10.10 |                     |  | Software License Agreement, dated
	February 23, 1995, between Raytheon Company and Summus,
	Ltd.**                                                                                                                                                                               
|        | 10.11 |                     |  | Technology License Agreement, dated
	August 17, 2000, between ADLabs, Inc. and Summus, Ltd.**                                                                                                                                                                                    
|        | 10.12 |                     |  | Master Consulting Agreement, dated
	August 17, 2000, between ADLabs, Inc. and Summus, Ltd.**                                                                                                                                                                                     
|        | 10.13 |                     |  | Contract #N00014-00-C-0023, dated January 4,
	2000, between Summus, Ltd. and the Office of Naval Research**                                                                                                                                                                      
|        | 10.14 |                     |  | Contract #N00014-01-C-0217, dated March 13,
	2001, between Summus, Ltd. and the Office of Naval Research**                                                                                                                                                                       
|        | 10.15 |                     |  | Rich Media Direct Services Agreement, dated
	June 1, 2000, between High Speed Net Solutions, Inc. and
	LearnKey Inc.**                                                                                                                                                           
|        | 10.16 |                     |  | Systems Work Agreement, dated July 27, 2000,
	between Nexgenix, Inc. and High Speed Net Solutions, Inc.**                                                                                                                                                                        
|        | 10.17 |                     |  | Outsourcing Agreement, dated July 31, 2000,
	between E.Piphany, Inc. and High Speed Net Solutions, Inc.**                                                                                                                                                                        
|        | 10.18 |                     |  | Internet Streaming Service Agreement, dated
	September 18, 2000, between High Speed Net Solutions, Inc.
	and All Video Network, Inc.**                                                                                                                                           
|        | 10.19 |                     |  | Second Amended and Restated Settlement Agreement,
	dated as of October 26, 2000, between High Speed Net Solutions,
	Inc. and William R. Dunavant**                                                                                                                               
|        | 10.20 |                     |  | Memo, dated December 5, 2000, supplementing
	the Second Amended and Restated Settlement Agreement**                                                                                                                                                                              
|        | 10.21 |                     |  | Settlement Agreement and General Release of all
	Claims, effective April 25, 2001, by and among High Speed
	Net Solutions, Inc., RPC International L.C. and Ronald Cropper**                                                                                                     
|        | 10.22 |                     |  | Settlement Agreement, dated September 22,
	1999, between High Speed Net Solutions, Inc. and Peter R.
	Rogina**                                                                                                                                                                   
|        | 10.23 |                     |  | Anti-Dilution Settlement Agreement, dated
	December 8, 2000, between High Speed Net Solutions, Inc.
	and Peter Rogina**                                                                                                                                                          
|        | 10.24 |                     |  | Release and Settlement Agreement, dated
	April 30, 2001, between Pin High Company, Inc. and Summus,
	Ltd.**                                                                                                                                                                      

75



---



##### 






|        |        |                     |  |                                                                                                                                                                                                                                     
|------- | ------ | ------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |                    
|Number  |        | Exhibit Description
|        |        |                    
|        | 10.25* |                     |  | Equity Compensation Plan, effective
	January 31, 2000 (incorporated by reference to
	Exhibit 10.05 to our Quarterly Report on Form 10-Q
	filed for the quarter ended March 31. 2000)**                                              
|        | 10.26* |                     |  | Amendment to Equity Compensation Plan, effective
	May 1, 2000**                                                                                                                                                                     
|        | 10.27* |                     |  | Amendment to High Speed Net Solutions, Inc.
	Equity Compensation Plan, effective February 16, 2001
	(incorporated by reference to Exhibit 10.09 to our Current
	Report on Form 8-K dated February 16, 2001)**                       
|        | 10.28* |                     |  | Employment Offer Letter, dated January 20,
	2000, with Andrew L. Fox (incorporated by reference to
	Exhibit 10.06 to our Quarterly Report on Form 10-Q
	filed for the quarter ended March 31, 2000)**                               
|        | 10.29* |                     |  | Employment Offer Letter, dated March 29,
	2000, with Robert S. Lowrey**                                                                                                                                                             
|        | 10.30* |                     |  | Executive Employment Agreement, dated as of
	February 16, 2001, between High Speed Net Solutions, Inc.
	and Bjorn Jawerth (incorporated by reference to
	Exhibit 10.06 to our Current Report on Form 8-K dated
	February 16, 2001)**
|        | 10.31  |                     |  | Lease Agreement, dated as of October 15,
	1999, as modified on March 23, 2000 and June 9, 2000,
	between Phoenix Limited Partnership of Raleigh and High Speed
	Net Solutions, Inc.**                                               
|        | 10.32  |                     |  | Lease Agreement, dated as of August 12,
	1999, between Phoenix Limited Partnership of Raleigh and Summus,
	Ltd.**                                                                                                                   
|        | 10.33  |                     |  | Lease Modification Agreement Number 1, dated as
	of December  22, 1999, between Phoenix Limited Partnership
	of Raleigh and Summus, Ltd.**                                                                                          
|        | 10.34  |                     |  | Stock Purchase Agreement, dated
	September 2000, between Dial2Go, Inc. and High Speed Net
	Solutions, Inc.**                                                                                                                        
|        | 10.35  |                     |  | Data Network Exchange Facility Services
	Agreement, dated as of September 19, 2000, between InFlow, Inc.
	and High Speed Net Solutions, Inc.**                                                                                      
|        | 10.36  |                     |  | Addendum to Data Network Services Agreement,
	dated as of September 19, 2000, between InFlow, Inc. and
	High Speed Net Solutions, Inc.**                                                                                            
|        | 10.37  |                     |  | Settlement Agreement, dated as of June 29,
	2001, among High Speed Net Solutions, Inc., William R. Dunavant,
	Richard E. Brodsky, P.A. and Richard E. Brodsky**                                                                     
|        | 10.38  |                     |  | Voting Agreement, dated as of June 29, 2001,
	among William R. Dunavant, Lucille Dunavant, Richard E. Brodsky,
	P.A., Richard E. Brodsky and High Speed Net Solutions, Inc.**                                                       
|        | 10.39  |                     |  | Agreement of Settlement and Compromise, dated
	June 25, 2001, among High Speed Net Solutions, Inc.,
	HealthTec, Inc. and Brad Richdale Direct, Inc.**                                                                               
|        | 10.40* |                     |  | HSNS Inventions Awards Plan, effective
	October 30, 2000.                                                                                                                                                                           
|        | 10.41  |                     |  | Master Porting Agreement, dated July 27,
	2001, between High Speed Net Solutions, Inc. and Samsung
	Electronics America.                                                                                                            
|        | 16.1   |                     |  | Letter from Barry L. Friedman, P.C. regarding
	change in Certifying Accountant dated September 21, 2000
	(incorporated by reference to Exhibit 16.02 to our Current
	Report on Form 8-K/ A dated April 21, 2000)**                  
|        | 21.1   |                     |  | Subsidiaries of High Speed Net Solutions,
	Inc.  None.                                                                                                                                                                             









Reports on Form 8-K

During the fourth quarter of the year ended December 31,
2000, the Company filed with the SEC an amendment to its Current
Report on Form 8-K, filed May 8, 2000, pursuant to
Items 1, 2, 6 and 7 with respect to its acquisition of J.S.J.
Capital Corp. The amendment was filed October 19, 2000.

76



---



##### 



SIGNATURES

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



| |                               
| | ------------------------------
| | HIGH SPEED NET SOLUTIONS, INC.



| |     |                     
| | --- | --------------------
| | By: | /s/ ROBERT S. LOWREY

| |                        
| | -----------------------
| |                        
| | Robert S. Lowrey       
| | Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
date indicated.




|                                         |  |                                                                       |  |                 
|---------------------------------------- |  | --------------------------------------------------------------------- |  | ----------------
|Signature                                |  | Title                                                                 |  | Date            
|                                         |  |                                                                       |  |                 
|/s/ DR. BJORN JAWERTHDr. Bjorn Jawerth   |  | Principal Executive Officer; Co-Chief Executive
	Officer and Director |  | October 31, 2001
|/s/ RICHARD F. SEIFERTRichard F. Seifert |  | Co-Chief Executive Officer and Director                               |  | October 31, 2001
|/s/ ROBERT S. LOWREYRobert S. Lowrey     |  | Principal Accounting Officer; Chief Financial
	Officer                |  | October 31, 2001
|/s/ ANDREW L. FOXAndrew L. Fox           |  | Director                                                              |  | October 31, 2001
|Herman Rush                              |  | Director                                                              |  | October 31, 2001




77



---



##### 



INDEX TO FINANCIAL STATEMENTS




|                                                                                                                 |  |      |      | 
|---------------------------------------------------------------------------------------------------------------- |  | ---- | ---- | 
|                                                                                                                 |  | Page
|                                                                                                                 |  |     
|Financial Statements Of Summus, Ltd.                                                                             |  |      |      | 
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Independent Auditors Report of Ernst &
	Young LLP                                                               |  |      | F-3  | 
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Independent Auditors Report of Bauknight
	Pietras & Stormer, P.A.                                               |  |      | F-4  | 
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Balance Sheets at December 31, 2000 and 1999                                                                     |  |      | F-5  | 
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Statements of Operations for the Years Ended
	December 31, 2000, 1999 and 1998                                   |  |      | F-6  | 
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Statements of Shareholders Equity (Deficit)
	for the Years Ended December 31, 2000, 1999 and 1998               |  |      | F-7  | 
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Statements of Cash Flows for the Years Ended
	December 31, 2000, 1999 and 1998                                   |  |      | F-8  | 
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Notes to Financial Statements                                                                                    |  |      | F-9  | 
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Consolidated Financial Statements Of High
	Speed Net Solutions, Inc.                                             |  |      |      | 
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Independent Auditors Report                                                                                     |  |      | F-23 | 
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Consolidated Balance Sheets at December 31,
	2000 and 1999                                                       |  |      | F-24 | 
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Consolidated Statements of Operations for the
	Years Ended December 31, 2000, 1999 and 1998                      |  |      | F-25 | 
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Consolidated Statements of Shareholders
	Equity (Deficit) for the Years Ended December 31, 2000,
	1999 and 1998 |  |      | F-26 | 
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Consolidated Statements of Cash Flows for the
	Years Ended December 31, 2000, 1999 and 1998                      |  |      | F-28 | 
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Notes to Consolidated Financial Statements                                                                       |  |      | F-29 | 
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Financial Statements Of Douglas May & Co.,
	Inc.                                                                 |  |      |      | 
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Independent Auditors Report                                                                                     |  |      | F-51 | 
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Balance Sheet at December 31, 1999                                                                               |  |      | F-52 | 
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Statement of Income and Returned Earnings for the
	Year Ended December 31, 1999                                  |  |      | F-53 | 
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Statement of Cash Flows for the Year Ended
	December 31, 1999                                                    |  |      | F-54 | 
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Notes to Financial Statements                                                                                    |  |      | F-55 | 




F-1



---



##### 



Financial Statements

Summus, Ltd.

Years ended December 31, 2000 and 1999 with Report of
Independent Auditors

F-2



---



##### 



Report of Independent Auditors

The Board of Directors



We have audited the accompanying balance sheets of Summus, Ltd.
as of December 31, 1999 and 2000 and the related statements
of operations, shareholders equity (deficit), and cash
flows for each of the two years in the period ended
December 31, 2000. These financial statements are the
responsibility of Summus, Ltd.s management. Our
responsibility is to express an opinion on these financial
statements based on our audits. The statements of operations,
shareholders equity (deficit), and cash flows for the year
ended December 31, 1998, were audited by other auditors
whose report dated March 24, 1999, expressed an unqualified
opinion on those statements.

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

In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Summus, Ltd. at December 31, 1999 and 2000 and the
results of its operations and its cash flows for the each of the
two years in the period ended December 31, 2000 in
conformity with accounting principles generally accepted in the
United States.

As more fully described in Note 2, the accompanying 1999
financial statements have been restated to reflect a reduction
in capitalized software costs and deferred revenue, an increase
in Summus, Ltd.s investment in a related party, and
increases in certain expenses related to compensation, bonuses
and contract termination fees.

The accompanying financial statements have been prepared
assuming that Summus, Ltd. will continue as a going concern. As
more fully described in Note 2, Summus, Ltd. has incurred
operating losses for each year during the three-year period
ended December 31, 2000, has experienced negative cash
flows from operations and has a significant deficiency in
working capital at December 31, 2000. These conditions
raise substantial doubt about Summus, Ltd.s ability to
continue as a going concern. Managements plans in regard
to these matters are also described in Note 2. The
financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and
classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.

Ernst & Young LLP





F-3



---



##### 



Bauknight Pietras & Stormer, P.A.

Certified Public Accountants





Columbia, South Carolina 







|                          |                    
|------------------------- | -------------------
|KENNETH H. BAUKNIGHT, CPA | 1517 GERVAIS STREET

|                          |               
|------------------------- | --------------
|RUSSELL L. BAUKNIGHT, CPA | COLUMBIA, SC 

|                       |       
|---------------------- | ------
|THOMAS D. PIETRAS, CPA | FAX: 



Report of Independent Auditors

The Board of Directors



We have audited the accompanying statements of operations,
changes in shareholders equity (deficit), and cash flows
of Summus, Ltd. for the year ended December 31, 1998. These
financial statements are the responsibility of Summus,
Ltd.s management. Our responsibility is to express an
opinion on these financial statements based on our audit.

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

In our opinion, the financial statements referred to above,
present fairly, in all material respects, the results of
operations and cash flows of Summus, Ltd. for the year ended
December 31, 1998, in conformity with accounting principles
generally accepted in the United States.

As disclosed in Note 14, and as a result of a business
combination completed in February 2001, the 1998 financial
statements have been restated to reflect the historical equity
of Summus, Ltd.

Bauknight Pietras & Stormer, P.A.

March 24, 1999



F-4



---



##### 



Summus, Ltd.

Balance Sheets

|                                                |                                                                                                                                                    |             |           |             |   |   |            |             |  
|----------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------- | ----------- | --------- | ----------- | - | - | ---------- | ----------- | -
|                                                |                                                                                                                                                    |            
|                                                |                                                                                                                                                    | December 31
|                                                |                                                                                                                                                    |            
|                                                |                                                                                                                                                    | 1999        |           | 2000       
|                                                |                                                                                                                                                    |             |           |            
|                                                |                                                                                                                                                    | (Restated)  |           |            
|                                               
|                                               
|                                               
|                                               
|Assets                                          |                                                                                                                                                    |             |           |             |   |   |            |            
|                                               
|                                               
|                                               
|                                               
|Current assets:                                 |                                                                                                                                                    |             |           |             |   |   |            |            
|                                               
|                                               
|                                               
|                                               
|                                                | Cash                                                                                                                                               |             | $         | 647,704     |   |   | $          | 208,495     |  
|                                               
|                                               
|                                               
|                                               
|                                                | Accounts receivable (net of allowance of $11,800
	in 1999)                                                                                         |             |           | 59,314      |   |   |            | 32,744      |  
|                                               
|                                               
|                                               
|                                               
|                                                | Other current assets                                                                                                                               |             |           | 64,967      |   |   |            | 39,153      |  
|                                                |                                                                                                                                                    |             |           |             |   |   |            |            
|Total current assets                            |                                                                                                                                                    |             | 771,985   |             |   |   | 280,392    |            
|                                               
|                                               
|                                               
|                                               
|Equipment and furniture, net                    |                                                                                                                                                    |             | 610,787   |             |   |   | 991,202    |            
|                                               
|                                               
|                                               
|                                               
|Receivable from related party                   |                                                                                                                                                    |             | 154,000   |             |   |   | 134,677    |            
|                                               
|                                               
|                                               
|                                               
|Investment in equity investee                   |                                                                                                                                                    |             | 5,845,874 |             |   |   |           |            
|                                                |                                                                                                                                                    |             |           |             |   |   |            |            
|Total assets                                    |                                                                                                                                                    | $           | 7,382,646 |             |   | $ | 1,406,271  |            
|                                                |                                                                                                                                                    |             |           |             |   |   |            |            
|Liabilities and shareholders equity
	(deficit) |                                                                                                                                                    |             |           |             |   |   |            |            
|                                               
|                                               
|                                               
|                                               
|Current liabilities:                            |                                                                                                                                                    |             |           |             |   |   |            |            
|                                               
|                                               
|                                               
|                                               
|                                                | Accounts payable                                                                                                                                   |             | $         | 330,179     |   |   | $          | 1,282,157   |  
|                                               
|                                               
|                                               
|                                               
|                                                | Accrued salaries and related costs                                                                                                                 |             |           | 686,659     |   |   |            | 721,956     |  
|                                               
|                                               
|                                               
|                                               
|                                                | Current portion of notes payable                                                                                                                   |             |           | 119,268     |   |   |            | 229,215     |  
|                                               
|                                               
|                                               
|                                               
|                                                | Capital lease obligations, current portion                                                                                                         |             |           | 161,087     |   |   |            | 339,724     |  
|                                               
|                                               
|                                               
|                                               
|                                                | Loans payable to related party                                                                                                                     |             |           |            |   |   |            | 1,435,000   |  
|                                                |                                                                                                                                                    |             |           |             |   |   |            |            
|Total current liabilities                       |                                                                                                                                                    |             | 1,297,193 |             |   |   | 4,008,052  |            
|                                               
|                                               
|                                               
|                                               
|Capital lease obligations, less current portion |                                                                                                                                                    |             | 187,718   |             |   |   | 117,966    |            
|                                               
|                                               
|                                               
|                                               
|Notes payable, less current portion             |                                                                                                                                                    |             | 59,647    |             |   |   | 100,000    |            
|                                               
|                                               
|                                               
|                                               
|Deferred software royalty revenue               |                                                                                                                                                    |             | 2,492,396 |             |   |   | 1,834,065  |            
|                                               
|                                               
|                                               
|                                               
|Shareholders equity (deficit):                 |                                                                                                                                                    |             |           |             |   |   |            |            
|                                               
|                                               
|                                               
|                                               
|                                                | Preferred stock, Series B, $.001 par value,
	authorized 6,500 shares, 4,000 shares issued and outstanding                                          |             |           | 4           |   |   |            | 4           |  
|                                               
|                                               
|                                               
|                                               
|                                                | Common stock, $.001 par value, 10,000,000 shares
	authorized, 9,561,860 and 9,584,938 shares issued and
	outstanding at December 31, 1999 and 2000 |             |           | 9,562       |   |   |            | 9,585       |  
|                                               
|                                               
|                                               
|                                               
|                                                | Additional paid-in capital                                                                                                                         |             |           | 15,298,958  |   |   |            | 19,729,222  |  
|                                               
|                                               
|                                               
|                                               
|                                                | Deferred compensation                                                                                                                              |             |           |            |   |   |            | (978,510    | )
|                                               
|                                               
|                                               
|                                               
|                                                | Accumulated deficit                                                                                                                                |             |           | (11,962,832 | ) |   |            | (23,414,113 | )
|                                                |                                                                                                                                                    |             |           |             |   |   |            |            
|Total shareholders equity (deficit)            |                                                                                                                                                    |             | 3,345,692 |             |   |   | (4,653,812 | )          
|                                                |                                                                                                                                                    |             |           |             |   |   |            |            
|Total liabilities and shareholders equity      |                                                                                                                                                    | $           | 7,382,646 |             |   | $ | 1,406,271  |            
|                                                |                                                                                                                                                    |             |           |             |   |   |            |            

See accompanying notes.

F-5



---



##### 



Summus, Ltd.

Statements of Operations




|                                                                    |                                          |                        |            |         |   |      |            |            |   |   |             |            |  
|------------------------------------------------------------------- | ---------------------------------------- | ---------------------- | ---------- | ------- | - | ---- | ---------- | ---------- | - | - | ----------- | ---------- | -
|                                                                    |                                          |                       
|                                                                    |                                          | Year ended December 31
|                                                                    |                                          |                       
|                                                                    |                                          | 1998                   |            | 1999    |   | 2000
|                                                                    |                                          |                        |            |         |   |     
|                                                                    |                                          |                       
|                                                                    |                                          | (Restated)            
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Revenues:                                                           |                                          |                        |            |         |   |      |            |            |   |   |             |           
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Contract services                        |                        | $          | 310,155 |   |      | $          | 407,986    |   |   | $           | 774,545    |  
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | License fees                             |                        |            | 246,483 |   |      |            | 107,230    |   |   |             | 294,113    |  
|                                                                    |                                          |                        |            |         |   |      |            |            |   |   |             |           
|Total revenues                                                      |                                          |                        | 556,638    |         |   |      | 515,216    |            |   |   | 1,068,658   |           
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Cost of revenues                                                    |                                          |                        | 271,701    |         |   |      | 281,254    |            |   |   | 398,326     |           
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Selling, general and administrative expenses                        |                                          |                        | 2,720,152  |         |   |      | 3,797,067  | *          |   |   | 6,221,362   | *         
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Non-cash compensation charges                                       |                                          |                        |           |         |   |      | 2,670,050  |            |   |   | 2,127,962   |           
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Research and development                                            |                                          |                        | 421,685    |         |   |      | 1,356,686  |            |   |   | 1,119,333   |           
|                                                                    |                                          |                        |            |         |   |      |            |            |   |   |             |           
|Operating loss                                                      |                                          |                        | (2,856,900 | )       |   |      | (7,589,841 | )          |   |   | (8,798,325  | )         
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Other income (expense):                                             |                                          |                        |            |         |   |      |            |            |   |   |             |           
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Gain on sale of stock of equity investee |                        |            |        |   |      |            | 2,314,390  |   |   |             | 3,680,065  |  
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Participation in loss of equity investee |                        |            |        |   |      |            | (3,447,110 | ) |   |             | (6,356,932 | )
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Loss on disposal of assets               |                        |            | (9,869  | ) |      |            | (119,180   | ) |   |             |           |  
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Interest income (expense), net           |                        |            | (14,455 | ) |      |            | (5,239     | ) |   |             | 23,911     |  
|                                                                    |                                          |                        |            |         |   |      |            |            |   |   |             |           
|Other expense, net                                                  |                                          |                        | (24,324    | )       |   |      | (1,257,139 | )          |   |   | (2,652,956  | )         
|                                                                    |                                          |                        |            |         |   |      |            |            |   |   |             |           
|                                                                   
|Net loss                                                            |                                          | $                      | (2,881,224 | )       |   | $    | (8,846,980 | )          |   | $ | (11,451,281 | )         
|                                                                    |                                          |                        |            |         |   |      |            |            |   |   |             |           
|Net loss per share (basic and diluted)                              |                                          | $                      | (0.09      | )       |   | $    | (0.27      | )          |   | $ | (0.35       | )         
|                                                                    |                                          |                        |            |         |   |      |            |            |   |   |             |           
|Weighted average shares outstanding (basic and
	diluted)            |                                          |                        | 9,189,165  |         |   |      | 9,428,075  |            |   |   | 9,546,768   |           
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Recapitalization resulting from the Summus, Ltd.
	asset acquisition |                                          |                        | 23,392,035 |         |   |      | 23,392,035 |            |   |   | 23,392,035  |           
|                                                                    |                                          |                        |            |         |   |      |            |            |   |   |             |           
|Weighted average shares giving effect to the
	recapitalization      |                                          |                        | 32,581,200 |         |   |      | 32,820,110 |            |   |   | 32,958,803  |           
|                                                                    |                                          |                        |            |         |   |      |            |            |   |   |             |           









|  |                                                                                                                                                       
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Selling general and administrative expenses in 1999 and 2000
	exclude $2.7  million and $2.1 million, respectively,
	of non-cash compensation charges.

See accompanying notes.

F-6



---



##### 



Summus, Ltd.

Statements of Shareholders Equity (Deficit)

|                                         |                                                                                    |                 |       |              |  |            |   |          |  |             |           |               |   |         |       |           |  |   |            |           |   |   |          |            |   |   |             |             |   |   |            |             |  
|---------------------------------------- | ---------------------------------------------------------------------------------- | --------------- | ----- | ------------ |  | ---------- | - | -------- |  | ----------- | --------- | ------------- | - | ------- | ----- | --------- |  | - | ---------- | --------- | - | - | -------- | ---------- | - | - | ----------- | ----------- | - | - | ---------- | ----------- | -
|                                         |                                                                                    |                 |       |              |  |            |   |          |  |             |           |               |   |        
|                                         |                                                                                    | Series B        |       |              |  |            |   |          |  |             |           | Total        
|                                         |                                                                                    | Preferred Stock |       | Common Stock |  | Additional |   |          |  |             |           | Shareholders
|                                         |                                                                                    |                 |       |              |  | Paid-In    |   | Deferred |  | Accumulated |           | Equity       
|                                         |                                                                                    | Shares          |       | Amount       |  | Shares     |   | Amount   |  | Capital     |           | Compensation  |   | Deficit |       | (Deficit)
|                                         |                                                                                    |                 |       |              |  |            |   |          |  |             |           |               |   |         |       |          
|                                        
|                                        
|                                        
|                                        
|Balance at December 31, 1997             |                                                                                    |                 | 4,000 |              |  | $          | 4 |          |  |             | 8,544,642 |               |   | $       | 8,545 |           |  | $ | (75,954    | )         |   | $ |         |            |   | $ | (234,628    | )           |   | $ | (302,033   | )          
|                                        
|                                        
|                                        
|                                        
|                                         | Sale of common stock                                                               |                 |       |             |  |            |   |         |  |             |           | 831,000       |   |         |       | 831       |  |   |            | 3,499,252 |   |   |          |           |   |   |             |            |   |   |            | 3,500,083   |  
|                                        
|                                        
|                                        
|                                        
|                                         | Net loss for 1998                                                                  |                 |       |             |  |            |   |         |  |             |           |              |   |         |       |          |  |   |            |          |   |   |          |           |   |   |             | (2,881,224  | ) |   |            | (2,881,224  | )
|                                         |                                                                                    |                 |       |              |  |            |   |          |  |             |           |               |   |         |       |           |  |   |            |           |   |   |          |            |   |   |             |             |   |   |            |            
|Balance at December 31, 1998             |                                                                                    |                 | 4,000 |              |  |            | 4 |          |  |             | 9,375,642 |               |   |         | 9,376 |           |  |   | 3,423,298  |           |   |   |         |            |   |   | (3,115,852  | )           |   |   | 316,826    |            
|                                        
|                                        
|                                        
|                                        
|                                         | Repurchase of common stock                                                         |                 |       |             |  |            |   |         |  |             |           | (71           | ) |         |       |          |  |   |            | (298      | ) |   |          |           |   |   |             |            |   |   |            | (298        | )
|                                        
|                                        
|                                        
|                                        
|                                         | Common stock issued in exchange for investment in
	equity investee                 |                 |       |             |  |            |   |         |  |             |           | 132,888       |   |         |       | 133       |  |   |            | 7,902,134 |   |   |          |           |   |   |             |            |   |   |            | 7,902,267   |  
|                                        
|                                        
|                                        
|                                        
|                                         | Issuance of common stock for services                                              |                 |       |             |  |            |   |         |  |             |           | 53,401        |   |         |       | 53        |  |   |            | 2,669,997 |   |   |          |           |   |   |             |            |   |   |            | 2,670,050   |  
|                                        
|                                        
|                                        
|                                        
|                                         | Sales of stock by equity investee                                                  |                 |       |             |  |            |   |         |  |             |           |              |   |         |       |          |  |   |            | 1,303,827 |   |   |          |           |   |   |             |            |   |   |            | 1,303,827   |  
|                                        
|                                        
|                                        
|                                        
|                                         | Net loss for 1999                                                                  |                 |       |             |  |            |   |         |  |             |           |              |   |         |       |          |  |   |            |          |   |   |          |           |   |   |             | (8,846,980  | ) |   |            | (8,846,980  | )
|                                         |                                                                                    |                 |       |              |  |            |   |          |  |             |           |               |   |         |       |           |  |   |            |           |   |   |          |            |   |   |             |             |   |   |            |            
|Balance at December 31, 1999
	(Restated) |                                                                                    |                 | 4,000 |              |  |            | 4 |          |  |             | 9,561,860 |               |   |         | 9,562 |           |  |   | 15,298,958 |           |   |   |         |            |   |   | (11,962,832 | )           |   |   | 3,345,692  |            
|                                        
|                                        
|                                        
|                                        
|                                         | Deferred compensation recognized in connection
	with the issuance of stock options |                 |       |             |  |            |   |         |  |             |           |              |   |         |       |          |  |   |            | 3,106,472 |   |   |          | (3,106,472 | ) |   |             |            |   |   |            |            |  
|                                        
|                                        
|                                        
|                                        
|                                         | Exercise of stock options                                                          |                 |       |             |  |            |   |         |  |             |           | 23,078        |   |         |       | 23        |  |   |            |          |   |   |          |           |   |   |             |            |   |   |            | 23          |  
|                                        
|                                        
|                                        
|                                        
|                                         | Amortization of deferred compensation                                              |                 |       |             |  |            |   |         |  |             |           |              |   |         |       |          |  |   |            |          |   |   |          | 2,127,962  |   |   |             |            |   |   |            | 2,127,962   |  
|                                        
|                                        
|                                        
|                                        
|                                         | Sales of stock by equity investee                                                  |                 |       |             |  |            |   |         |  |             |           |              |   |         |       |          |  |   |            | 1,323,792 |   |   |          |           |   |   |             |            |   |   |            | 1,323,792   |  
|                                        
|                                        
|                                        
|                                        
|                                         | Net loss for 2000                                                                  |                 |       |             |  |            |   |         |  |             |           |              |   |         |       |          |  |   |            |          |   |   |          |           |   |   |             | (11,451,281 | ) |   |            | (11,451,281 | )
|                                         |                                                                                    |                 |       |              |  |            |   |          |  |             |           |               |   |         |       |           |  |   |            |           |   |   |          |            |   |   |             |             |   |   |            |            
|Balance at December 31, 2000             |                                                                                    |                 | 4,000 |              |  | $          | 4 |          |  |             | 9,584,938 |               |   | $       | 9,585 |           |  | $ | 19,729,222 |           |   | $ | (978,510 | )          |   | $ | (23,414,113 | )           |   | $ | (4,653,812 | )          
|                                         |                                                                                    |                 |       |              |  |            |   |          |  |             |           |               |   |         |       |           |  |   |            |           |   |   |          |            |   |   |             |             |   |   |            |            

See accompanying notes.

F-7



---



##### 



Summus, Ltd.

Statements of Cash Flows

|                                                                                        |                                                                              |                                              |                                    |      |         |          |            |   |            |          |             |   |            |          |  
|--------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | -------------------------------------------- | ---------------------------------- | ---- | ------- | -------- | ---------- | - | ---------- | -------- | ----------- | - | ---------- | -------- | -
|                                                                                        |                                                                              |                                             
|                                                                                        |                                                                              | Year ended December 31                      
|                                                                                        |                                                                              |                                             
|                                                                                        |                                                                              | 1998                                         |                                    | 1999 |         | 2000    
|                                                                                        |                                                                              |                                              |                                    |      |         |         
|                                                                                        |                                                                              |                                             
|                                                                                        |                                                                              | (Restated)                                  
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|Operating activities                                                                    |                                                                              |                                              |                                    |      |         |          |            |   |            |          |             |  
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|Net loss                                                                                |                                                                              | $                                            | (2,881,224                         | )    |         | $        | (8,846,980 | ) |            | $        | (11,451,281 | )
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        | Adjustments to reconcile net loss to net cash
	used in operating activities: |                                              |                                    |      |         |          |            |   |            |          |             |   |           
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        |                                                                              | Depreciation and amortization                |                                    |      | 244,495 |          |            |   | 45,651     |          |             |   | 274,708    |         
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        |                                                                              | Loss on disposal of assets                   |                                    |      | 9,869   |          |            |   | 119,230    |          |             |   |           |         
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        |                                                                              | Gain on sale of stock of equity investee     |                                    |      |        |          |            |   | (2,314,390 | )        |             |   | (3,680,065 | )       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        |                                                                              | Non-cash compensation charges                |                                    |      |        |          |            |   | 2,670,050  |          |             |   | 2,127,962  |         
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        |                                                                              | Participation in loss equity investee        |                                    |      |        |          |            |   | 3,447,110  |          |             |   | 6,356,932  |         
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        |                                                                              | Changes in operating assets and liabilities: |                                    |      |         |          |            |   |            |          |             |   |            |         
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        |                                                                              |                                              | Accounts receivable                |      |         | (110,033 | )          |   |            | (34,827  | )           |   |            | 26,570   |  
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        |                                                                              |                                              | Receivable from related party      |      |         |         |            |   |            | (154,000 | )           |   |            | 19,323   |  
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        |                                                                              |                                              | Accounts payable                   |      |         | (12,046  | )          |   |            | 127,729  |             |   |            | 951,999  |  
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        |                                                                              |                                              | Accrued salaries and related costs |      |         |          |            |   |            | 595,609  |             |   |            | 35,297   |  
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        |                                                                              |                                              | Deferred software royalty revenue  |      |         | (31,018  | )          |   |            |         |             |   |            | (658,331 | )
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        |                                                                              |                                              | Other current assets               |      |         | (15,015  | )          |   |            | (49,952  | )           |   |            | 25,814   |  
|                                                                                        |                                                                              |                                              |                                    |      |         |          |            |   |            |          |             |  
|Net cash used in operating activities                                                   |                                                                              |                                              | (2,794,972                         | )    |         |          | (4,394,770 | ) |            |          | (5,971,072  | )
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|Investing activities                                                                    |                                                                              |                                              |                                    |      |         |          |            |   |            |          |             |  
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|Proceeds from deferred revenue collected                                                |                                                                              |                                              |                                   |      |         |          | 2,250,000  |   |            |          |            |  
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|Proceeds from sale of stock of equity investee                                          |                                                                              |                                              |                                   |      |         |          | 2,977,500  |   |            |          | 4,492,799   |  
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|Purchases of property and equipment                                                     |                                                                              |                                              | (205,100                           | )    |         |          | (318,289   | ) |            |          | (132,233    | )
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|Increase in capitalized software development costs                                      |                                                                              |                                              | (307,490                           | )    |         |          |           |   |            |          |            |  
|                                                                                        |                                                                              |                                              |                                    |      |         |          |            |   |            |          |             |  
|Net cash provided by (used in) investing
	activities                                    |                                                                              |                                              | (512,590                           | )    |         |          | 4,909,211  |   |            |          | 4,360,566   |  
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|Financing activities                                                                    |                                                                              |                                              |                                    |      |         |          |            |   |            |          |             |  
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|Proceeds from exercise of stock options                                                 |                                                                              |                                              |                                   |      |         |          |           |   |            |          | 23          |  
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|Proceeds from sale of common stock                                                      |                                                                              |                                              | 3,500,083                          |      |         |          |           |   |            |          |            |  
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|Increase in notes payable                                                               |                                                                              |                                              |                                   |      |         |          | 268,075    |   |            |          |            |  
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|Principal payments on notes payable                                                     |                                                                              |                                              |                                   |      |         |          |           |   |            |          | (49,700     | )
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|Proceeds from short-term borrowings                                                     |                                                                              |                                              | 25,000                             |      |         |          |           |   |            |          |            |  
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|Principal payments on short-term borrowings                                             |                                                                              |                                              | (76,000                            | )    |         |          | (233,458   | ) |            |          |            |  
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|Principal payments on capital lease obligations                                         |                                                                              |                                              | (16,302                            | )    |         |          | (38,392    | ) |            |          | (214,026    | )
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|Proceeds from loans payable to related party                                            |                                                                              |                                              |                                   |      |         |          |           |   |            |          | 1,435,000   |  
|                                                                                        |                                                                              |                                              |                                    |      |         |          |            |   |            |          |             |  
|Net cash provided by (used in) financing
	activities                                    |                                                                              |                                              | 3,432,781                          |      |         |          | (3,775     | ) |            |          | 1,171,297   |  
|                                                                                        |                                                                              |                                              |                                    |      |         |          |            |   |            |          |             |  
|(Decrease) increase in cash                                                             |                                                                              |                                              | 125,219                            |      |         |          | 510,666    |   |            |          | (439,209    | )
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|Cash and cash equivalents at beginning of year                                          |                                                                              |                                              | 11,819                             |      |         |          | 137,038    |   |            |          | 647,704     |  
|                                                                                        |                                                                              |                                              |                                    |      |         |          |            |   |            |          |             |  
|Cash and cash equivalents at end of year                                                |                                                                              | $                                            | 137,038                            |      |         | $        | 647,704    |   |            | $        | 208,495     |  
|                                                                                        |                                                                              |                                              |                                    |      |         |          |            |   |            |          |             |  
|Supplemental disclosures of cash flow
	information                                      |                                                                              |                                              |                                    |      |         |          |            |   |            |          |             |  
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|Cash paid for interest                                                                  |                                                                              | $                                            | 14,455                             |      |         | $        | 21,792     |   |            | $        |            |  
|                                                                                        |                                                                              |                                              |                                    |      |         |          |            |   |            |          |             |  
|Supplemental schedule of noncash
	activity                                              |                                                                              |                                              |                                    |      |         |          |            |   |            |          |             |  
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|Assets acquired under capital leases                                                    |                                                                              | $                                            | 44,965                             |      |         | $        | 351,241    |   |            | $        | 322,890     |  
|                                                                                        |                                                                              |                                              |                                    |      |         |          |            |   |            |          |             |  
|Acquisition of common stock of equity investee in
	exchange for prepaid royalty payment |                                                                              | $                                            |                                   |      |         | $        | 750,000    |   |            | $        |            |  
|                                                                                        |                                                                              |                                              |                                    |      |         |          |            |   |            |          |             |  

See accompanying notes.

F-8



---



##### 



Summus, Ltd.

Notes to Financial Statements

December 31, 2000

1.  Business and Organization and Basis of
Presentation




Summus, Ltd. (Summus, Ltd.) develops proprietary
software products for image and video compression for license to
third party software developers. Summus, Ltd. also performs
related research and development under various contracts with
the U.S. government and others. Management has structured the
Summus, Ltd.s internal organization as one business
segment from which all operating decisions and operating results
are made and evaluated.




During 1998, shareholders of Summus, Ltd. formed Summus
Technologies, Inc. (Summus Technologies). Summus
Technologies was formed for the purpose of marketing Summus,
Ltd.s products. In August 1999, Summus Ltd. and
Summus Technologies merged, resulting in Summus, Ltd. being
the surviving entity.

The acquisition of Summus Technologies was accounted for in a
manner similar to a pooling of interests since it was acquired
from an entity under common control. Approximately
999,500 shares of common stock of Summus, Ltd. were
issued to the shareholders of Summus Technologies in exchange
for the net assets of Summus Technologies.

The accompanying financial statements have been prepared on a
going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course
of business. As shown in the financial statements for the year
ended December 31, 2000, Summus, Ltd. has incurred a net
loss of $11.5 million, has experienced negative cash flows
from operations and has a significant deficiency in working
capital at December 31, 2000. Summus, Ltd.s
continuation as a going concern is dependent on its ability to
generate sufficient cash flow to meet its obligations on a
timely basis, to obtain additional financing and ultimately to
attain profitability. Summus, Ltd. is actively promoting and
expanding its product line and pursuing additional financing
from third parties. Management expects it will be able to
attract additional capital to continue to fund operations and
also expects that increased revenues will reduce its operating
losses in future periods. However, there can be no assurance
that managements plan will be executed as anticipated.

The financial statements presented herein do not include any
adjustments relating to the recoverability of assets and
classification of liabilities that might be necessary should
Summus, Ltd. be unable to continue as a going concern.




On February 16, 2001, High Speed Net Solutions, Inc.
(HSNS) acquired all the assets and operations of
Summus, Ltd. under the terms of an asset purchase agreement,
dated October 30, 2000, as amended (the Asset
Purchase Agreement). The transaction was recorded as a
capital transaction, accompanied by a recapitalization. As a
result of the transaction, the historical financial statements
of Summus, Ltd., for accounting purposes, are deemed to be that
of High Speed Net Solutions, Inc. (See Note 14).




2.  Restatement

The accompanying financial statements as of and for the year
ended December 31, 1999 have been restated to reflect a
reduction in capitalized software costs and deferred revenue of
$507,604 and a related reversal of previously recorded
amortization of capitalized software costs of $216,644,
resulting in a net reduction of $290,960. These adjustments were
recorded to reflect the accounting treatment specified by AICPA
Statement of Position 97-2 whereby capitalized software costs
are offset against deferred revenue recorded in connection with
a software agreement (i.e., the February 1999 Marketing
License Agreement with HSNS, its equity investee). The deferred
revenue balance was also restated to increase the balance
initially recorded for stock received for deferred revenue by
$180,468, with a corresponding increase to Summus, Ltd.s
investment in equity investee. The restated value of the shares
received by Summus, Ltd. was determined by

F-9



---



##### 



Summus, Ltd.


Notes to Financial Statements (continued)



2.  Restatement (continued)


applying a revised discount to the traded value of the stock
received based on actual stock sales transactions in proximity
to this transaction and represents the same per share value used
by HSNS to record the transaction.

The accompanying financial statements as of and for the year
ended December 31, 1999 have also been restated to reflect
an increase of $1,303,827 in the value of Summus, Ltd.s
investment in HSNS, its equity investee, resulting from sales of
stock by the equity investee during 1999.

Additionally, the accompanying financial statements as of and
for the year ended December 31, 1999 have been restated to
reflect the accrual of $595,609 of salaries and bonuses related
to 1999 that were initially expensed in 2000 when paid but which
related to 1999 compensation and should have been accrued at
December 31, 1999, as well as $268,075 of expense
representing a termination fee of a development contract in 1999
which was previously recorded as part of a stock repurchase by
Summus, Ltd..

The following table summarizes the effect of the restatement
adjustments on Summus, Ltd.s balance sheet and statement
of operations as of and for the year ended December 31,
1999:

|                                                   |  |               |           |  
|-------------------------------------------------- |  | ------------- | --------- | -
|                                                   |  | Balance Sheet
|                                                   |  |              
|Total assets as previously reported                |  | $             | 6,189,311 |  
|                                                  
|                                                  
|                                                  
|                                                  
|Reduction in capitalized software costs            |  |               | (290,960  | )
|                                                  
|                                                  
|                                                  
|                                                  
|Increase in value of investment in equity investee |  |               | 1,484,295 |  
|                                                   |  |               |           |  
|Total assets as restated                           |  | $             | 7,382,646 |  
|                                                   |  |               |           |  

|                                                        |  |               |            |  
|------------------------------------------------------- |  | ------------- | ---------- | -
|                                                        |  | Statement    
|                                                        |  | of Operations
|                                                        |  |              
|Net loss as previously reported                         |  | $             | (8,199,940 | )
|                                                       
|                                                       
|                                                       
|                                                       
|Reversal of amortization of capitalized software
	costs |  |               | 216,644    |  
|                                                       
|                                                       
|                                                       
|                                                       
|Salary and bonus expense                                |  |               | (595,609   | )
|                                                       
|                                                       
|                                                       
|                                                       
|Contract termination fee                                |  |               | (268,075   | )
|                                                        |  |               |            |  
|Net loss as restated                                    |  | $             | (8,846,980 | )
|                                                        |  |               |            |  

3.  Summary of Significant Accounting Policies

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 revenue and expenses during the reporting
period. Actual results could differ from those estimates.

Revenue Recognition and
Related Costs

Summus, Ltd. recognizes revenue on time and materials consulting
projects at the time services are rendered based upon the terms
of individual contracts.

Summus, Ltd. follows the provisions of AICPA Statement of
Position 97-2, Software Revenue Recognition, as
amended by AICPA Statement of Position 98-9
Modification of SOP No. 97-2 Software

F-10



---



##### 



Summus, Ltd.


Notes to Financial Statements (continued)



3.  Summary of Significant Accounting Policies
(continued)


Revenue Recognition with Respect to Certain Transactions.
Revenues from software license fees and hardware sales are
generally recognized upon delivery provided that a contract has
been executed, the vendor fee is fixed or determinable, no
significant vendor obligations or uncertainties surrounding
customer acceptance remain, and collection of the resulting
receivable is deemed probable.

Deferred revenue is recorded for amounts received for which
Summus, Ltd. has not yet completed its contractual obligations.
Deferred revenue related to the software agreement with HSNS
(i.e., the February 1999 Marketing License Agreement), its
equity investee, is used to offset capitalized software costs
related to the development arrangement in accordance with the
provisions of AICPA Statement of Position 97-2.

Costs of revenues primarily represent costs of providing
contract services. The costs of license fee revenue is not
separately maintained and has historically been insignificant.

Equipment and
Furniture

Equipment and furniture is stated at cost. Depreciation is
computed over the estimated useful lives of the assets
(generally three to seven years) using the straight-line method.

Investment in Equity
Investee

Summus, Ltd. accounts for its investment in HSNS using the
equity method of accounting. During 1999, Summus, Ltd. acquired
a majority of the outstanding stock of HSNS. Soon thereafter,
Summus, Ltd. began to sell a portion of the HSNS shares it had
acquired to independent third parties for cash such that by
December 31, 1999, the ownership percentage in HSNS was
reduced to approximately 44%. Since Summus, Ltd.s
controlling interest in HSNS was temporary, Summus, Ltd.
accounted for its investment using the equity method rather than
consolidating. Summus, Ltd. sold additional shares of its HSNS
stock in 2000 such that its ownership percentage at
December 31, 2000 was approximately 33%.

Concentrations of Credit
Risk and Financial Instruments

During 1999 and 2000, revenue from the U.S. Government and
related entities represented 76% and 60% of total revenue,
respectively.

Summus, Ltd.s financial instruments that are exposed to
concentrations of credit risk consist primarily of its trade
accounts receivable. Collateral is generally not required.
Management provides an estimated allowance for doubtful accounts
based on its assessment of the likelihood of future collections.
No allowance has been recorded as of December 31, 2000, as
all amounts were subsequently collected.

The carrying amount of cash, accounts receivable, accounts
payable and debt approximate fair value for these financial
instruments.

Software Development
Costs

Capitalization of software development costs begins with the
establishment of technological feasibility of new or enhanced
software products. Technological feasibility of a computer
software product is established when Summus, Ltd. has completed
all planning, designing, coding and testing that is necessary to
establish that the software product can be produced to meet
design specifications including functions, features and

F-11



---



##### 



Summus, Ltd.


Notes to Financial Statements (continued)



3.  Summary of Significant Accounting Policies
(continued)


technical performance requirements. All costs incurred prior to
establishing technological feasibility of a software product are
charged to research and development expense as incurred.

Summus, Ltd. amortizes capitalized software development costs on
a product-by-product basis at the greater of the amount computed
using (a) the ratio of current gross revenues for a product
to the total of current and anticipated future gross revenues or
(b) the straight-line method over the estimated remaining
economic life of the products, generally three years.
Amortization begins when the product is available for general
release to customers. Summus, Ltd. capitalized $307,490,
$136,837 and $658,332 during 1998, 1999 and 2000, respectively,
of costs incurred related to product development that met these
criteria for capitalization. During 1999 and 2000, all of the
costs capitalized related to certain license agreements with
HSNS, a related party (see Note 10). During 1998, Summus,
Ltd. recorded $50,871 of amortization expense, which was
included in cost of revenues in the accompanying statement of
operations. During 1999 and 2000, Summus, Ltd. did not record
amortization expense due to the fact that all capitalized
software development costs were offset by proceeds from Summus,
Ltd.s equity investee, HSNS. Summus, Ltd. offset the
entire balance of its capitalized software costs with these
proceeds, resulting in a zero balance of capitalized software as
of December 31, 1999 and 2000.

Income Taxes

Summus, Ltd. uses the liability method to account for income
taxes. Under this method, deferred income taxes are determined
based on differences between the financial statement and tax
basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to
reverse. Valuation allowances are established if and when
necessary to reduce deferred tax assets to the amounts expected
to be realized.

Stock-Based
Compensation

Summus, Ltd. has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards (SFAS)
No. 123, Accounting for Stock-Based
Compensation. As permitted by the provisions of SFAS
No. 123, Summus, Ltd. continues to follow Accounting
Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees and related interpretations
for its stock-based awards.

In accordance with APB 25, Summus, Ltd. has valued employee
stock options and awards and stock issued to employees and
directors for services performed based on the estimated fair
value of Summus, Ltd. common stock, at the measurement date of
the stock options and awards.

New Accounting
Pronouncements

In June 1998, the Financial Accounting Standards Board issued
Statement No. 133 Accounting for Derivative
Instruments and Hedging Activities
(SFAS 133), which is required to be adopted in
years beginning after June 15, 2000. Because Summus, Ltd.
has not historically used derivative instruments, management
does not anticipate that the adoption of this statement will
have a significant effect on its operations, financial position
or cash flows.

In December 1999, the Securities and Exchange Commission
released Staff Accounting Bulletin No. 101
(SAB No. 101), Revenue Recognition in
Financial Statements, which provides guidance on the
recognition, presentation, and disclosure of revenue in
financial statements. SAB No. 101 provides guidance

F-12



---



##### 



Summus, Ltd.


Notes to Financial Statements (continued)



3.  Summary of Significant Accounting Policies
(continued)


on a variety of revenue recognition issues, including gross
versus net income statement presentation. Summus, Ltd. adopted
the provisions of SAB No. 101 during 2000.




On June 29, 2001, the Financial Accounting Standards Board
(FASB) unanimously approved the issuance of
Statements of Financial Accounting Standards (SFAS)
No. 141, Business Combinations and
No. 142, Goodwill and Other Intangible Assets.
SFAS 141 eliminates the pooling-of-interests method of
accounting for business combinations except for qualifying
business combinations that were initiated prior to July 1,
2001. SFAS 141 also includes new criteria to recognize
intangible assets separately from goodwill. The requirements of
SFAS 141 are effective for any business combination
accounted for by the purchase method that is completed after
June 30, 2001. Under SFAS 142, goodwill and intangible
assets with indefinite lives are no longer amortized but are
reviewed annually, or more frequently if impairment indicators
arise, for impairment. Separable intangible assets that are not
deemed to have an indefinite life will continue to be amortized
over their useful lives. The amortization provisions of
SFAS 142 requiring non-amortization of goodwill and
indefinite-lived intangible assets apply to goodwill and
indefinite-lived intangible assets acquired after June 30,
2001. Summus, Ltd. will adopt SFAS 142 in the fiscal year
beginning January 1, 2002. The effect of adopting
SFAS 142 by the Company beginning January 1, 2002, is
not expected to have a significant effect on the operating
results or financial position of the Company.




4.  Equipment and Furniture

Equipment and furniture consists of the following at
December 31:

|                                               |  |      |         |      |  |   |           |  
|---------------------------------------------- |  | ---- | ------- | ---- |  | - | --------- | -
|                                               |  | 1999 |         | 2000
|                                               |  |      |         |     
|Computer equipment financed by capital leases  |  | $    | 596,400 |      |  | $ | 802,020   |  
|                                              
|                                              
|                                              
|                                              
|Computer software                              |  |      | 45,623  |      |  |   | 261,396   |  
|                                              
|                                              
|                                              
|                                              
|Furniture and office equipment                 |  |      | 23,379  |      |  |   | 227,985   |  
|                                               |  |      |         |      |  |   |           |  
|                                               |  |      | 665,402 |      |  |   | 1,291,401 |  
|                                              
|                                              
|                                              
|                                              
|Less accumulated depreciation and amortization |  |      | (54,615 | )    |  |   | (300,199  | )
|                                               |  |      |         |      |  |   |           |  
|                                               |  | $    | 610,787 |      |  | $ | 991,202   |  
|                                               |  |      |         |      |  |   |           |  

Depreciation and amortization expense totaled $244,495, $45,651
and $274,708 for the years ended December 31, 1998, 1999
and 2000, respectively.

5.  Leases

Summus, Ltd. leases equipment and office space under long-term
capital and operating lease agreements. Rental expense amounted
to $95,000 and $180,000, and $424,000 for the years ended
December 31, 1998, 1999 and 2000, respectively.

F-13



---



##### 



Summus, Ltd.


Notes to Financial Statements (continued)



5.  Leases (continued)


Minimum future lease payments at December 31, 2000 are as
follows:

|                                        |  |         |          |           |  |   |           | 
|--------------------------------------- |  | ------- | -------- | --------- |  | - | --------- | 
|                                        |  | Capital |          | Operating
|                                        |  | Leases  |          | Leases   
|                                        |  |         |          |          
|2001                                    |  | $       | 357,107  |           |  | $ | 264,588   | 
|                                       
|                                       
|                                       
|                                       
|2002                                    |  |         | 111,737  |           |  |   | 295,754   | 
|                                       
|                                       
|                                       
|                                       
|2003                                    |  |         | 11,033   |           |  |   | 301,622   | 
|                                       
|                                       
|                                       
|                                       
|2004                                    |  |         |         |           |  |   | 307,678   | 
|                                       
|                                       
|                                       
|                                       
|2005 and thereafter                     |  |         |         |           |  |   | 260,690   | 
|                                        |  |         |          |           |  |   |           | 
|Total minimum lease payments            |  |         | 479,877  |           |  | $ | 1,430,332 | 
|                                        |  |         |          |           |  |   |           | 
|Less amounts representing interest      |  |         | (22,187  | )         |  |   |           | 
|                                        |  |         |          |           |  |   |           | 
|Present value of minimum lease payments |  |         | 457,690  |           |  |   |           | 
|                                       
|                                       
|                                       
|                                       
|Less current portion                    |  |         | (339,724 | )         |  |   |           | 
|                                        |  |         |          |           |  |   |           | 
|                                        |  | $       | 117,966  |           |  |   |           | 
|                                        |  |         |          |           |  |   |           | 

6.  Income Taxes

No provision for income taxes has been recorded during the years
presented due to Summus, Ltd.s significant operating
losses in each year.

Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of Summus,
Ltd.s deferred tax assets are as follows:

|                             |  |             |            |      |  |   |            |  
|---------------------------- |  | ----------- | ---------- | ---- |  | - | ---------- | -
|                             |  |            
|                             |  | December 31
|                             |  |            
|                             |  | 1999        |            | 2000
|                             |  |             |            |     
|Deferred revenue             |  | $           | 4,500,000  |      |  | $ | 700,000    |  
|                            
|                            
|                            
|                            
|Accrued expenses and revenue |  |             | 1,000,000  |      |  |   | 800,000    |  
|                            
|                            
|                            
|                            
|NOL carryforward             |  |             | 1,100,000  |      |  |   | 2,400,000  |  
|                            
|                            
|                            
|                            
|Investments                  |  |             | 700,000    |      |  |   | 1,600,000  |  
|                             |  |             |            |      |  |   |            |  
|Total deferred tax assets    |  |             | 7,300,000  |      |  |   | 5,500,000  |  
|                            
|                            
|                            
|                            
|Valuation allowance          |  |             | (7,300,000 | )    |  |   | (5,500,000 | )
|                             |  |             |            |      |  |   |            |  
|Net deferred taxes           |  | $           |           |      |  | $ |           |  
|                             |  |             |            |      |  |   |            |  

Management has determined that a 100% valuation allowance for
existing deferred tax assets is appropriate given the
uncertainty regarding the ultimate realization of any such
assets.

At December 31, 2000, Summus, Ltd. had federal and state
net operating loss carryforwards of approximately $6,200,000 for
income tax purposes. The tax benefit of these carryforwards is
reflected in the above table of deferred tax assets. If not
used, these carryforwards begin to expire in 2018 for federal
tax purposes and in 2013 for state tax purposes. U.S. tax rules
impose limitations on the use of net operating losses following
certain changes in ownership. If such a change occurs, the
limitation could reduce the amount of these benefits that would
be available to offset future taxable income each year, starting
with the year of ownership change.

F-14



---



##### 



Summus, Ltd.


Notes to Financial Statements (continued)

7.  Related Party Transactions

In February 1999, Summus, Ltd. entered into a Marketing License
Agreement with HSNS. In March 2000, Summus, Ltd. entered into a
Master Agreement with HSNS (see Note 10).

During 1999, Summus, Ltd. provided cash advances to HSNS, its
equity investee. The balance outstanding related to these
advances as of December 31, 1999 and 2000 was $154,000 and
$134,677, respectively.




During 2000, HSNS made loans to Summus, Ltd. totaling
$1,435,000. These loans accrued interest at 8% and were payable
within 60 days of issuance. These loans were canceled upon
the closing of the Summus, Ltd. asset acquisition on
February 16, 2001 (see Note 14).




Deferred compensation to an officer and significant shareholder
of Summus, Ltd. was $91,050 and $81,050 at December 31,
1999 and 2000, respectively.

8.  Notes Payable

During 1999, Summus, Ltd. entered into an agreement with a
shareholder to repurchase 71.428 shares of its common stock from
that shareholder for an aggregate value of $268,373, of which
$268,075 represented a termination fee for a development
contract and $298 represented the fair value of the shares
repurchased. In connection with this agreement, Summus, Ltd.
entered into a promissory note with the shareholder whereby
Summus, Ltd. agreed to pay approximately $10,000 per month over
a 27-month period to fund this transaction. During 2000, Summus,
Ltd. did not make all required monthly installments and thus
defaulted on the promissory note. Consequently, the note is
accruing interest at 18% per annum and the total amount has been
classified as a current liability. The outstanding balance as of
December 31, 1999 and 2000 is $178,915 and $129,215,
respectively.

On September 4, 2000, Summus, Ltd. entered into an
agreement to obtain the rights to certain software technology.
In exchange for these rights, Summus, Ltd. agreed to pay
$200,000 in eight equal installments of $25,000 beginning in
2001 and continuing over the next two years. The outstanding
principal balance of this note as of December 30, 2000 was
$200,000.

9.  Investment in Equity Investee

During 1999, Summus, Ltd. acquired 1,500,000 shares of common
stock of HSNS as partial payment for royalties due in connection
with a Marketing License Agreement between the companies. The
shares were not registered with the Securities and Exchange
Commission and were, thus, restricted securities
within the meaning of Rule 144 under the Securities Act of
1933. Subsequently, Summus, Ltd. acquired an additional
9,542,360 shares of HSNS common stock (such shares also being
restricted securities) from a significant shareholder of HSNS in
exchange for the issuance of 132,888 shares of Summus,
Ltd.s common stock. This resulted in Summus, Ltd.
obtaining a majority ownership interest in HSNS at that time. As
of December 31, 1999 and 2000, Summus, Ltd.s
ownership percentage decreased to approximately 44% and 33%,
respectively, as a portion of the shares initially acquired were
sold. Summus, Ltd. accounted for this investment using the
equity method of accounting. The initial carrying amount was
recorded at the estimated fair value of the stock received
taking into account the fact that the stock was not registered
and thus was not freely tradable. Summus, Ltd. adjusted the
carrying amount of its investment in HSNS for its share of
HSNSs losses subsequent to the date of investment.
Additionally, during 1999 and 2000, Summus, Ltd.s
investment in HSNS was increased based on sales of additional
shares of HSNS stock to third parties by HSNS and was decreased
based on Summus, Ltd. recording its share of HSNSs losses.
Based on these transactions, the

F-15



---



##### 



Summus, Ltd.


Notes to Financial Statements (continued)



9.  Investment in Equity Investee (continued)





carrying value of Summus, Ltd.s investment was reduced to
zero at December 31, 2000. At December 31, 2000,
Summus, Ltd. owned 8,217,781 shares of HSNS which represented
approximately a 33% ownership percentage. On February 16,
2001, Summus, Ltd. sold substantially all of its assets and
operations to HSNS in a transaction accounted for as a capital
transaction, accompanied by a recapitalization. (see
Note 14).




The condensed results of operations and financial position of
HSNS at December 31, 1999 and 2000 are summarized below:

|                                     |  |             |            |      |  |   |             |  
|------------------------------------ |  | ----------- | ---------- | ---- |  | - | ----------- | -
|                                     |  |            
|                                     |  | December 31
|                                     |  |            
|                                     |  | 1999        |            | 2000
|                                     |  |             |            |     
|Total assets                         |  | $           | 4,275,064  |      |  | $ | 4,497,607   |  
|                                     |  |             |            |      |  |   |             |  
|Total liabilities                    |  | $           | 1,489,691  |      |  | $ | 4,849,259   |  
|                                     |  |             |            |      |  |   |             |  
|Total stockholders equity (deficit) |  | $           | 2,785,373  |      |  | $ | (351,652    | )
|                                     |  |             |            |      |  |   |             |  
|Net loss                             |  | $           | (9,684,529 | )    |  | $ | (12,441,655 | )
|                                     |  |             |            |      |  |   |             |  

10.  Deferred Software Royalty Revenue

In February 1999, Summus, Ltd. entered into a Marketing License
Agreement (MLA) with HSNS. As consideration for this
agreement, Summus, Ltd. received prepaid software royalty
payments. The amount of prepaid royalties received consisted of
cash payments of $2,250,000 and the receipt of 1,500,000 shares
of HSNS common stock valued at $750,000 for total aggregate
consideration of $3,000,000. The value assigned to the 1,500,000
common shares was based on a discounted value of HSNSs
common stock taking into the consideration the restricted nature
of these shares. This amount was classified as deferred revenue
in Summus, Ltd.s balance sheet.

In February 2000, Summus, Ltd. and HSNS entered into a Master
Agreement, which included a Software License Agreement
(SLA), a Software Maintenance Agreement
(SMA) and a Revenue Sharing Agreement
(RSA) (collectively with the Master Agreement, the
New Agreements). The New Agreements entirely
replaced and superseded the MLA entered into in February 1999.
The New Agreements provided for various payment terms by and
between Summus, Ltd. and HSNS.

The products specified under the MLA and the New Agreements were
technologically feasible at the time the software agreements
were entered into and as such, the $3 million proceeds from
the MLA and New Agreements were credited against all costs
related to the software (i.e., the software covered by the MLA
and the New Agreements) which had been capitalized by Summus,
Ltd. Summus, Ltd. applied $507,604 and $658,332 of its deferred
revenue balance against its capitalized software development
costs during 1999 and 2000, respectively.

11.  Profit Sharing Plan

Summus, Ltd. has established a 401(k) profit sharing plan for
the benefit of employees who have attained the age of
21 years. Summus, Ltd.s contribution to the plan is
discretionary and is not limited to profits. For the years ended
December 31, 1998, 1999, and 2000, Summus, Ltd. contributed
approximately $21,000, $26,000, and $42,303 to the plan,
respectively.

F-16



---



##### 



Summus, Ltd.


Notes to Financial Statements (continued)

12.  Stock Options

During 2000, Summus, Ltd. established a stock option plan to
provide for the issuance of stock options to employees and
directors. Options granted in connection with initial employment
with Summus, Ltd. vest upon issuance. Options granted in
connection with ongoing annual grants vest 20% immediately, then
5% each three-month period thereafter over the next
4 years. Each stock option generally has a term of
10 years.

Summus, Ltd. has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards (SFAS)
No. 123, Accounting for Stock-Based
Compensation. As permitted by the provisions of SFAS
No. 123, Summus, Ltd. continues to follow Accounting
Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees and related interpretations
for its stock-based awards.

During 2000, all of the stock options were granted with an
exercise price of $0.19 per share. This exercise price was below
the estimated fair value of the underlying common stock of
Summus, Ltd. Deferred compensation has been recorded for the
difference in value between exercise price and the estimated
fair value of the underlying common stock and is being
recognized over the vesting period of the stock options. As of
December 31, 2000, 999,349 options were exercisable.

A summary of Summus, Ltd.s stock option activity is as
follows:

|                                |           |             |           |           |   |   |      |      | 
|------------------------------- | --------- | ----------- | --------- | --------- | - | - | ---- | ---- | 
|                                |           | Outstanding |           | Exercise 
|                                |           | Options     |           | Price    
|                                |           |             |           |          
|Outstanding  December 31, 1999 |           |             |          |           |   | $ |     |     
|                               
|                               
|                               
|                               
|                                | Granted   |             |           | 1,613,838 |   |   |      | 0.19 | 
|                               
|                               
|                               
|                               
|                                | Exercised |             |           | (447,205  | ) |   |      | 0.19 | 
|                                |           |             |           |           |   |   |      |     
|Outstanding  December 31, 2000 |           |             | 1,166,633 |           |   | $ | 0.19 |     
|                                |           |             |           |           |   |   |      |     

In accordance with SFAS 123, the fair value of each option grant
was determined by using the minimum value method with the
following weighted average assumptions for the twelve month
period ended December 31, 2000: dividend yield of 0%; risk
free interest rate of 6.20% and expected option lives of
5 years. The weighted average fair value at the date of
grant was $39.00 per option. Had compensation expense for
Summus, Ltd.s stock options been determined based on the
fair value at the date of grant consistent with the provisions
of SFAS 123, Summus, Ltd.s net loss and net loss per
share would have been $14.6 million and $1.52 for the
twelve months ended December 31, 2000.

13.  Change in Par Value

In 1999, Summus, Ltd.s shareholders approved a change in
the par value of Summus, Ltd.s common stock retroactively
from $1 per share to $.0001 per share. Relevant amounts in the
financial statements have been restated to reflect
the change.

14.  Subsequent Event




On February 16, 2001, HSNS acquired all the assets and
operations of Summus, Ltd. under the terms of the Asset Purchase
Agreement.







From Summus, Ltd.s perspective, the primary business
purpose of entering into the transaction with HSNS was to
provide a vehicle for raising capital. Summus, Ltd. was at a
stage in its development where it required additional financing
or needed to combine with another entity in order to finance its
business and realize its other objectives. Entering into the
Asset Purchase Agreement became the most logical course of




F-17



---



##### 



Summus, Ltd.


Notes to Financial Statements (continued)

14.  Subsequent Event (continued)




action to provide financing to Summus, Ltd. and accomplish other
key objectives in view of, among other things, the following:






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Summus, Ltd. already had a substantial equity interest in HSNS.
	In fact, the transaction contemplated by the Asset Purchase
	Agreement provided both companies the opportunity to capitalize
	on investments they previously made in each other. Prior to the
	closing of the transaction, Summus, Ltd. owned approximately
	27.6% of HSNS on a fully-diluted basis and HSNS owned
	approximately 14% of Summus, Ltd.
|
|
|
| |  | HSNS had had success in raising equity capital through private
	placements or other types of fund-raising, notwithstanding its
	own limited financial resources and unprofitable operations.
	This caused Summus, Ltd.s management to believe that the
	Company, following the closing of the transaction, would be able
	to continue to have success in raising capital.                                            
|
|
|
| |  | HSNS was in the process of seeking to register its common stock
	under Section  12 of the Securities Exchange Act of 1934
	and then seeking to have such stock made eligible for quotation
	on the OTC Bulletin Board. This offered potential for future
	liquidity in such stock.                                                                                                                                    
|
|
|
| |  | The transaction offered the potential to create more growth
	opportunities for the Company based on the expected enhanced
	access to capital resources.                                                                                                                                                                                                                                                               
|




Initially, the transaction was recorded as a business
combination under the guidance of Accounting Principles Board
Opinion No. 16 (APB 16), Business Combinations
because, among other reasons:






| |   |                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------
|
| |  | HSNS acquired all the operating assets and liabilities of
	Summus, Ltd.;                                                             
|
|
|
| |  | each of HSNS and Summus, Ltd. were operating entities at the
	time of the closing of the transaction; and                            
|
|
|
| |  | Summus, Ltd. was (and is) to be liquidated following its
	distribution of the equity securities of HSNS received in the
	transaction.
|




Under APB 16, the transaction was also accounted for as a
reverse acquisition in which Summus, Ltd. was
treated as the accounting acquirer; HSNS, the acquired
corporation. Summus, Ltd. was considered the accounting acquirer
in the transaction because Summus, Ltd. received shares of
HSNSs common stock and other equity securities, to be
distributed to the Summus, Ltd. shareholders, representing the
largest portion of the voting interests in HSNS.







At the time the determination was made to account for the
transaction as a business combination, the Company considered an
alternative accounting treatment: accounting for the transaction
as a capital transaction, accompanied by a recapitalization. The
more typical type of transaction for which this accounting
treatment is deemed appropriate is the merger of a private
operating company into a non-operating public shell corporation
with nominal net assets, with the owners and management of the
private company having actual or effective operating control of
the combined company after the transaction. The Company did not
believe this was the most appropriate accounting treatment
because HSNS (including its wholly-owned subsidiary, Douglas May
& Co.) was an operating company, not a non-operating public
shell corporation.




F-18



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##### 



Summus, Ltd.


Notes to Financial Statements (continued)

14.  Subsequent Event (continued)




The Company has since reassessed the appropriateness of
accounting for the transaction as a capital transaction,
accompanied by a recapitalization, in view of the particular
facts and circumstances of this transaction, including:






| |   |                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Summus, Ltd.s management evaluated the operating
	activities of HSNS, which, at the time the Asset Purchase
	Agreement was entered into, were primarily conducted through
	HSNSs wholly-owned subsidiary, Douglas May & Co.
	However, the operating activities of HSNS, from Summus,
	Ltd.s perspective, were an incidental consideration in its
	decision to enter into and consummate the transaction.
|
|
|
| |  | As noted above, Summus, Ltd.s primary purpose in entering
	into the transaction was to provide a vehicle for raising
	additional capital through the acquisition of a majority
	interest in an entity (i.e., HSNS) whose common stock is
	publicly traded.                                                                                                                                                
|




Considering these factors and the result of discussions with the
staff of Securities and Exchange Commission, the Company has
have concluded that HSNSs status as an operating company
does not preclude accounting for the transaction as a capital
transaction, accompanied by a recapitalization. Accordingly, the
Company has have determined that it is more appropriate to
account for the transaction in this manner.







By accounting for the transaction as a capital transaction, the
transaction is effectively viewed as the issuance of stock by
Summus, Ltd. in exchange for the net monetary assets of HSNS,
accompanied by a recapitalization of Summus, Ltd. The accounting
for the transaction is quite similar to that resulting from a
reverse acquisition, except that no goodwill or other intangible
assets are recorded.







As a result of the transaction, the historical financial
statements of Summus, Ltd., for accounting purposes, are deemed
to be those of High Speed Net Solutions, Inc. The equity
accounts of Summus, Ltd. have been adjusted for a
recapitalization to reflect the equity structure of HSNS, the
legal acquirer. Specifically:






| |   |                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | the historical shareholders equity of Summus, Ltd. prior
	to the transaction has been restated for the equivalent number
	of shares of HSNS common and Series B preferred stock, and
	other equity interests, received in the transaction after giving
	effect to any difference in par value of HSNSs and Summus,
	Ltd.s common stock, with an offset to additional paid-in
	capital;
|
|
|
| |  | the accumulated deficit of Summus, Ltd. has been carried forward
	after the transaction; and                                                                                                                                                                                                                                                                                             
|
|
|
| |  | loss per share for periods prior to the transaction has been
	restated to reflect the number of equivalent shares received by
	Summus, Ltd. in the transaction.                                                                                                                                                                                                                          
|




Prior to the closing of the transaction, Summus, Ltd. was the
largest shareholder of HSNS. It owned 8,217,781 shares (33.2%)
of HSNSs common stock, approximately 27.6% on a fully
diluted basis. Immediately after the closing, Summus,
Ltd.s ownership interest in the Company increased to
20,593,352 shares (55.5%) of the Companys common stock on
an as-converted basis, approximately (53.1%) on a fully-diluted
basis. The Asset Purchase Agreement contemplates that Summus,
Ltd. will liquidate following the completion of its distribution
of the Companys securities received in the transaction to
the shareholders of Summus, Ltd. On March 13, 2001, Summus,
Ltd. distributed certain of the shares of the Companys
common stock received in the transaction to the shareholders of
Summus, Ltd. in accordance with their pro rata interests; the
balance of such shares was distributed in mid-July 2001.




F-19



---



##### 



Summus, Ltd.


Notes to Financial Statements (continued)



14.  Subsequent Event (continued)





In legal form, the transaction was effected by HSNS issuing
shares of its common and Series B preferred stock, and
other equity interests, in exchange for the net assets of
Summus, Ltd. The consideration paid by HSNS to acquire the
assets of Summus, Ltd. is described below:






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | HSNS issued to Summus, Ltd. for distribution to the shareholders
	of Summus, Ltd. a total of 20,218,733 shares of HSNS common
	stock and 6,000 shares of Series B preferred stock. As a
	shareholder of Summus, Ltd., HSNS was entitled to receive
	3,604,445 of the total number of shares of common stock issued
	in the transaction. However, under the terms of the Asset
	Purchase Agreement these shares were canceled, resulting in a
	net issuance of 16,614,288 shares of HSNS common stock. In
	addition, the Asset Purchase Agreement provided for the
	cancellation of 8,217,781 shares of HSNS common stock owned by
	Summus, Ltd. prior to the parties execution of the
	agreement.
|
| |  | HSNS issued to Summus, Ltd. 6,000 shares of newly created
	Series B preferred stock, of which 2,000 shares were
	deposited with an escrow agent as security for any
	indemnification obligations of Summus, Ltd. and its shareholders
	under the Asset Purchase Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                        



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | HSNS has authorized the issuance of up to 6,500 shares of
	Series B Preferred Stock. The rights of the Series B
	Preferred Stock are as follows: each share of Series B
	Preferred Stock will be automatically converted into 1,000
	shares of common stock, subject to adjustment for stock
	dividends, stock splits and the like, after HSNSs charter
	is amended to increase the number of authorized shares of common
	stock to at least 60 million shares. Until then, the
	Series B Preferred Stock will not be convertible. Each
	share of Series B Preferred Stock will be entitled to
	receive dividends and participate in distributions upon
	liquidation pro rata with the common stock on an as-converted
	basis, and will vote equally with the common stock on an
	as-converted basis. These rights apply even if there is
	insufficient authorized common stock to permit conversion of the
	Series B Preferred Stock. There are no other preferences or
	privileges associated with the Series B Preferred Stock.
	Under the terms of the Asset Purchase Agreement, HSNS is
	required to seek shareholder approval to amend its charter to
	increase the number of authorized shares of common stock so that
	there will be sufficient shares of common stock available and
	reserved for issuance upon conversion of the Series B
	Preferred Stock.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | HSNS issued to Summus, Ltd. warrants to purchase a total of 500
	shares of its Series B preferred stock, exercisable for a
	period of 5 years from February 16, 2001. The exercise
	price of the warrants is $5,500.00 per share of Series B
	preferred stock ($5.50 per share of the Companys common
	stock on an as-converted basis), and was calculated based on the
	closing market price of the HSNS common stock on
	February 16, 2001, on an as converted basis (HSNS common
	stock currently trades in a public market on the Pink
	Sheets®).




In addition to the items described above, the terms of the Asset
Purchase Agreement provided for HSNSs assumption of
approximately $2.8 million of liabilities of Summus, Ltd.
to third parties. All amounts owed by and between HSNS and
Summus, Ltd. were cancelled upon the closing of the transaction.







In connection with the transaction, the Company entered into a
three-year employment agreement with Dr. Bjorn Jawerth.
Under this employment agreement, in exchange for
Dr. Jawerths covenant not to compete with the Company
for a period of 18 months from and after the termination of
his employment with the Company, the Company issued options to
Dr. Jawerth to purchase 166,667 shares of common stock at
$0.50 per share and 333,333 shares of common stock at $3.75 per
share. Non-cash compensation expense of $541,688 was recorded
upon the issuance of these options as of February 16, 2001,
the closing date of the transaction. The issuance of these
options was in lieu of a $500,000 cash payment provided for in
Dr. Jawerths employment agreement.




F-20



---



##### 



Summus, Ltd.


Notes to Financial Statements (continued)



14.  Subsequent Event (continued)


Under the Asset Purchase Agreement HSNS agreed to use reasonable
commercial efforts to assist Dr. Jawerth in the private
sale of up to 1,666,667 shares of HSNS common stock held by
Dr. Jawerth (representing $2.5 million in value) at a
per share price of not less than $1.50 per share. The Asset
Purchase Agreement does not stipulate a date or time period by
which such sale is to occur. Under the terms of
Dr. Jawerths employment agreement, the Company is
obligated to issue to Dr. Jawerth options, with an exercise
price of $1.50 per share, exercisable for three times the number
of shares of common stock sold in the private sale. The options
will be exercisable during the second through the fifth year
after the options are issued. Non-cash compensation will be
recorded upon the issuance of these options. The non-cash
compensation will be determined under the provisions of APB 25,
pursuant to which the compensation cost will be based on the
difference between the stock option exercise price of $1.50 per
share and the traded value of the HSNS common stock on the date
the options are issued.




During the term of the employment agreement, Dr. Jawerth
will receive a base salary of $350,000 (which is subject to an
annual increase of at least 10%) plus other benefits including
severance benefits.




F-21



---



##### 



Consolidated Financial Statements

High Speed Net Solutions, Inc.

Years ended December 31, 2000 and 1999 with Report of
Independent Auditors

F-22



---



##### 



Report of Independent Auditors

The Board of Directors and Shareholders



We have audited the accompanying consolidated balance sheets of
High Speed Net Solutions, Inc. as of December 31, 1999 and
2000, and the related consolidated statements of operations,
stockholders equity (deficit) and cash flows for each of
the three years in the period ended December 31, 2000.
These financial statements are the responsibility of High Speed
Net Solutions, Inc.s management. Our responsibility is to
express an opinion on these financial statements based on our
audits.

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

In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of High Speed Net Solutions, Inc. at
December 31, 1999 and 2000 and the consolidated results of
its operations and its cash flows, for each of the three years
in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States.

As more fully described in Note 2, the accompanying 1999
financial statements have been restated to reflect an increase
in the recorded value of High Speed Net Solutions, Inc.s
investment in a related party resulting from a capital
contribution, a reduction in the recorded value of prepaid
royalties, a reduction in the recorded value of High Speed Net
Solutions, Inc.s investment in a related party resulting
from an exchange of restricted equity securities, and a
reduction in the expense associated with stock options granted
to non-employees.

The accompanying financial statements have been prepared
assuming that High Speed Net Solutions, Inc. will continue as a
going concern. As more fully described in Note 1, High
Speed Net Solutions, Inc. has incurred operating losses since
inception and will require additional capital in 2001 to
continue operations. These conditions raise substantial doubt
about High Speed Net Solutions, Inc.s ability to continue
as a going concern. Managements plans in regard to these
matters are also described in Note 1. The financial
statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification
of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.

Ernst & Young LLP







Raleigh, North Carolina

F-23



---



##### 



High Speed Net Solutions, Inc.

Consolidated Balance Sheets

|                                                                               |                                                                                                                                                      |             |           |             |   |   |           |             |  
|------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------- | ----------- | --------- | ----------- | - | - | --------- | ----------- | -
|                                                                               |                                                                                                                                                      |            
|                                                                               |                                                                                                                                                      | December 31
|                                                                               |                                                                                                                                                      |            
|                                                                               |                                                                                                                                                      | 1999        |           | 2000       
|                                                                               |                                                                                                                                                      |             |           |            
|                                                                               |                                                                                                                                                      | (Restated)  |           |            
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|Assets                                                                         |                                                                                                                                                      |             |           |             |   |   |           |            
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|Current assets:                                                                |                                                                                                                                                      |             |           |             |   |   |           |            
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               | Cash and cash equivalents                                                                                                                            |             | $         | 248,740     |   |   | $         | 326,622     |  
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               | Restricted cash                                                                                                                                      |             |           |            |   |   |           | 300,000     |  
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               | Accounts receivable                                                                                                                                  |             |           |            |   |   |           | 167,459     |  
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               | Other current assets                                                                                                                                 |             |           |            |   |   |           | 26,674      |  
|                                                                               |                                                                                                                                                      |             |           |             |   |   |           |            
|Total current assets                                                           |                                                                                                                                                      |             | 248,740   |             |   |   | 820,755   |            
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|Equipment, software and furniture, net                                         |                                                                                                                                                      |             | 3,720     |             |   |   | 385,915   |            
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|Investment in common stock of related party                                    |                                                                                                                                                      |             | 1,855,937 |             |   |   | 1,855,937 |            
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|Prepaid software royalties                                                     |                                                                                                                                                      |             | 2,166,667 |             |   |   |          |            
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|Loans due from related party                                                   |                                                                                                                                                      |             |          |             |   |   | 1,435,000 |            
|                                                                               |                                                                                                                                                      |             |           |             |   |   |           |            
|Total assets                                                                   |                                                                                                                                                      | $           | 4,275,064 |             |   | $ | 4,497,607 |            
|                                                                               |                                                                                                                                                      |             |           |             |   |   |           |            
|Liabilities, redeemable common stock and
	shareholders equity (deficit)       |                                                                                                                                                      |             |           |             |   |   |           |            
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|Current liabilities:                                                           |                                                                                                                                                      |             |           |             |   |   |           |            
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               | Payables to related parties                                                                                                                          |             | $         | 589,815     |   |   | $         | 570,492     |  
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               | Accounts payable and accrued expenses                                                                                                                |             |           | 99,876      |   |   |           | 2,528,765   |  
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               | Loss contingency accrual                                                                                                                             |             |           | 800,000     |   |   |           | 544,960     |  
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               | Preferred stock dividends payable                                                                                                                    |             |           |            |   |   |           | 133,333     |  
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               | Capital lease obligations, current portion                                                                                                           |             |           |            |   |   |           | 94,936      |  
|                                                                               |                                                                                                                                                      |             |           |             |   |   |           |            
|Total current liabilities                                                      |                                                                                                                                                      |             | 1,489,691 |             |   |   | 3,872,486 |            
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|Capital lease obligation, less current portion                                 |                                                                                                                                                      |             |          |             |   |   | 100,773   |            
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|Redeemable common stock                                                        |                                                                                                                                                      |             |          |             |   |   | 876,000   |            
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|Stockholders equity (deficit):                                                |                                                                                                                                                      |             |           |             |   |   |           |            
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               | Preferred Stock, $0.001 par value; 5,000,000
	shares authorized,
	2,000 shares issued and outstanding (liquidation preference
	of
	$1,000 per share) |             |           |            |   |   |           | 2,000,000   |  
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               | Common stock, $0.001 par value, authorized
	50,000,000 shares; issued and outstanding 21,112,149 and
	24,422,927 shares, respectively                |             |           | 21,112      |   |   |           | 24,423      |  
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               | Additional paid-in capital                                                                                                                           |             |           | 14,386,105  |   |   |           | 22,115,657  |  
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               | Accumulated deficit                                                                                                                                  |             |           | (11,394,225 | ) |   |           | (24,264,113 | )
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               | Treasury stock, at cost (38,500 shares)                                                                                                              |             |           | (227,619    | ) |   |           | (227,619    | )
|                                                                               |                                                                                                                                                      |             |           |             |   |   |           |            
|Total shareholders equity (deficit)                                           |                                                                                                                                                      |             | 2,785,373 |             |   |   | (351,652  | )          
|                                                                               |                                                                                                                                                      |             |           |             |   |   |           |            
|Total liabilities, redeemable common stock and
	stockholders equity (deficit) |                                                                                                                                                      | $           | 4,275,064 |             |   | $ | 4,497,607 |            
|                                                                               |                                                                                                                                                      |             |           |             |   |   |           |            

See accompanying notes.

F-24



---



##### 



High Speed Net Solutions, Inc.

Consolidated Statements of Operations

|                                             |                                                                      |                        |            |            |   |      |            |            |   |   |             |             |  
|-------------------------------------------- | -------------------------------------------------------------------- | ---------------------- | ---------- | ---------- | - | ---- | ---------- | ---------- | - | - | ----------- | ----------- | -
|                                             |                                                                      |                       
|                                             |                                                                      | Year ended December 31
|                                             |                                                                      |                       
|                                             |                                                                      | 1998                   |            | 1999       |   | 2000
|                                             |                                                                      |                        |            |            |   |     
|                                             |                                                                      |                       
|                                             |                                                                      | (Restated)            
|                                            
|                                            
|                                            
|                                            
|Revenue                                      |                                                                      | $                      |           |            |   | $    |           |            |   | $ | 599,054     |            
|                                            
|                                            
|                                            
|                                            
|Costs of revenue                             |                                                                      |                        |           |            |   |      |           |            |   |   | 476,280     |            
|                                             |                                                                      |                        |            |            |   |      |            |            |   |   |             |            
|Gross profit                                 |                                                                      |                        |           |            |   |      |           |            |   |   | 122,774     |            
|                                            
|                                            
|                                            
|                                            
|Selling, general and administrative expenses |                                                                      |                        | 374,841    |            |   |      | 2,582,447  | *          |   |   | 6,864,159   | *          
|                                            
|                                            
|                                            
|                                            
|Non-cash compensation                        |                                                                      |                        |           |            |   |      | 2,813,000  |            |   |   | 333,750     |            
|                                            
|                                            
|                                            
|                                            
|Interest expense                             |                                                                      |                        |           |            |   |      | 2,655,749  |            |   |   | 15,192      |            
|                                            
|                                            
|                                            
|                                            
|Amortization expense                         |                                                                      |                        |           |            |   |      | 833,333    |            |   |   | 116,200     |            
|                                            
|                                            
|                                            
|                                            
|Impairment charges                           |                                                                      |                        |           |            |   |      |           |            |   |   | 3,953,182   |            
|                                            
|                                            
|                                            
|                                            
|Loss contingency charges                     |                                                                      |                        |           |            |   |      | 800,000    |            |   |   | 1,281,946   |            
|                                             |                                                                      |                        |            |            |   |      |            |            |   |   |             |            
|Loss from continuing operations              |                                                                      |                        | (374,841   | )          |   |      | (9,684,529 | )          |   |   | (12,441,655 | )          
|                                            
|                                            
|                                            
|                                            
|Loss from discontinued operations            |                                                                      |                        | (1,334,855 | )          |   |      |           |            |   |   |            |            
|                                             |                                                                      |                        |            |            |   |      |            |            |   |   |             |            
|Net loss                                     |                                                                      | $                      | (1,709,696 | )          |   | $    | (9,684,529 | )          |   | $ | (12,441,655 | )          
|                                             |                                                                      |                        |            |            |   |      |            |            |   |   |             |            
|Net loss applicable to common shareholders:  |                                                                      |                        |            |            |   |      |            |            |   |   |             |            
|                                            
|                                            
|                                            
|                                            
|                                             | Net loss                                                             |                        | $          | (1,709,696 | ) |      | $          | (9,684,529 | ) |   | $           | (12,441,655 | )
|                                            
|                                            
|                                            
|                                            
|                                             | Beneficial conversion feature of preferred stock                     |                        |            |           |   |      |            |           |   |   |             | (294,900    | )
|                                            
|                                            
|                                            
|                                            
|                                             | Preferred stock dividends                                            |                        |            |           |   |      |            |           |   |   |             | (133,333    | )
|                                             |                                                                      |                        |            |            |   |      |            |            |   |   |             |            
|Net loss applicable to common shareholders   |                                                                      | $                      | (1,709,696 | )          |   | $    | (9,684,529 | )          |   | $ | (12,869,888 | )          
|                                             |                                                                      |                        |            |            |   |      |            |            |   |   |             |            
|Per share amounts (basic and diluted):       |                                                                      |                        |            |            |   |      |            |            |   |   |             |            
|                                            
|                                            
|                                            
|                                            
|                                             | Loss applicable to common shareholders from
	continuing operations   |                        | $          | (0.03      | ) |      | $          | (0.51      | ) |   | $           | (0.60       | )
|                                            
|                                            
|                                            
|                                            
|                                             | Loss applicable to common shareholders from
	discontinued operations |                        | $          | (0.11      | ) |      | $          |           |   |   | $           |            |  
|                                             |                                                                      |                        |            |            |   |      |            |            |   |   |             |            
|Net loss                                     |                                                                      | $                      | (0.14      | )          |   | $    | (0.51      | )          |   | $ | (0.60       | )          
|                                             |                                                                      |                        |            |            |   |      |            |            |   |   |             |            
|Weighted average common shares outstanding   |                                                                      |                        | 11,868,867 |            |   |      | 19,080,492 |            |   |   | 21,619,618  |            
|                                             |                                                                      |                        |            |            |   |      |            |            |   |   |             |            






|  |                                                                                                                                                        
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Selling, general and administrative expenses in 1999 and 2000
	exclude $2.8  million and $0.3 million, respectively,
	of non-cash compensation charges.

See accompanying notes.

F-25



---



##### 



High Speed Net Solutions, Inc.

Consolidated Statement of Shareholders Equity
(Deficit)

|                                                                                                 |  |                 |   |              |  |            |   |             |  |          |            |               |  |       |        |           |  |   |           |   |  |   |            |   |  |   |          |   |  |   |            |  
|------------------------------------------------------------------------------------------------ |  | --------------- | - | ------------ |  | ---------- | - | ----------- |  | -------- | ---------- | ------------- |  | ----- | ------ | --------- |  | - | --------- | - |  | - | ---------- | - |  | - | -------- | - |  | - | ---------- | -
|                                                                                                 |  |                 |   |              |  |            |   |             |  |          |            | Total        
|                                                                                                 |  | Preferred Stock |   | Common Stock |  | Additional |   |             |  |          |            | Shareholders
|                                                                                                 |  |                 |   |              |  | Paid-in    |   | Accumulated |  | Treasury |            | Equity       
|                                                                                                 |  | Shares          |   | Amount       |  | Shares     |   | Amount      |  | Capital  |            | Deficit       |  | Stock |        | (Deficit)
|                                                                                                 |  |                 |   |              |  |            |   |             |  |          |            |               |  |       |        |          
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Balance January 2, 1998 (inception)
	reflecting the MWI and JSJ recapitalizations of the Company |  |                 |  |              |  | $          |  |             |  |          | 10,325,000 |               |  | $     | 10,325 |           |  | $ | (10,325   | ) |  | $ |           |   |  | $ |         |   |  | $ |           |  
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Founders shares issued for no consideration                                                      |  |                 |  |              |  |            |  |             |  |          | 100        |               |  |       |       |           |  |   |          |   |  |   |           |   |  |   |         |   |  |   |           |  
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Shareholders capital contributions                                                              |  |                 |  |              |  |            |  |             |  |          |           |               |  |       |       |           |  |   | 1,091,648 |   |  |   |           |   |  |   |         |   |  |   | 1,091,648  |  
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Common stock sold for cash                                                                       |  |                 |  |              |  |            |  |             |  |          | 3,766,600  |               |  |       | 3,767  |           |  |   | 313,233   |   |  |   |           |   |  |   |         |   |  |   | 317,000    |  
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Common stock issued for payment of debt to a
	shareholder                                        |  |                 |  |              |  |            |  |             |  |          | 1,550,000  |               |  |       | 1,550  |           |  |   | 148,270   |   |  |   |           |   |  |   |         |   |  |   | 149,820    |  
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Treasury stock acquired for cash                                                                 |  |                 |  |              |  |            |  |             |  |          |           |               |  |       |       |           |  |   |          |   |  |   |           |   |  |   | (227,619 | ) |  |   | (227,619   | )
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Common stock issued for licensing rights                                                         |  |                 |  |              |  |            |  |             |  |          | 775,000    |               |  |       | 775    |           |  |   | 76,725    |   |  |   |           |   |  |   |         |   |  |   | 77,500     |  
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Common stock issued for employee compensation and
	to non-employees                              |  |                 |  |              |  |            |  |             |  |          | 765,000    |               |  |       | 765    |           |  |   | 75,735    |   |  |   |           |   |  |   |         |   |  |   | 76,500     |  
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Cancellation of compensatory and other stock                                                     |  |                 |  |              |  |            |  |             |  |          | (530,000   | )             |  |       | (530   | )         |  |   | (52,470   | ) |  |   |           |   |  |   |         |   |  |   | (53,000    | )
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Net loss for 1998                                                                                |  |                 |  |              |  |            |  |             |  |          |           |               |  |       |       |           |  |   |          |   |  |   | (1,709,696 | ) |  |   |         |   |  |   | (1,709,696 | )
|                                                                                                 |  |                 |   |              |  |            |   |             |  |          |            |               |  |       |        |           |  |   |           |   |  |   |            |   |  |   |          |   |  |   |            |  
|Balance at December 31, 1998                                                                     |  |                 |  |              |  |            |  |             |  |          | 16,651,700 |               |  |       | 16,652 |           |  |   | 1,642,816 |   |  |   | (1,709,696 | ) |  |   | (227,619 | ) |  |   | (277,847   | )
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Compensation and other expense related to grants
	of stock options                               |  |                 |  |              |  |            |  |             |  |          |           |               |  |       |       |           |  |   | 3,397,250 |   |  |   |           |   |  |   |         |   |  |   | 3,397,250  |  
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Common stock sold for cash                                                                       |  |                 |  |              |  |            |  |             |  |          | 338,188    |               |  |       | 338    |           |  |   | 347,162   |   |  |   |           |   |  |   |         |   |  |   | 347,500    |  
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Common stock issued for investment in a related
	party                                           |  |                 |  |              |  |            |  |             |  |          | 795,001    |               |  |       | 795    |           |  |   | 643,156   |   |  |   |           |   |  |   |         |   |  |   | 643,951    |  
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Capital contribution received for investment in
	related party                                   |  |                 |  |              |  |            |  |             |  |          |           |               |  |       |       |           |  |   | 1,109,986 |   |  |   |           |   |  |   |         |   |  |   | 1,109,986  |  
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Common stock issued for services                                                                 |  |                 |  |              |  |            |  |             |  |          | 85,500     |               |  |       | 85     |           |  |   | 130,729   |   |  |   |           |   |  |   |         |   |  |   | 130,814    |  

F-26



---



##### 



High Speed Net Solutions, Inc.

Consolidated Statement of Shareholders Equity (Deficit)
(continued)

|                                                                                                                 |  |                 |       |              |  |            |           |             |  |          |            |               |  |       |        |           |  |   |            |   |  |   |             |   |  |   |          |   |  |   |             |  
|---------------------------------------------------------------------------------------------------------------- |  | --------------- | ----- | ------------ |  | ---------- | --------- | ----------- |  | -------- | ---------- | ------------- |  | ----- | ------ | --------- |  | - | ---------- | - |  | - | ----------- | - |  | - | -------- | - |  | - | ----------- | -
|                                                                                                                 |  |                 |       |              |  |            |           |             |  |          |            | Total        
|                                                                                                                 |  | Preferred Stock |       | Common Stock |  | Additional |           |             |  |          |            | Shareholders
|                                                                                                                 |  |                 |       |              |  | Paid-in    |           | Accumulated |  | Treasury |            | Equity       
|                                                                                                                 |  | Shares          |       | Amount       |  | Shares     |           | Amount      |  | Capital  |            | Deficit       |  | Stock |        | (Deficit)
|                                                                                                                 |  |                 |       |              |  |            |           |             |  |          |            |               |  |       |        |          
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Common stock issued for prepaid royalties                                                                        |  |                 |      |              |  |            |           |             |  |          | 1,500,000  |               |  |       | 1,500  |           |  |   | 748,500    |   |  |   |            |   |  |   |         |   |  |   | 750,000     |  
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Beneficial conversion feature related to
	convertible debentures                                                 |  |                 |      |              |  |            |          |             |  |          |           |               |  |       |       |           |  |   | 2,655,749  |   |  |   |            |   |  |   |         |   |  |   | 2,655,749   |  
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Common stock issued in exchange for convertible
	debentures                                                      |  |                 |      |              |  |            |          |             |  |          | 4,852,860  |               |  |       | 4,853  |           |  |   | 2,650,896  |   |  |   |            |   |  |   |         |   |  |   | 2,655,749   |  
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Common stock canceled in connection with the
	merger between High Speed Net Solutions and Marketers
	World, Inc. |  |                 |      |              |  |            |          |             |  |          | (5,161,100 | )             |  |       | (5,161 | )         |  |   | 5,161      |   |  |   |            |   |  |   |         |   |  |   |            |  
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Cancellation of compensatory stock                                                                               |  |                 |      |              |  |            |          |             |  |          | (25,000    | )             |  |       | (25    | )         |  |   | (38,225    | ) |  |   |            |   |  |   |         |   |  |   | (38,250     | )
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Stock option exercises                                                                                           |  |                 |      |              |  |            |          |             |  |          | 1,825,000  |               |  |       | 1,825  |           |  |   | (1,825     | ) |  |   |            |   |  |   |         |   |  |   |            |  
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Common stock sold to a related party                                                                             |  |                 |      |              |  |            |          |             |  |          | 250,000    |               |  |       | 250    |           |  |   | 1,094,750  |   |  |   |            |   |  |   |         |   |  |   | 1,095,000   |  
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Net loss for 1999                                                                                                |  |                 |      |              |  |            |          |             |  |          |           |               |  |       |       |           |  |   |           |   |  |   | (9,684,529  | ) |  |   |         |   |  |   | (9,684,529  | )
|                                                                                                                 |  |                 |       |              |  |            |           |             |  |          |            |               |  |       |        |           |  |   |            |   |  |   |             |   |  |   |          |   |  |   |             |  
|Balance at December 31, 1999 (restated)                                                                          |  |                 |      |              |  |            |          |             |  |          | 21,112,149 |               |  |       | 21,112 |           |  |   | 14,386,105 |   |  |   | (11,394,225 | ) |  |   | (227,619 | ) |  |   | 2,785,373   |  
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Preferred stock sold for cash, net of issuance
	costs                                                            |  |                 | 2,000 |              |  |            | 2,000,000 |             |  |          |           |               |  |       |       |           |  |   | (149,048   | ) |  |   |            |   |  |   |         |   |  |   | 1,850,952   |  
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Beneficial conversion feature of preferred stock                                                                 |  |                 |      |              |  |            |          |             |  |          |           |               |  |       |       |           |  |   | 294,900    |   |  |   | (294,900    | ) |  |   |         |   |  |   |            |  
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Common stock and options issued for services                                                                     |  |                 |      |              |  |            |          |             |  |          | 7,500      |               |  |       | 8      |           |  |   | 884,028    |   |  |   |            |   |  |   |         |   |  |   | 884,036     |  
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Issuance of common stock in partial settlement of
	loss contingency                                              |  |                 |      |              |  |            |          |             |  |          | 1,700,000  |               |  |       | 1,700  |           |  |   | 1,408,611  |   |  |   |            |   |  |   |         |   |  |   | 1,410,311   |  
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Common stock issued to acquire equipment                                                                         |  |                 |      |              |  |            |          |             |  |          | 8,988      |               |  |       | 9      |           |  |   | 15,102     |   |  |   |            |   |  |   |         |   |  |   | 15,111      |  
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Common stock issued to acquire Douglas May &
	Co.                                                                |  |                 |      |              |  |            |          |             |  |          | 50,000     |               |  |       | 50     |           |  |   | 499,950    |   |  |   |            |   |  |   |         |   |  |   | 500,000     |  
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Common stock sold for cash                                                                                       |  |                 |      |              |  |            |          |             |  |          | 1,544,290  |               |  |       | 1,544  |           |  |   | 4,776,009  |   |  |   |            |   |  |   |         |   |  |   | 4,777,553   |  
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Preferred stock dividends                                                                                        |  |                 |      |              |  |            |          |             |  |          |           |               |  |       |       |           |  |   |           |   |  |   | (133,333    | ) |  |   |         |   |  |   | (133,333    | )
|                                                                                                                
|                                                                                                                
|                                                                                                                
|                                                                                                                
|Net loss for 2000                                                                                                |  |                 |      |              |  |            |          |             |  |          |           |               |  |       |       |           |  |   |           |   |  |   | (12,441,655 | ) |  |   |         |   |  |   | (12,441,655 | )
|                                                                                                                 |  |                 |       |              |  |            |           |             |  |          |            |               |  |       |        |           |  |   |            |   |  |   |             |   |  |   |          |   |  |   |             |  
|Balance at December 31, 2000                                                                                     |  |                 | 2,000 |              |  | $          | 2,000,000 |             |  |          | 24,422,927 |               |  | $     | 24,423 |           |  | $ | 22,115,657 |   |  | $ | (24,264,113 | ) |  | $ | (227,619 | ) |  | $ | (351,652    | )
|                                                                                                                 |  |                 |       |              |  |            |           |             |  |          |            |               |  |       |        |           |  |   |            |   |  |   |             |   |  |   |          |   |  |   |             |  

F-27



---



##### 



High Speed Net Solutions, Inc.

Consolidated Statements of Cash Flows

|                                                                                                    |                                                                                 |                                       |            |        |        |      |            |           |         |   |             |           |           |  
|--------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------- | ------------------------------------- | ---------- | ------ | ------ | ---- | ---------- | --------- | ------- | - | ----------- | --------- | --------- | -
|                                                                                                    |                                                                                 |                                      
|                                                                                                    |                                                                                 | Year ended December 31               
|                                                                                                    |                                                                                 |                                      
|                                                                                                    |                                                                                 | 1998                                  |            | 1999   |        | 2000
|                                                                                                    |                                                                                 |                                       |            |        |        |     
|                                                                                                    |                                                                                 |                                      
|                                                                                                    |                                                                                 | (Restated)                           
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Operating activities                                                                                |                                                                                 |                                       |            |        |        |      |            |           |         |   |             |          
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Loss from continuing operations                                                                     |                                                                                 | $                                     | (374,841   | )      |        | $    | (9,684,529 | )         |         | $ | (12,441,655 | )        
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Adjustments to reconcile loss from continuing
	operations to net cash used in operating activities: |                                                                                 |                                       |            |        |        |      |            |           |         |   |             |          
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | Loss on disposal of equipment                                                   |                                       |            | 36,858 |        |      |            |          |         |   |             |          |          
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | Impairment charge                                                               |                                       |            |       |        |      |            |          |         |   |             | 3,953,182 |          
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | Non cash compensation                                                           |                                       |            |       |        |      |            | 2,813,000 |         |   |             | 333,750   |          
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | Stock issued for partial settlement of loss
	contingency                        |                                       |            |       |        |      |            |          |         |   |             | 1,410,311 |          
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | Depreciation and amortization                                                   |                                       |            | 21,900 |        |      |            | 833,665   |         |   |             | 282,494   |          
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | Common stock issued to non-employees                                            |                                       |            | 23,500 |        |      |            | 1,521,814 |         |   |             | 550,286   |          
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | Interest expense relating to beneficial
	conversion feature of convertible debt |                                       |            |       |        |      |            | 2,655,749 |         |   |             |          |          
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | Changes in operating assets and liabilities, net
	of acquisitions:              |                                       |            |        |        |      |            |           |         |   |             |           |          
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    |                                                                                 | Accounts receivable                   |            |        | (7,559 | )    |            |           | 7,559   |   |             |           | 261,716   |  
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    |                                                                                 | Prepaid royalties                     |            |        |       |      |            |           | (60,000 | ) |             |           |          |  
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    |                                                                                 | Increase in other current assets      |            |        |       |      |            |           |        |   |             |           | (23,329   | )
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    |                                                                                 | Accounts payable and accrued expenses |            |        | 8,457  |      |            |           | 91,419  |   |             |           | 2,105,990 |  
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    |                                                                                 | Loss contingency accrual              |            |        |       |      |            |           | 800,000 |   |             |           | (255,040  | )
|                                                                                                    |                                                                                 |                                       |            |        |        |      |            |           |         |   |             |          
|Net cash used in operating activities from
	continuing operations                                   |                                                                                 |                                       | (291,685   | )      |        |      | (1,021,323 | )         |         |   | (3,822,295  | )        
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Net cash used in discontinued operations                                                            |                                                                                 |                                       | (1,265,965 | )      |        |      |           |           |         |   |            |          
|                                                                                                    |                                                                                 |                                       |            |        |        |      |            |           |         |   |             |          
|Net cash used in operating activities                                                               |                                                                                 |                                       | (1,557,650 | )      |        |      | (1,021,323 | )         |         |   | (3,822,295  | )        
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Investing activities                                                                                |                                                                                 |                                       |            |        |        |      |            |           |         |   |             |          
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Capital expenditures, net of acquisitions                                                           |                                                                                 |                                       | (50,148    | )      |        |      | (4,052     | )         |         |   | (1,032,528  | )        
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Cash invested in common stock of related party                                                      |                                                                                 |                                       |           |        |        |      | (102,000   | )         |         |   |            |          
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Cash received in acquisition                                                                        |                                                                                 |                                       |           |        |        |      |           |           |         |   | 63,971      |          
|                                                                                                    |                                                                                 |                                       |            |        |        |      |            |           |         |   |             |          
|Net cash used in investing activities                                                               |                                                                                 |                                       | (50,148    | )      |        |      | (106,052   | )         |         |   | (968,557    | )        
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Financing activities                                                                                |                                                                                 |                                       |            |        |        |      |            |           |         |   |             |          
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Funds loaned to related party                                                                       |                                                                                 |                                       |           |        |        |      |           |           |         |   | (1,435,000  | )        
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Net proceeds from sale of common stock                                                              |                                                                                 |                                       | 317,000    |        |        |      | 597,500    |           |         |   | 4,777,553   |          
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Payments on capital leases                                                                          |                                                                                 |                                       |           |        |        |      |           |           |         |   | (5,448      | )        
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Increase in restricted cash                                                                         |                                                                                 |                                       |           |        |        |      |           |           |         |   | (300,000    | )        
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Net proceeds from sale of preferred stock                                                           |                                                                                 |                                       |           |        |        |      |           |           |         |   | 1,850,952   |          
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Shareholder capital contributions                                                                   |                                                                                 |                                       | 1,091,648  |        |        |      |           |           |         |   |            |          
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Advances from stockholders                                                                          |                                                                                 |                                       | 445,378    |        |        |      | 210,852    |           |         |   |            |          
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Repayments to stockholders                                                                          |                                                                                 |                                       |           |        |        |      | (9,486     | )         |         |   | (19,323     | )        
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Proceeds from issuance of convertible debentures                                                    |                                                                                 |                                       |           |        |        |      | 558,640    |           |         |   |            |          
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Purchase of treasury stock                                                                          |                                                                                 |                                       | (227,619   | )      |        |      |           |           |         |   |            |          
|                                                                                                    |                                                                                 |                                       |            |        |        |      |            |           |         |   |             |          
|Net cash provided by financing activities                                                           |                                                                                 |                                       | 1,626,407  |        |        |      | 1,357,506  |           |         |   | 4,868,734   |          
|                                                                                                    |                                                                                 |                                       |            |        |        |      |            |           |         |   |             |          
|Net increase in cash and cash equivalents                                                           |                                                                                 |                                       | 18,609     |        |        |      | 230,131    |           |         |   | 77,882      |          
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Cash and cash equivalents at beginning of year                                                      |                                                                                 |                                       |           |        |        |      | 18,609     |           |         |   | 248,740     |          
|                                                                                                    |                                                                                 |                                       |            |        |        |      |            |           |         |   |             |          
|Cash and cash equivalents at end of year                                                            |                                                                                 | $                                     | 18,609     |        |        | $    | 248,740    |           |         | $ | 326,622     |          
|                                                                                                    |                                                                                 |                                       |            |        |        |      |            |           |         |   |             |          
|Supplemental disclosures of cash flow
	information                                                  |                                                                                 |                                       |            |        |        |      |            |           |         |   |             |          
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Cash paid for interest                                                                              |                                                                                 | $                                     |           |        |        | $    |           |           |         | $ | 15,192      |          
|                                                                                                    |                                                                                 |                                       |            |        |        |      |            |           |         |   |             |          
|Non-cash investing and financing
	activities                                                        |                                                                                 |                                       |            |        |        |      |            |           |         |   |             |          
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Debentures issued for shareholder advances on
	behalf of Company                                    |                                                                                 | $                                     |           |        |        | $    | 2,097,109  |           |         | $ |            |          
|                                                                                                    |                                                                                 |                                       |            |        |        |      |            |           |         |   |             |          
|Assets acquired under capital leases                                                                |                                                                                 | $                                     |           |        |        | $    |           |           |         | $ | 201,157     |          
|                                                                                                    |                                                                                 |                                       |            |        |        |      |            |           |         |   |             |          

See accompanying notes.

F-28



---



##### 



High Speed Net Solutions, Inc.

Notes to Consolidated Financial Statements

December 31, 2000

1.  Business and Organization and Basis of
Presentation

In 1984, High Speed Net Solutions, Inc. (HSNS) was
incorporated under the name EMN Enterprises, Inc. HSNS was
inactive from the time of its incorporation in 1984 until it
acquired all of the assets of Marketers World, Inc.
(MWI) on August 24, 1998. In September 1998, in
conjunction with the MWI asset acquisition, HSNS changed its
name to ZZAP.NET, Inc. and in January 1999 changed its name to
High Speed Net Solutions, Inc. Prior to the MWI asset
acquisition, HSNS was a non-operating shell corporation and MWI
was a private operating company. In legal form, the asset
acquisition was effected by HSNS issuing its shares in exchange
for the net assets of MWI. Total outstanding shares of HSNS
common stock subsequent to the transaction were 10,275,000. At
the time of the transaction, HSNS had no assets or liabilities,
and accordingly, the transaction was accounted for as a
recapitalization of HSNS, and the outstanding shares are
recorded accordingly.

MWI was incorporated in January 1998 and its planned principal
operations were to lease computer systems to businesses. For the
period prior to August 24, 1998 the historical amounts are
those of MWI. During 1998, HSNS was not able to execute its
planned activities in connection with the asset acquisition,
other than the sale of pilot products and services, and
consequently ceased all operating activities in December 1998.
MWI was subsequently legally dissolved in September 1999.
Accordingly, the operating results of the MWI business have been
presented as discontinued operations for the year ended
December 31, 1998. Revenues of MWI during the year ended
December 31, 1998 were approximately $1,335,300, and the
loss totaled $1,334,855. As of December 31, 1998, HSNS had
completed its disposal of the discontinued operations of the MWI
business. There were no remaining assets or liabilities related
to such business at December 31, 1998. Results for the year
ended December 31, 1999 represent solely the activity of
HSNS, which primarily related to raising capital and
establishing strategic relationships.

On April 24, 2000, HSNS acquired 100% of the issued and
outstanding shares of common stock of JSJ Capital Corp., a
non-operating shell company incorporated in a Nevada Corporation
(JSJ), in exchange for 50,000 shares of common stock
of HSNS. The shares were issued in a transaction exempt from
registration under the Securities Act of 1933 and, as such, were
restricted securities as defined in Rule 144
under the Securities Act of 1933. JSJ was then merged into HSNS,
with HSNS being the surviving corporation. The acquisition was
accounted for as an issuance of HSNS common stock in exchange
for the net monetary assets of JSJ, accompanied by a
recapitalization.

The 50,000 shares issued by HSNS in connection with the
acquisition of JSJ are considered a nominal issuance to effect
the acquisition. All share and per share data presented herein
have been restated to reflect the issuance of these shares. The
pro forma impact of the JSJ acquisition is a $400,000 charge to
retained earnings on HSNSs balance sheet, representing
cash legal fees paid in excess of the net assets acquired. This
charge was recognized in earnings upon consummation of the
acquisition.

In August 1999, Summus Ltd. acquired a majority of the
outstanding common stock of HSNS. Subsequently, Summus, Ltd.
sold certain of the shares it acquired and at December 31,
1999, Summus, Ltd. owned 44.5% of HSNSs outstanding common
stock. This ownership percentage was 33.6% at December 31,
2000.

On July 10, 2000, HSNS acquired all of the issued and
outstanding common stock of Douglas May & Co., Inc.
(Douglas May & Co.) in a business
combination accounted for as a purchase (see Note 4). HSNS
had been a development stage company since its inception and
ceased being a development stage company in the third quarter of
2000 upon its acquisition of Douglas May & Co. HSNS
provides media creation services through Douglas May &
Co., a wholly owned and fully operational subsidiary, which
include

F-29



---



##### 



High Speed Net Solutions, Inc.


Notes to Consolidated Financial Statements (continued)



1.  Business and Organization and Basis of
Presentation (continued)


creative design assistance and commercial content development,
development of audio and video images and animation, as well as
web site design and construction (see Note 4).




Effective February 16, 2001, HSNS acquired all the assets
and operations of Summus, Ltd. under the terms of an asset
purchase agreement, dated October 30, 2000, as amended (the
Asset Purchase Agreement). The transaction was
accounted for as a capital transaction, accompanied by a
recapitalization. As a result of the transaction, the historical
financial statements of Summus, Ltd., for accounting purposes,
are deemed that of the Company (see Note 14).




The accompanying financial statements have been prepared on a
going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course
of business. As shown in the financial statements presented
herein, for the year ended December 31, 2000, HSNS incurred
a net loss of $12,441,655 and had negative cash flows from
operations. These factors, among others, indicate HSNS may be
unable to continue as a going concern for a reasonable period of
time. The financial statements presented herein do not include
any adjustments relating to the recoverability of assets and
classification of liabilities that might be necessary should
HSNS be unable to continue as a going concern.




Following the Summus, Ltd. asset acquisition, the
post-transaction company (which, for clarity of reference, is
referred to as the Company) will actively seek to
expand business opportunities and pursue additional financing
from third parties. The Companys management anticipates
that it will be able to attract additional capital to continue
to fund operations. However, there can be no assurance that
managements plans will be executed as anticipated. The
Companys continuation as a going concern is dependent on
its ability to generate sufficient cash flow to meet its
obligations on a timely basis, to obtain additional financing or
refinancing as required, and ultimately to attain profitability.




2.  Restatement

The accompanying financial statements as of and for the year
ended December 31, 1999 have been restated to reflect a
reduction in the recorded value of prepaid software royalties of
$2,361,458. Of this amount, $1,528,125 reflects a reduction in
the value of 1.5 million shares of HSNS restricted common
stock issued as the final installment under the Marketing
License Agreement with Summus, Ltd. (see Note 6). The
restated value of these shares was determined by applying a
discount to the traded value of HSNSs unrestricted common
stock at the time of issuance based on the discount associated
with private sales of shares of such stock (such shares being
restricted securities as defined in Rule 144
under the Securities Act) for cash to third parties within close
proximity of the time of the final payment under the Marketing
License Agreement. Initially, the value of these shares was
based on the traded value of HSNSs common stock at the
time of issuance. The recorded value of the prepaid software
royalties has also been reduced by $833,333 to reflect
amortization of the prepaid balance for 1999.

Additionally, the accompanying financial statements have been
restated to reflect both an increase and a decrease to
HSNSs investment in the common stock of a related party.
The increase reflects a capital contribution to HSNS in the form
of common stock of the related party made by a shareholder
during 1999 valued at $1,109,986 which was previously not
recorded. The non-cash capital contribution consisted of shares
of common stock of Summus Technologies, Inc. contributed to HSNS
in connection with its acquisition of an equity interest in
Summus Technologies, Inc. See Note 10 to the financial
statements for a further discussion of this transaction,
including the manner in which the contribution was valued. The
decrease to the investment in the common stock of related party
account reflects a reduction in the valuation of the stock of
the related party obtained in exchange for shares of HSNS common
stock determined by applying an appropriate

F-30



---



##### 



High Speed Net Solutions, Inc.


Notes to Consolidated Financial Statements (continued)



2.  Restatement (continued)


discount to the traded value of the HSNS stock to reflect the
restricted nature of the shares issued. This change reduced the
investment in common stock of related party account
by $1,148,176.

Also, the accompanying financial statements have been restated
to reflect a reduction in the expense associated with the
granting of stock options primarily to non-employees. Initially,
the fair value of these grants to non-employees was calculated
using the traded value of HSNSs common stock as an input
to the valuation model. HSNS determined that it should have used
the fair value of its restricted stock rather than the traded
value of its freely tradable shares of stock as the appropriate
input to the valuation model. The effect of these changes
related to stock option grants was to reduce the amount of
expense previously recorded in 1999 by $1,320,350.

The following table summarizes the effect of the restatement
adjustments on HSNSs balance sheet and statement of
operations as of and for the year ended December 31, 1999.

|                                                          |  |               |            |  
|--------------------------------------------------------- |  | ------------- | ---------- | -
|                                                          |  | Balance Sheet
|                                                          |  |              
|Total assets as previously reported                       |  | $             | 6,674,712  |  
|                                                         
|                                                         
|                                                         
|                                                         
|Reduction in prepaid royalties                            |  |               | (2,361,458 | )
|                                                         
|                                                         
|                                                         
|                                                         
|Reduction in investment in common stock of
	related party |  |               | (1,148,176 | )
|                                                         
|                                                         
|                                                         
|                                                         
|Increase in investment in common stock of related
	party  |  |               | 1,109,986  |  
|                                                          |  |               |            |  
|Total assets as restated                                  |  | $             | 4,275,064  |  
|                                                          |  |               |            |  

|                                                                                 |  |               |             |  
|-------------------------------------------------------------------------------- |  | ------------- | ----------- | -
|                                                                                 |  | Statement    
|                                                                                 |  | of Operations
|                                                                                 |  |              
|Net loss as previously reported                                                  |  | $             | (10,171,546 | )
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Amortization of prepaid royalties                                                |  |               | (833,333    | )
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Reduction in amount of expense recorded in
	connection with
	stock option grants |  |               | 1,320,350   |  
|                                                                                 |  |               |             |  
|Net loss as restated                                                             |  | $             | (9,684,529  | )
|                                                                                 |  |               |             |  
|Net loss per share as previously reported                                        |  | $             | (.53        | )
|                                                                                 |  |               |             |  
|Net loss per share as restated                                                   |  | $             | (.51        | )
|                                                                                 |  |               |             |  

3.  Significant Accounting Policies

Principles of
Consolidation

The consolidated financial statements include the accounts of
HSNS and its wholly owned subsidiary, Douglas May & Co.
Significant intercompany accounts and transactions have been
eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual
results could differ from those estimates.

F-31



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##### 



High Speed Net Solutions, Inc.


Notes to Consolidated Financial Statements (continued)



3.  Significant Accounting Policies (continued)


Cash and Cash
Equivalents

Cash and cash equivalents consist of unrestricted cash accounts
and highly liquid investments with an original maturity of three
months or less when purchased.

Restricted Cash

Restricted cash at December 31, 2000 of $300,000 represents
funds held in escrow related to the Companys obligation to
repurchase 45,572 shares of its common stock issued in
connection with the acquisition of Douglas May & Co.
(see Note 4). These shares were repurchased and retired by
HSNS in January 2001 using the funds from the escrow account.

Equipment, Software and
Furniture

Equipment, software and furniture are stated at cost.
Depreciation, as recorded by MWI, was computed using the
straight-line method over the estimated useful lives of the
assets beginning when assets were placed in service.
Depreciation expense amounted to $13,290 for the year ended
December 31, 1998. Based on HSNSs discontinuance of
the MWI business operations in 1998, along with no future
alternative use, the net book value of the equipment and
furniture acquired in connection with the MWI asset acquisition
at December 31, 1998, totaling $36,858, was written off and
is included as part of the loss from discontinued operations.

Depreciation expense in 1999 and 2000 was $332 and $166,294,
respectively. Depreciation expense was calculated on a
straight-line basis over the estimated useful lives of the
assets ranging from three to five years.

Stock-Based
Compensation

HSNS has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation. As
permitted by the provisions of SFAS No. 123, HSNS continues
to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees and
related interpretations for its stock-based awards.

In accordance with APB 25, HSNS has valued employee stock
option awards and shares of HSNS common stock issued to
employees and directors for services performed based on the
traded value of HSNSs common stock, or its estimated fair
value prior to it becoming traded, at the measurement date of
the stock options and awards.

HSNS accounts for stock-based amounts issued to non-employees of
HSNS at fair value in accordance with the provisions of SFAS
No. 123.

Income Taxes

Income taxes are accounted for using the liability method in
accordance with Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes
(see Note 12).

F-32



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##### 



High Speed Net Solutions, Inc.


Notes to Consolidated Financial Statements (continued)



3.  Significant Accounting Policies (continued)


Loss Per Share

Loss per share has been calculated in accordance with Statement
of Financial Accounting Standards No. 128,
Earnings per Share. HSNS has potential common
stock equivalents related to its outstanding stock options,
preferred stock and common stock warrants. These potential
common stock equivalents were not included as outstanding for
loss per share purposes for all periods presented because the
effect would have been antidilutive.

Investment in Common Stock
of Related Party




Investment in common stock of related party represents
HSNSs 16.7% and 13.5% ownership interest in Summus, Ltd.
at December 31, 1999 and 2000, respectively (see
Note 10). HSNS accounted for its investment in Summus, Ltd.
using the cost method. Under this method, the investment is
recorded at its historical cost. Although the market value of
this investment is not readily determinable, management believes
its fair value is not less than its carrying amount. On
February 16, 2001, HSNS acquired the assets and operations
of Summus, Ltd. (see Note 14).




Valuation of Long-Lived
Assets

HSNS periodically reviews its long-lived assets, including
goodwill, to determine if events or changes in circumstances
indicate that the carrying amount of an asset may be impaired
and not recoverable. Adjustments are made when the sum of the
expected future undiscounted cash flows is less than the
carrying value of the asset.

Financial Instruments

The carrying amount of cash and cash equivalents, accounts
receivable and accounts payable approximates fair value for
these financial instruments.

Financial instruments that potentially subject HSNS to
concentrations of credit risk consist of cash and cash
equivalents and trade accounts receivable. HSNS maintains cash
and cash equivalents with financial institutions. HSNS
periodically performs evaluations of the credit standings of
those financial institutions. HSNSs customer base consists
of companies operating in the United States. HSNSs
exposure to credit risk with respect to its trade accounts
receivable is limited to the carrying amount of the receivables.
HSNS does not require collateral on these financial instruments.

Revenue Recognition

Revenue from media creation services, which includes creative
design assistance and commercial content development, is
recognized at the time the services are rendered based on the
terms of the individual contracts.

Advertising

The cost of advertising is expensed when incurred. The Company
incurred $128,000 in advertising costs in 1998. No advertising
costs were incurred in 1999 or 2000.

F-33



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##### 



High Speed Net Solutions, Inc.


Notes to Consolidated Financial Statements (continued)



3.  Significant Accounting Policies (continued)


New Accounting
Pronouncements

In June 1998, The Financial Accounting Standards Board issued
Statement No. 133 Accounting for Derivative
Instruments and Hedging Activities
(SFAS 133), which is required to be adopted in
years beginning after June 15, 2000. Because HSNS has not
historically used derivative instruments, management does not
anticipate that the adoption of this statement will have a
significant effect on its operations, financial position or
cash flows.

In December 1999, the Securities and Exchange Commission
released Staff Accounting Bulletin No. 101 (SAB
No. 101), Revenue Recognition in Financial
Statements, which provides guidance on the
recognition, presentation, and disclosure of revenue in
financial statements. SAB No. 101 provides guidance on a
variety of revenue recognition issues, including gross versus
net income statement presentation. HSNS adopted the provisions
of SAB No. 101 during 2000.




On June 29, 2001, the Financial Accounting Standards Board
(FASB) unanimously approved the issuance of
Statements of Financial Accounting Standards (SFAS)
No. 141, Business Combinations and
No. 142, Goodwill and Other Intangible Assets.
SFAS 141 eliminates the pooling-of-interests method of
accounting for business combinations except for qualifying
business combinations that were initiated prior to July 1,
2001. SFAS 141 also includes new criteria to recognize
intangible assets separately from goodwill. The requirements of
SFAS 141 are effective for any business combination
accounted for by the purchase method that is completed after
June 30, 2001. Under SFAS 142, goodwill and intangible
assets with indefinite lives are no longer amortized but are
reviewed annually, or more frequently if impairment indicators
arise, for impairment. Separable intangible assets that are not
deemed to have an indefinite life will continue to be amortized
over their useful lives. The amortization provisions of
SFAS 142 requiring non-amortization of goodwill and
indefinite-lived intangible assets apply to goodwill and
indefinite-lived intangible assets acquired after June 30,
2001. The Company will adopt SFAS 142 in the fiscal year
beginning January 1, 2002. The effect of adopting
SFAS 142 by the Company beginning January 1, 2002 is
not expected to have a significant effect on the operating
results or financial condition of the Company.







4.  Business Combination




On July 10, 2000, under the terms of a share acquisition
agreement dated as of June 30, 2000, by and between HSNS
and Douglas May, HSNS acquired all of the issued and outstanding
capital stock of Douglas May & Co. by issuing to
Mr. May 183,070 shares of HSNS common stock in a
business combination accounted for as a purchase.

The acquisition of Douglas May & Co. was made in order
to supplement HSNSs planned rich media direct business.
This acquisition was expected to create synergies with
HSNSs planned rich media direct service offering.

The shares of HSNS common stock were valued at $1,376,000. Under
the terms of the acquisition agreement, the 183,070 shares of
common stock were issued in three allotments. The first
allotment corresponded to $500,000 of value. At closing, HSNS
issued 50,000 shares of common stock, the number of such shares
being subject to adjustment if the Over the Counter Bulletin
Board trading price of the common stock on the first anniversary
of the closing date of the transaction is less than
$10.00 per share. Under such circumstances, HSNS is
obligated to issue additional shares of common stock that, when
added to the 50,000 shares, and multiplied by the per share
trading price on the first anniversary of the closing date,
shall equal $500,000 in value. The issuance of the 50,000
shares has been recorded at the guaranteed amount of
$10.00 per share on the date of issuance, July 10,
2000. Payment or issuance of any additional shares under the

F-34



---



##### 



High Speed Net Solutions, Inc.


Notes to Consolidated Financial Statements (continued)






4.  Business Combination (continued)





terms of the share acquisition agreement will not change the
recorded cost of the acquisition of Douglas May &
Co.

The second allotment of shares of common stock
(87,498 shares) issued at closing corresponded to $576,000
of value. HSNS committed to file a registration statement with
the SEC to register the resale of these shares. If the shares
were not freely tradable on or before January 1, 2001,
Mr. May has the right to cause HSNS to repurchase these
shares from him by making six cash installment payments totaling
$576,000. Mr. May has not yet elected to have HSNS
repurchase these shares.

The third allotment of shares of common stock
(45,572 shares) issued at closing corresponded to $300,000
of value. HSNS committed to file a registration statement with
the SEC to register the resale of these shares. If the shares
were not freely tradable on or before the expiration of
90 days from the closing date, Mr. May had the right
to cause HSNS to repurchase these shares from him by releasing
funds, in the amount of $300,000, which the share acquisition
agreement provided be placed into an escrow account, the funds
being from certain accounts receivable of Douglas May &
Co. that were collected subsequent to the acquisition date. In
January 2001, based on the election of Mr. May, HSNS
repurchased and retired these shares for $300,000 using the
funds from the escrow account. These shares were treated as
outstanding for loss per share purposes in accordance with the
guidance set forth in SFAS No. 128. All shares issued that
are subject to repurchase by HSNS have been presented on
HSNSs balance sheet as redeemable stock outside of
stockholders equity.

The results of operations of Douglas May & Co. are
included in HSNSs operations from the date of acquisition.
HSNS recorded goodwill in the amount of $1,174,437 related to
this acquisition.

During 2000 the Douglas May & Co. produced negative
cash flows. Because of the decision made in the fourth quarter
of 2000 to not further pursue the planned rich media direct
business due to funding constraints (see Note 6),
management determined there was no basis upon which to project
positive future cash flows from Douglas May & Co. since
the basis for making the acquisition was originally related to
expected synergies and expected future prospects by
incorporating the Douglas May & Co. business into the
planned rich media direct business. Thus, in accordance with the
provisions of SFAS 121, HSNS concluded that the unamortized
portion of the goodwill recorded in connection with the
acquisition of Douglas May & Co. ($1,058,177, net of
the previously amortized amount of $116,260) had become fully
impaired and should be written off. Thus, the company recorded
an impairment charge of $1,058,177 in the fourth quarter of 2000
to recognize the unamortized balance of goodwill written-off.

The following unaudited pro forma summary information presents
consolidated results of operations for HSNS as if the
acquisition of Douglas May & Co. had been consummated
on January 1, 1999. The pro forma information does not
necessarily reflect the actual results that would have been
achieved, nor is it necessarily indicative of future
consolidated results for HSNS.

|                                                 |  |                        |           |      |  |   |            |  
|------------------------------------------------ |  | ---------------------- | --------- | ---- |  | - | ---------- | -
|                                                 |  |                       
|                                                 |  | Year ended December 31
|                                                 |  |                       
|                                                 |  | 1999                   |           | 2000
|                                                 |  |                        |           |     
|Revenue                                          |  | $                      | 880,432   |      |  | $ | 1,673,260  |  
|                                                
|                                                
|                                                
|                                                
|Net loss                                         |  |                        | 9,899,011 |      |  |   | 12,311,544 |  
|                                                
|                                                
|                                                
|                                                
|Loss per share applicable to common shareholders |  | $                      | (0.51     | )    |  | $ | (0.59      | )

F-35



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##### 



High Speed Net Solutions, Inc.


Notes to Consolidated Financial Statements (continued)

5.  Equipment, Software and Furniture

Equipment, software and furniture consists of the following:

|                                               |  |      |       |      |  |   |          |  
|---------------------------------------------- |  | ---- | ----- | ---- |  | - | -------- | -
|                                               |  | 1999 |       | 2000
|                                               |  |      |       |     
|Furniture and fixtures                         |  | $    | 4,052 |      |  | $ | 258,220  |  
|                                              
|                                              
|                                              
|                                              
|Equipment under capital lease                  |  |      |      |      |  |   | 201,157  |  
|                                              
|                                              
|                                              
|                                              
|Computer equipment and software                |  |      |      |      |  |   | 93,104   |  
|                                               |  |      |       |      |  |   |          |  
|                                               |  |      | 4,052 |      |  |   | 552,481  |  
|                                              
|                                              
|                                              
|                                              
|Less accumulated depreciation and amortization |  |      | (332  | )    |  |   | (166,566 | )
|                                               |  |      |       |      |  |   |          |  
|                                               |  | $    | 3,720 |      |  | $ | 385,915  |  
|                                               |  |      |       |      |  |   |          |  

6.  Prepaid Software Royalties

In February 1999, HSNS entered into a Marketing License
Agreement (MLA) with Summus, Ltd., a related party
(see Notes 1 and 9). Under the MLA, HSNS became
obligated to pay Summus, Ltd. an upfront fee of $3,000,000,
payable in four installments of $750,000 each. The first three
installments consisted of cash payments in the aggregate amount
of $2,250,000. Of this amount, $2,190,000 was made by a
shareholder on behalf of HSNS. The final installment was
satisfied by HSNSs issuance of 1.5 million shares of
its restricted common stock.

HSNS determined the value of the 1.5 million shares issued
in lieu of the final cash payment due under the MLA by applying
a discount to the traded value of HSNSs common stock at
the time of issuance based on the discount associated with
private sales of shares of its common stock (such shares being
restricted securities as defined in Rule 144
under the Securities Act of 1933) within close proximity of the
time of the issuance of such shares.

Under the terms of the MLA, HSNS had the right to resell
stand-alone software products specified in the MLA. Since the
specified products were completed and ready for resale, HSNS
capitalized the $3.0 million value of the upfront fees
under the MLA as prepaid software royalties (essentially license
fees) in accordance with the provisions of Statement of
Financial Accounting Standards No. 86, Accounting
for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed, as each of the four software
products specifically referred to in the MLA had reached
technological feasibility within the meaning of
Paragraphs 4 and 38 of that statement.

HSNS reduced the recorded value of the prepaid royalties by
$833,333 to reflect amortization of the prepaid software
royalties in 1999 in accordance with the provisions of SFAS
No. 86. The amount amortized was derived by applying the
straight-line method over a three-year estimated economic life
of the products licensed under the MLA.

In August 1999, Summus, Ltd. acquired a majority of the
outstanding shares of HSNS (this percentage was subsequently
reduced to 44% by December 31, 1999 as Summus, Ltd. sold a
portion of the shares it acquired to third parties). In
connection with this transaction, HSNSs existing
management team was replaced with new management. Over the next
several months, the new management team determined to revise
HSNSs business plan. Rather than function as a reseller of
Summus, Ltd. software products, management determined that HSNS
should function as a service bureau or application service
provider, utilizing Summus Ltd.s wavelet-based technology
for delivery of multimedia services over the Internet. As a
result of this change in business plan, HSNS entered into
negotiations with Summus, Ltd., beginning in December 1999, to
modify the companies contractual relationship under the
MLA. These negotiations

F-36



---



##### 



High Speed Net Solutions, Inc.


Notes to Consolidated Financial Statements (continued)



6.  Prepaid Software Royalties (continued)


resulted in the execution of several agreements (i.e. a master
agreement, software license agreement, software maintenance
agreement, revenue sharing agreement and software escrow
agreement) in mid-February 2000, which superseded in its
entirety the MLA.

Under the new agreements, HSNS did not become obligated to make
any additional payments, in cash or other consideration, to
Summus, Ltd. for the software products to be provided
thereunder. In fact, HSNS received approximately
$2.2 million in credits toward future fees due and payable
to Summus, Ltd. Therefore, the HSNS determined that, in the
absence of information that would have caused management to
conclude that the net realizable value of any of the products
licensed under the MLA had been adversely affected by
HSNSs change in business plan or that the unamortized
capitalized costs exceeded the net realizable value of such
products, no impairment-related write off under SFAS No. 86
was appropriate as of December 31, 1999. As of that date,
HSNS fully expected to generate future revenues, in its
contemplated service bureau business, through the use of the
Summus, Ltd. software products covered by the several agreements
then being negotiated, sufficient to recover the carrying value
of the prepayments under the MLA.

The software license agreement provided HSNS with rights to the
use of Summus, Ltd.s MaxxSystem suite of products in its
planned rich media direct service bureau business. The agreement
did not permit HSNS to resell any of the software products
constituting MaxxSystem. As such, HSNS determined that the
MaxxSystem suite of software products constituted internal
use software subject to Statement of
Position (SOP) 98-1, Accounting
for the Costs of Computer Software Developed or Obtained for
Internal Use.

The agreements were executed in mid-February 2000. However, the
terms of such agreements had been substantially negotiated and
agreed to at the time HSNSs financial statements as of and
for the year ended December 31, 1999 were issued.
SOP 98-1 requires an evaluation of capitalized software
costs for impairment in accordance with FASB Statement
No. 121. Statement No. 121 requires an estimate of
future cash flows to determine if an asset that is in use is
impaired. The change in HSNSs business plan was driven
primarily by the view that delivery of multimedia over the
Internet through the use of the MaxxSystem suite of software
products offered greater future cash flows than the resale of
the software products licensed under the MLA. In view of these
considerations, HSNS determined that an impairment-related write
off of the prepaid royalties was not appropriate as of
December 31, 1999 under SOP 98-1 and SFAS 121.

During 2000, HSNS observed a combination of market conditions
and potential government regulatory actions that caused it to
modify its short-term and long-term plans for revenue generation
as a service provider of rich media content over the Internet.
Market resistance developed to the delivery of Internet services
via .exe file types following the delivery of
certain of such files with viruses. Indeed, this prompted many
companies to configure firewalls to block all files with an.exe
extension. This limited the market for e-mail distribution using
the MaxxNote (i.e., the video e-mail) module of MaxxSystem. At
about the same time, the Federal Trade Commission initiated an
investigation of the use of information gathered by
permission-based marketing through e-mails and banner ads.

Management determined in the fourth quarter of 2000 that it was
unlikely that funding would be available to develop and rollout
the service bureau business model as previously planned. Under
FASB 121, when it is no longer probable that computer
software will be placed in service, the software should be
reported at the lower of its carrying amount or fair value.
Therefore, during the fourth quarter of 2000, management
determined that the assets associated with HSNSs rich
media direct service bureau business (other than the tangible
assets of Douglas May & Co.) were impaired.
Accordingly, an impairment charge of $2.9 million was
recorded consisting of the net carrying value of the capitalized
amounts associated with MaxxSystem of

F-37



---



##### 



High Speed Net Solutions, Inc.


Notes to Consolidated Financial Statements (continued)



6.  Prepaid Software Royalties (continued)


approximately $2.2 million and other capitalized costs
incurred in the development of the service bureau business of
approximately $0.7 million.

7.  Licensing Rights

In September 1998, HSNS issued 775,000 shares of its common
stock, valued at $77,500, for all of the issued and outstanding
common stock of Brad Richdale Direct, Inc. (BRD).
The primary purpose of this transaction was to obtain licensing
and marketing rights held by BRD for certain products to be
developed by Summus, Ltd. Since BRD had nominal assets and
operations, this transaction was accounted for as an acquisition
of licensing rights, rather than as a business combination. The
value of this transaction was based on recent transactions in
HSNSs common stock near the date of the transaction. The
products to be delivered by Summus, Ltd. under these licensing
rights were to be used in the planned operations of MWI. Since
these products were not completed by the end of 1998 and HSNS
had determined to discontinue MWIs operations, HSNS
abandoned its rights to these yet-to-be delivered products.
Accordingly, the net book value of these assets $68,890 was
written off at December 31, 1998 and is included as part of
the loss on discontinued operations.

8.  Convertible Debentures

During 1999, HSNS issued convertible debentures (the
debentures) in the principal amount of $2,655,749 to
Mr. Richdale, entities affiliated with Mr. Richdale
and third parties. These debentures were issued in exchange for
both cash of $558,640 and in partial satisfaction of payments
made by Mr. Richdale on behalf of HSNS in the aggregate
amount of $2,097,109. Prior to the issuance of these debentures,
HSNS owed $2,190,000 to Mr. Richdale for amounts he paid on
behalf of HSNS (see Note 6). This liability was reduced to
$92,891 through the issuance of the convertible debentures
valued at $2,097,109. The remaining amount of the liability,
$92,891, plus other amounts owed to entities affiliated with
Mr. Richdale in connection with funds advanced to HSNS,
totaling $342,924, are included in Payable to related parties in
HSNSs balance sheet. The debentures were convertible at
the date of issuance into HSNSs common stock at conversion
prices ranging from $0.25 to $1.33 per share
(all of which were substantially
in-the-money at the date of issuance).

Since the conversion price of the debentures was below the fair
market value of the common stock, HSNS recorded a $2,655,749
beneficial conversion feature as debt discount and additional
paid-in-capital on the date the debentures were issued. The
resulting interest expense was immediately recognized because
the debentures were convertible upon issuance.

Shortly after the issuance of the debentures, the debenture
holders exercised the conversion feature and converted all
outstanding debentures into 4,852,860 shares of HSNSs
common stock. As of December 31, 1999, all debentures had
been converted.

9.  Related Party Transactions




As of December 31, 2000 Summus, Ltd. held a 33.6% ownership
interest in HSNS. On February 16, 2001, HSNS purchased all
the assets and operations of Summus, Ltd. The transaction was
accounted for as a capital transaction, accompanied by a
recapitalization. (see Note 14).




During 2000, in connection with the negotiations of the Asset
Purchase Agreement with Summus, Ltd., HSNS advanced certain
funds to Summus, Ltd. to assist Summus, Ltd. in funding its
operating expenses.

F-38



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##### 



High Speed Net Solutions, Inc.


Notes to Consolidated Financial Statements (continued)



9.  Related Party Transactions (continued)


These advances, which were evidenced by a promissory note in
favor of HSNS, totaled $1,435,000 as of December 31, 2000.
This balance accrued interest compounded monthly at 8%, was
collateralized by Summus, Ltd.s investment in HSNSs
stock and was payable within 60 days. Upon the closing of
the business combination on February 16, 2001, the entire
balance of this note plus accrued interest was canceled.

During 1999, Summus, Ltd. funded certain expenses of HSNS. The
balance outstanding related to these advances as of
December 31, 2000 and 1999 was $134,677 and $154,000,
respectively.

Payables to Related Parties also includes an unpaid balance of
$435,815 for advances made to HSNS by affiliates of a former
majority shareholder during 1998 and 1999. These amounts were
unsecured and were payable on demand. These amounts have
subsequently been satisfied in full (see Note 14).

10.  Shareholders Equity

On June 20, 1998, HSNS amended its articles of
incorporation to increase the number of authorized shares of its
common stock, par value $.001 per share, to 50,000,000
and to effect a 200-for-1 stock split, thereby increasing its
issued and outstanding shares to 1,000,000. HSNS also has
5,000,000 authorized shares of preferred stock, par value
$.001 per share.

Preferred stock

On February 28, 2000, HSNS issued 2,000 shares of its
Series A Convertible Preferred Stock, par value $.001 per
share (the Series A Preferred Stock), at a
price of $1,000 per share. Proceeds, net of issuance costs of
$149,048, were $1,850,952. The holders of the Series A
Preferred Stock are entitled to receive cumulative cash
dividends at a rate of 8% per annum of the initial liquidation
preference of $1,000 per share (the Liquidation
Preference). Dividends are cumulative from the date of
issuance and are payable, when, as and if declared by the Board
of Directors on June 30 and September 30 of each year
commencing on September 30, 2000. As of December 31,
2000 cumulative dividends accrued were $133,333. The holders of
the Series A Preferred Stock are not entitled to vote on
matters submitted to HSNSs shareholders for voting.
However, approval of holders of a majority of the Series A
Preferred Stock is required prior to the issuance of a new
series of preferred stock that ranks senior to the Series A
Preferred Stock.

Each share of the Series A Preferred Stock is convertible
at the option of the holder, at any time after the date of
issuance, into shares of common stock equal to the Liquidation
Preference divided by an initial conversion price of $14.24. The
conversion price is subject to adjustment as defined in
HSNSs articles of incorporation. Since the Series A
Preferred Stock was convertible at the date of issuance and
since the conversion price was below the fair value of the
common stock at the time of issuance, HSNS recorded a beneficial
conversion feature in the amount of $294,900. The beneficial
conversion feature has been added to the historical net loss for
the year ended December 31, 2000, for purposes of computing
the net loss applicable to common shareholders.

Common stock

During the year ended December 31, 1998, HSNS issued
465,000 shares of its common stock to employees and consultants
for services rendered. It also issued 100,000 shares to a
non-employee shareholder in connection with potential business
combinations. These shares were valued at $46,500 based on the
estimated fair value of the common stock, as determined by a
sale of HSNSs common stock near the time of such
issuances. At the time of such issuances, HSNSs common
stock was not publicly traded. During the

F-39



---



##### 



High Speed Net Solutions, Inc.


Notes to Consolidated Financial Statements (continued)



10.  Shareholders Equity (continued)


year ended December 31, 1999, HSNS issued 85,500 shares of
common stock to consultants for services rendered. These shares
were valued at $130,814 based on the fair value of the common
stock at the time of such issuances.

During 1998, HSNS acquired 38,500 shares of its common stock for
$227,619 in cash and currently holds these shares as treasury
stock.

In August 1999, HSNS issued 795,001 shares of its common stock
valued at $643,951, along with a cash payment of $102,000, to
acquire 402,000 shares of common stock of Summus Technologies,
Inc. The value assigned to the shares issued by HSNS was
recorded at a discount from the traded value of HSNSs
common stock. An additional 598,182 shares of Summus
Technologies, Inc. stock valued at $1,109,986 was contributed to
HSNS by a significant shareholder, bringing HSNSs total
holdings of Summus Technologies, Inc. stock to 1,000,182 shares
or 19%. The value assigned to the shares received by the Company
was recorded based on the derived value of the per share amounts
purchased from the other Summus Technologies, Inc. shareholders.
Subsequently, Summus Technologies, Inc. and Summus, Ltd. merged
with Summus, Ltd. being the surviving entity. The Companys
ownership in Summus, Ltd. after the merger was 16.7% and as of
December 31, 2000 was 13.5%. On February 16, 2001,
HSNS and Summus, Ltd. effected a business combination whereby
HSNS, as the legal acquirer, purchased substantially all of the
assets and operations of Summus, Ltd. The transaction was
accounted for as a reverse acquisition in which
Summus, Ltd. is treated as the accounting acquirer (see
Note 4).

In August 1999, former management of HSNS entered into an
agreement to sell shares of common stock to family members of a
Director. The agreement provided for HSNS to sell 250,000 shares
of its common stock for $1.00 per share. Since the stock price
was below the fair market value of the underlying stock on the
date of the agreement, $845,000 of expense related to this
transaction has been charged to non-cash compensation in the
statement of operations in 1999. The business purpose of this
transaction was to provide financing to HSNS at a critical time.

During 2000, HSNS issued 1,544,290 shares of its unregistered
common stock and issued warrants to purchase an additional
1,997,564 shares of common stock for gross cash proceeds of
$4,777,553. The warrants have exercise prices ranging from $4.00
to $4.625 per share, a term of five years, and cannot be
exercised within five months from the date of issuance.

Stock Options

HSNSs Board of Directors authorized an amendment of
HSNSs Equity Compensation Plan (the Plan)
in February 2001 to increase the aggregate number of shares of
its common stock available for issuance of stock awards under
the Plan to 6,500,000. The Plan provides for the issuance of
stock options to employees, directors, advisors and consultants
of and to HSNS. Options granted generally have a ten-year term
and vest over three years from the date of grant. Certain of the
stock options granted under the Plan have been pursuant to
various stock option agreements. Each stock option agreement
contains specific terms.

During 1999, HSNS granted to certain employees and directors
options exercisable for 1,050,000 shares of common stock that
had exercise prices below the fair value of the underlying
common stock. Non-cash compensation expense of $2,006,250 has
been recognized based upon the difference between the exercise
price and the traded value of the common stock on the date of
grant. In addition, HSNS granted options to purchase 1,140,000
shares of HSNSs common stock to non-employees. Non-cash
expense of $1,391,000 related to these options was recognized
based upon the fair value of these options on the date of grant.
Each of

F-40



---



##### 



High Speed Net Solutions, Inc.


Notes to Consolidated Financial Statements (continued)



10.  Shareholders Equity (continued)


these option grants vested immediately upon issuance and options
to acquire 1,825,000 shares of common stock were exercised
during 1999. Unexercised options expire between 5 and
10 years from date of grant.

During 2000, HSNS granted options to purchase 50,000 shares of
HSNSs common stock to non-employees. Non-cash expense of
$468,171 related to these options was recognized based on the
fair value of these options in accordance with
SFAS No. 123.

In addition, HSNS granted options to purchase 15,000 shares of
HSNSs common stock to a Director that had an exercise
price below the fair value of the underlying common stock.
Non-cash compensation expense of $333,750 has been recognized
based on the difference between the exercise price and the
traded value of the common stock on the date of grant.

A summary of HSNSs stock option activity is as follows:

|                                |           |        |           |                  |   |   |      |      | 
|------------------------------- | --------- | ------ | --------- | ---------------- | - | - | ---- | ---- | 
|                                |           |        |           | Weighted Average
|                                |           | Shares |           | Exercise Price  
|                                |           |        |           |                 
|Outstanding  December 31, 1998 |           |        |          |                  |   | $ |     |     
|                               
|                               
|                               
|                               
|                                | Granted   |        |           | 2,455,000        |   |   |      | 1.26 | 
|                               
|                               
|                               
|                               
|                                | Exercised |        |           | (1,825,000       | ) |   |      | 0.01 | 
|                                |           |        |           |                  |   |   |      |     
|Outstanding  December 31, 1999 |           |        | 630,000   |                  |   |   | 4.54 |     
|                               
|                               
|                               
|                               
|                                | Granted   |        |           | 830,800          |   |   |      | 6.41 | 
|                               
|                               
|                               
|                               
|                                | Exercised |        |           |                 |   |   |      |     | 
|                                |           |        |           |                  |   |   |      |     
|Outstanding  December 31, 2000 |           |        | 1,460,800 |                  |   | $ | 5.52 |     
|                                |           |        |           |                  |   |   |      |     

The following table summarizes information about stock options
outstanding at December 31, 2000:

|                    |              |             |  |                  |           |                  |  |  |           |  |  |   |       | 
|------------------- | ------------ | ----------- |  | ---------------- | --------- | ---------------- |  |  | --------- |  |  | - | ----- | 
|                   
|Options Outstanding
|                   
|Range of            |              | Number      |  | Weighted Average |           | Weighted Average
|Exercise Prices     |              | Outstanding |  | Contractual Life |           | Exercise Price  
|                    |              |             |  |                  |           |                 
|$                   | .01  .25    |             |  |                  | 282,300   |                  |  |  | 4 years   |  |  | $ | .02   | 
|                    | 2.50  7.50  |             |  |                  | 938,500   |                  |  |  | 6.9 years |  |  |   | 5.19  | 
|                    | 9.65  18.90 |             |  |                  | 240,000   |                  |  |  | 7 years   |  |  |   | 13.28 | 
|                    |              |             |  |                  |           |                  |  |  |           |  |  |   |       | 
|                    |              |             |  |                  | 1,460,800 |                  |  |  | 6.4 years |  |  | $ | 5.52  | 
|                    |              |             |  |                  |           |                  |  |  |           |  |  |   |       | 

|                |             |                     |  |                  |         |  |  |   |      | 
|--------------- | ----------- | ------------------- |  | ---------------- | ------- |  |  | - | ---- | 
|                |             |                    
|                |             | Options Exercisable
|                |             |                    
|Range of        |             | Number              |  | Weighted Average
|Exercise Prices |             | Exercisable         |  | Exercise Price  
|                |             |                     |  |                 
|$               | .01         |                     |  |                  | 282,000 |  |  | $ | .02  | 
|                | 2.50  7.50 |                     |  |                  | 180,000 |  |  |   | 4.00 | 
|                |             |                     |  |                  |         |  |  |   |      | 
|                |             |                     |  |                  | 462,000 |  |  | $ | 1.57 | 
|                |             |                     |  |                  |         |  |  |   |      | 

In accordance with SFAS 123, the fair value of each option grant
was determined by using the Black-Scholes option pricing model
with the following weighted average assumptions for the twelve
month period ended December 31, 2000: dividend yield of 0%;
volatility of 2.054; risk free interest rate of 6.20% and
expected option lives of 5 years. The weighted average fair
value at the date of grant was $6.36 per option. Had the
compensation expense for HSNSs stock options been
determined based on the fair value at the date of

F-41



---



##### 



High Speed Net Solutions, Inc.


Notes to Consolidated Financial Statements (continued)



10.  Shareholders Equity (continued)


grant consistent with the provisions of SFAS 123, HSNSs
net loss and net loss per share would have been $(15.4) million
and $(0.71) for the twelve months ended December 31, 2000.

During August 1999, HSNS negotiated, on an individual basis,
with each of the holders of the shares issued in connection with
the Companys acquisition of the Marketers World assets,
and as a result of such negotiations an aggregate of 5,161,100
shares of HSNSs common stock issued in connection with the
transaction were surrendered for cancellation. This followed
HSNSs decision to cease all operations associated with the
MWI business in 1998. Since no value was ascribed to the initial
shares issued in connection with the MWI asset acquisition, no
value was ascribed to the subsequent cancellation. Also during
1999, HSNS canceled 555,000 shares of its common stock, 530,000
of which were originally issued in 1998 and 25,000 issued in
1999. In August 1999, HSNS canceled 300,000 shares issued in
September 1998 in connection with the contemplated acquisitions
of HealthTec, Inc. and National Direct Corporation, transactions
that were not ultimately consummated. An additional 230,000
shares were canceled upon HSNSs determination not to
pursue certain other acquisitions. In August 1999, HSNS canceled
25,000 shares originally issued to Mr. Richdale and his
spouse in consideration for his assistance in HSNSs
acquisition of shares of Summus Technologies, Inc.s stock.

Common Stock Reserved for
Future Issuance

HSNS has reserved shares of its authorized 50,000,000 shares of
common stock for future issuance as follows:

|                                                  |  |  |           | 
|------------------------------------------------- |  |  | --------- | 
|                                                 
|                                                 
|                                                 
|                                                 
|Convertible preferred stock and related dividends |  |  | 149,812   | 
|                                                 
|                                                 
|                                                 
|                                                 
|Outstanding common stock warrants                 |  |  | 1,997,564 | 
|                                                 
|                                                 
|                                                 
|                                                 
|Outstanding stock options                         |  |  | 1,460,800 | 
|                                                 
|                                                 
|                                                 
|                                                 
|Possible future issuance under stock option plans |  |  | 5,039,200 | 
|                                                  |  |  |           | 
|Total                                             |  |  | 8,647,376 | 
|                                                  |  |  |           | 

11.  Leases

During 1999, HSNS established it headquarters in Raleigh, North
Carolina and entered into a noncancelable operating lease for
office space and also entered into certain capital leases for
office equipment. HSNS also leases office space and certain
office equipment in Dallas, Texas relating to the operations of
its subsidiary, Douglas May & Co., Inc. Rent expense
incurred during the years ended December 31, 1999 and 2000
was approximately $11,000 and $124,000, respectively.

F-42



---



##### 



High Speed Net Solutions, Inc.


Notes to Consolidated Financial Statements (continued)



11.  Leases (continued)


The following is a schedule of future minimum lease payments for
capital and operating leases:

|                                        |  |         |         |           |  |   |         | 
|--------------------------------------- |  | ------- | ------- | --------- |  | - | ------- | 
|                                        |  | Capital |         | Operating
|                                        |  | Leases  |         | Leases   
|                                        |  |         |         |          
|2001                                    |  | $       | 115,332 |           |  | $ | 108,452 | 
|                                       
|                                       
|                                       
|                                       
|2002                                    |  |         | 92,265  |           |  |   | 78,468  | 
|                                       
|                                       
|                                       
|                                       
|2003                                    |  |         | 15,378  |           |  |   | 81,252  | 
|                                       
|                                       
|                                       
|                                       
|2004                                    |  |         |        |           |  |   | 36,240  | 
|                                       
|                                       
|                                       
|                                       
|2005                                    |  |         |        |           |  |   | 37,200  | 
|                                        |  |         |         |           |  |   |         | 
|Total minimum lease payments            |  |         | 222,975 |           |  | $ | 341,612 | 
|                                        |  |         |         |           |  |   |         | 
|Less amounts representing interest      |  |         | 27,266  |           |  |   |         | 
|                                        |  |         |         |           |  |   |         | 
|Present value of minimum lease payments |  |         | 195,709 |           |  |   |         | 
|                                       
|                                       
|                                       
|                                       
|Less current portion                    |  |         | 94,936  |           |  |   |         | 
|                                        |  |         |         |           |  |   |         | 
|                                        |  | $       | 100,773 |           |  |   |         | 
|                                        |  |         |         |           |  |   |         | 

Amortization of capital leases is included in depreciation and
amortization expense.

During 1998, MWI leased its office facility and certain office
equipment under noncancelable operating leases, all which were
terminated in 1998. Total rent expense incurred in 1998 by MWI
was approximately $40,000.

12.  Income Taxes

No provision for income taxes has been recorded during the years
presented due to the Companys significant operating losses
in each year.

Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of
HSNSs deferred tax assets are as follows:

|                                       |                          |             |            |           |  |   |            |           | 
|-------------------------------------- | ------------------------ | ----------- | ---------- | --------- |  | - | ---------- | --------- | 
|                                       |                          |            
|                                       |                          | December 31
|                                       |                          |            
|                                       |                          | 1999        |            | 2000     
|                                       |                          |             |            |          
|Deferred tax assets:                   |                          |             |            |           |  |   |            |          
|                                      
|                                      
|                                      
|                                      
|                                       | Start-up expenses        |             | $          | 1,386,000 |  |   | $          | 1,386,000 | 
|                                      
|                                      
|                                      
|                                      
|                                       | Royalty amortization     |             |            | 333,000   |  |   |            |          | 
|                                      
|                                      
|                                      
|                                      
|                                       | Loss contingency accrual |             |            | 320,000   |  |   |            | 199,000   | 
|                                      
|                                      
|                                      
|                                      
|                                       | Depreciation             |             |            |          |  |   |            | 4,000     | 
|                                      
|                                      
|                                      
|                                      
|                                       | NOL carryforward         |             |            |          |  |   |            | 6,161,000 | 
|                                       |                          |             |            |           |  |   |            |          
|Total deferred tax assets              |                          |             | 2,039,000  |           |  |   | 7,750,000  |          
|                                      
|                                      
|                                      
|                                      
|Deferred tax asset valuation allowance |                          |             | (2,039,000 | )         |  |   | (7,750,000 | )        
|                                       |                          |             |            |           |  |   |            |          
|Net deferred taxes                     |                          | $           |           |           |  | $ |           |          
|                                       |                          |             |            |           |  |   |            |          

Management has determined that a 100% valuation allowance for
existing deferred tax assets is appropriate given the
uncertainty regarding the ultimate realization of any such
assets.

F-43



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##### 



High Speed Net Solutions, Inc.


Notes to Consolidated Financial Statements (continued)



12.  Income Taxes (continued)


At December 31, 2000, HSNS had federal and state net
operating loss carryforwards of approximately $15,400,000 for
income tax purposes. The tax benefit of these carryforwards is
reflected in the above table of deferred tax assets. If not
used, these carryforwards begin to expire in 2020 for federal
tax purposes and in 2015 for state tax purposes. U.S. tax rules
impose limitations on the use of net operating losses following
certain changes in ownership. If such a change occurs, the
limitation could reduce the amount of these benefits that would
be available to offset future taxable income each year, starting
with the year of ownership change.

13.  Loss Contingencies

Settlement with William R.
Dunavant

In January 2000, William R. Dunavant
(Dunavant), a former shareholder of Summus
Technologies, Inc. who received 350,000 shares of
HSNS common stock and $100,000 in cash in exchange for his
shares of Summus Technologies, Inc. stock, filed a lawsuit
against HSNS. Former management of HSNS had entered into an
agreement with Dunavant which obligated HSNS to register the
350,000 shares of HSNS common stock under the Securities
Act of 1933 (the Securities Act) within a specified
time period. HSNSs failure to register such shares
resulted in a lawsuit against HSNS seeking damages
of $13,300,000.

In June 2000, HSNS entered into a settlement agreement with
Dunavant to resolve the lawsuit. This settlement agreement was
amended on October 26, 2000 and then again on
December 5, 2000. Under the terms of the settlement
agreement, as amended, HSNS issued to Dunavant
1,700,000 shares of its restricted common stock in 2000.
The value of these shares, totaling $1.4 million, was based
on a discount applied to the traded value of HSNSs common
stock on the date of issuance. The number of common shares held
by Dunavant at December 31, 2000, totaled 2,050,000.
Additionally, HSNS became obligated to issue 25,000 shares
of restricted common stock per month and pay $25,000 in cash per
month to Dunavant until a registration statement on
Form S-1, covering the resale of Dunavants shares, is
declared effective by the SEC, which will result in the HSNS
shares owned by Dunavant becoming freely tradable. The loss
contingency accrual as of December 31, 2000, represents
managements best estimate of the monthly obligations
subsequent to December 31, 2000 that HSNS would incur under
the terms of the agreement with Dunavant through completion of
the registration process. The estimated value of the monthly
share allotment was determined by applying an appropriate
discount to the traded value of HSNSs common stock as of
December 31, 2000.

The AIC Litigation

On March 30, 2001, Analysts International Corporation
(AIC) filed a civil summons and complaint in General
Court of Justice, District Court Division, County of Wake, North
Carolina, against High Speed Net Solutions, Inc. The complaint
alleged that HSNS breached certain contracts with AIC, dated
December 9, 1999, February 11, 2000, April 25,
2000, May 9, 2000, and May 23, 2000, under which AIC
provided us with computer programming services. AIC has
requested that the court enter judgment in its favor for
$358,426, plus pre-judgment interest from September 26,
2000 on certain invoices at the rate of 18% per annum,
post-judgment interest at the rate of 8% per annum, reasonable
costs of AIC and other relief the court deems equitable. HSNS
and AIC are negotiating to resolve the matter. The principal
amount of $358,426 is included in accounts payable at
December 31, 2000.

F-44



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##### 



High Speed Net Solutions, Inc.


Notes to Consolidated Financial Statements (continued)



13.  Loss Contingencies (continued)


The Cale Yarborough
Litigation

On April 25, 2001, Cale Yarborough, a Company shareholder,
filed a summons and complaint against HSNS, David Gordon, Bear
Steams Securities Corp., MidSouth Capital, Inc., and Interwest
Stock Transfer Co. in the United States District Court, District
of South Carolina, Florence Division, alleging, among other
things, (i) breach of an agreement Mr. Yarborough
entered into with David Gordon under which Mr. Gordon was
to provide an opinion letter as to Mr. Yarboroughs
ability to resell shares of our common stock in accordance with
Rule 144 promulgated under the Securities Act of 1933,
(ii) violation of Rule 144, (iii) professional
negligence and breach of fiduciary duty, and (iv) violation
of federal and state securities laws. All of the causes of
action in the complaint stem from the alleged failure to
properly advise Mr. Yarborough as to when the shares of our
common stock could properly be resold under Rule 144. On
May 17, 2001, the complaint was dismissed without
prejudice. As such, it is subject to being reopened upon the
showing of good cause within the 60-day period following the
issuance of the dismissal order. It is HSNSs understanding
that Mr. Yarborough and Mr. Gordon are in the process
of reaching a settlement of this matter. The Company has not
recorded a loss contingency relating to this complaint because,
in managements opinion, it is not probable that a loss
contingency exists and an amount cannot reasonably be estimated.

14.  Subsequent Events




Summus, Ltd. Asset
Acquisition







On February 16, 2001, HSNS acquired all the assets and
operations of Summus, Ltd. under the terms of the Asset Purchase
Agreement.







Prior to the transaction, Summus, Ltd. was a technology company
located in Raleigh, North Carolina that provided contract
engineering, research and development in applications related to
image and video compression and communication, and provided
commercial technology in digital media through various methods,
including generating software development kits for resale,
licensing technology, and developing commercial software
products. Its intellectual property included capabilities in
encoding, manipulating, compressing, managing and distributing
digital content. Its core technology for compression, partially
derived from a field of mathematics known as wavelets, used the
brand name of Dynamic Wavelet. Under this brand, Summus.
Ltd. developed and supplied low-complexity, low bandwidth
wavelet technology for compression applications.




From HSNSs perspective, the primary business purpose of
entering into the transaction with Summus, Ltd. was to acquire
Summus, Ltd.s compression technology. Further, HSNS
perceived the combination of the two companies as offering the
potential to create more growth opportunities for the Company
based on the expected enhanced access to capital resources, plus
it provided the opportunity for HSNS to capitalize on its prior
investment in Summus, Ltd.




Prior to the closing of the transaction, Summus, Ltd. was the
largest shareholder of HSNS. It owned 8,217,781 shares (33.2%)
of HSNSs common stock, approximately 27.6% on a fully
diluted basis. Immediately after the closing, Summus,
Ltd.s ownership interest in the Company increased to
20,593,352 shares (55.5%) of the Companys common stock on
an as-converted basis, approximately (53.1%) on a fully-diluted
basis. The Asset Purchase Agreement contemplates that Summus,
Ltd. will liquidate following the completion of its distribution
of the Companys securities received in the transaction to
the shareholders of Summus, Ltd. On March 13, 2001, Summus,
Ltd. distributed certain of the shares of the Companys
common stock received in the transaction to the shareholders of
Summus, Ltd. in accordance with their pro rata interests; the
balance of such shares was distributed in mid-July 2001.




F-45



---



##### 



High Speed Net Solutions, Inc.


Notes to Consolidated Financial Statements (continued)



14.  Subsequent Events (continued)





Initially, the transaction was recorded as a business
combination under the guidance of Accounting Principles Board
Opinion No. 16 (APB 16), Business Combinations
because, among other reasons:






| |   |                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------
|
| |  | HSNS acquired all the operating assets and liabilities of
	Summus, Ltd.;                                                             
|
|
|
| |  | each of HSNS and Summus, Ltd. were operating entities at the
	time of the closing of the transaction; and                            
|
|
|
| |  | Summus, Ltd. was (and is) to be liquidated following its
	distribution of the equity securities of HSNS received in the
	transaction.
|




Under APB 16, the transaction was also accounted for as a
reverse acquisition in which Summus, Ltd. was
treated as the accounting acquirer; HSNS, the acquired
corporation. Summus, Ltd. was considered the accounting acquirer
in the transaction because Summus, Ltd. received shares of
HSNSs common stock and other equity securities, to be
distributed to the Summus, Ltd. shareholders, representing the
largest portion of the voting interests in HSNS.







At the time the determination was made to account for the
transaction as a business combination, the Company considered an
alternative accounting treatment: accounting for the transaction
as a capital transaction, accompanied by a recapitalization. The
more typical type of transaction for which this accounting
treatment is deemed appropriate is the merger of a private
operating company into a non-operating public shell corporation
with nominal net assets, with the owners and management of the
private company having actual or effective operating control of
the combined company after the transaction. The Company did not
believe this was the most appropriate accounting treatment
because HSNS (including its wholly-owned subsidiary, Douglas May
& Co.) was an operating company, not a non-operating public
shell corporation.







The Company has since reassessed the appropriateness of
accounting for the transaction as a capital transaction,
accompanied by a recapitalization, in view of the particular
facts and circumstances of this transaction, including:






| |   |                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Summus, Ltd.s management evaluated the operating
	activities of HSNS, which, at the time the Asset Purchase
	Agreement was entered into, were primarily conducted through
	HSNSs wholly-owned subsidiary, Douglas May & Co.
	However, the operating activities of HSNS, from Summus,
	Ltd.s perspective, were an incidental consideration in its
	decision to enter into and consummate the transaction.
|
|
|
| |  | As noted above, Summus, Ltd.s primary purpose in entering
	into the transaction was to provide a vehicle for raising
	additional capital through the acquisition of a majority
	interest in an entity (i.e., HSNS) whose common stock is
	publicly traded.                                                                                                                                                
|




Considering these factors and the result of discussions with the
staff of Securities and Exchange Commission, the Company has
have concluded that HSNSs status as an operating company
does not preclude accounting for the transaction as a capital
transaction, accompanied by a recapitalization. Accordingly, the
Company has have determined that it is more appropriate to
account for the transaction in this manner.







By accounting for the transaction as a capital transaction, the
transaction is effectively viewed as the issuance of stock by
Summus, Ltd. in exchange for the cash of HSNS, accompanied by a
recapitalization of Summus, Ltd. The accounting for the
transaction is quite similar to that resulting from a reverse
acquisition, except that no goodwill or other intangible assets
are recorded.




F-46



---



##### 



High Speed Net Solutions, Inc.


Notes to Consolidated Financial Statements (continued)



14.  Subsequent Events (continued)





As a result of the transaction, the historical financial
statements of Summus, Ltd., for accounting purposes, are deemed
to be those of High Speed Net Solutions, Inc. The equity
accounts of Summus, Ltd. have been adjusted for a
recapitalization to reflect the equity structure of HSNS, the
legal acquirer. Specifically:






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | the historical shareholders equity of Summus, Ltd. prior
        to the transaction has been restated for the equivalent number
        of shares of HSNS common and Series B preferred stock, and
        other equity interests, received in the transaction after giving
        effect to any difference in par value of HSNSs and Summus,
        Ltd.s common stock, with an offset to additional paid-in
        capital;
|
|
|
| |  | the accumulated deficit of Summus, Ltd. has been carried forward
        after the transaction; and                                                                                                                                                                                                                                                                                                                                
|
|
|
| |  | loss per share for periods prior to the transaction have been
        restated to reflect the number of equivalent shares received by
        Summus, Ltd. in the transaction.                                                                                                                                                                                                                                                     
|






In legal form, the transaction was effected by HSNS issuing
shares of its common and Series B preferred stock, and
other equity interests, in exchange for the net assets of
Summus, Ltd. The consideration paid by HSNS to acquire the
assets of Summus, Ltd. is described below:






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | HSNS issued to Summus, Ltd. for distribution to the shareholders
        of Summus, Ltd. a total of 20,218,733 shares of HSNS common
        stock and 6,000 shares of Series B preferred stock. As a
        shareholder of Summus, Ltd., HSNS was entitled to receive
        3,604,445 of the total number of shares of common stock issued
        in the transaction. However, under the terms of the Asset
        Purchase Agreement these shares were canceled, resulting in a
        net issuance of 16,614,288 shares of HSNS common stock. In
        addition, the Asset Purchase Agreement provided for the
        cancellation of 8,217,781 shares of HSNS common stock owned by
        Summus, Ltd. prior to the parties execution of the
        agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
|
| |  | HSNS issued to Summus, Ltd. 6,000 shares of newly created
        Series B preferred stock, of which 2,000 shares were
        deposited with an escrow agent as security for any
        indemnification obligations of Summus, Ltd. and its shareholders
        under the Asset Purchase Agreement. 
         HSNS has authorized the issuance of up to 6,500 shares of
        Series B Preferred Stock. The rights of the Series B
        Preferred are as follows: each share of Series B Preferred
        Stock will be automatically converted into 1,000 shares of
        common stock, subject to adjustment for stock dividends, stock
        splits and the like, after the Companys charter is amended
        to increase the number of authorized shares of common stock to
        at least 60 million shares. Until then, the Series B
        Preferred Stock will be entitled to receive dividends and
        participate in distributions upon liquidation pro rata with the
        common stock on an as-converted basis, and will vote equally
        with the common stock on an as-converted basis. These rights
        apply even if there is insufficient authorized common stock to
        permit conversion of the Series B Preferred Stock. There
        are no other preferences or privileges associated with the
        Series B Preferred Stock. Under the terms of the Asset
        Purchase Agreement, HSNS is required to seek shareholder
        approval to amend its charter to increase the number of
        authorized shares of common stock so that there will be
        sufficient shares of common stock available and reserved for
        issuance upon conversion of the Series B Preferred Stock.
|
| |  | HSNS issued to Summus, Ltd. warrants to purchase a total of 500
        shares of its Series B preferred stock, exercisable for a
        period of 5 years from February 16, 2001. The exercise
        price of the warrants is $5,500.00 per share of Series B
        preferred stock ($5.50 per share of the Companys common
        stock on an as-converted basis), and was calculated based on the
        closing market price of the HSNS common stock                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

F-47



---



##### 



High Speed Net Solutions, Inc.


Notes to Consolidated Financial Statements (continued)



14.  Subsequent Events (continued)




| |  |                                                                                                                                   
| |  | ----------------------------------------------------------------------------------------------------------------------------------
| |  | on February 16, 2001, on an as-converted basis (HSNS common
        stock currently trades in a public market on the Pink Sheets).




In addition to the items described above, the terms of the Asset
Purchase Agreement provided for HSNSs assumption of
approximately $2.8 million of liabilities of Summus, Ltd.
to third parties. All amounts owed by and between HSNS and
Summus, Ltd. were cancelled upon the closing of the transaction.







In connection with the transaction, the Company entered into a
three-year employment agreement with Dr. Bjorn Jawerth.
Under this employment agreement, in exchange for
Dr. Jawerths covenant not to compete with the Company
for a period of 18 months from and after the termination of
his employment with the Company, the Company issued options to
Dr. Jawerth to purchase 166,667 shares of common stock at
$0.50 per share and 333,333 shares of common stock at $3.75 per
share. Non-cash compensation expense of $541,688 was recorded
upon the issuance of these options as of February 16, 2001,
the closing date of the transaction. The issuance of these
options was in lieu of a $500,000 cash payment provided for in
Dr. Jawerths employment agreement.




Under the Asset Purchase Agreement HSNS agreed to use reasonable
commercial efforts to assist Dr. Jawerth in the private sale of
up to 1,666,667 shares of HSNS common stock held by
Dr. Jawerth (representing $2.5 million in value) at a
per share price of not less than $1.50 per share. The Asset
Purchase Agreement does not stipulate a date or time period by
which such sale is to occur. Under the terms of
Dr. Jawerths employment agreement, the Company is
obligated to issue to Dr. Jawerth options, with an exercise
price of $1.50 per share, exercisable for three times the number
of shares of common stock sold in the private sale. The options
will be exercisable during the second through the fifth year
after the options are issued. Non-cash compensation will be
recorded upon the issuance of these options. The non-cash
compensation will be determined under the provisions of APB 25,
pursuant to which the compensation cost will be based on the
difference between the stock option exercise price of $1.50 per
share and the traded value of the HSNS common stock on the date
the options are issued.

During the term of the employment agreement, Dr. Jawerth
will receive a base salary of $350,000 (which is subject to an
annual increase of at least 10%) plus other benefits including
severance benefits.




The Dunavant
Settlement




On June 29, 2001, the Company entered into a revised
settlement agreement and voting agreement with William R.
Dunavant and his counsel. Under the terms of such agreements:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the Company issued an aggregate of 475,000 shares of common
        stock to Mr.  Dunavant and his counsel which were valued at
        $352,688. Such amount was determined by applying a discount to
        the traded value of the Companys stock on the date of the
        revised settlement;                                                                                                                                                              
|
| |  | Mr. Dunavant agreed to certain resale restrictions with
        respect to all but 350,000 shares of common stock held by him
        (an aggregate of 2,275,000 shares), specifically, to limit his
        public resale of such shares to 30,000 shares per calendar month
        until February 15, 2002;                                                                                                                                                     
|
| |  | the Company agreed to prepare and proceed diligently to complete
        and file a registration statement with the SEC registering the
        resale of all of the shares held by Mr. Dunavant, his
        spouse and his counsel, with Mr. Dunavant and his counsel
        having a right to seek an immediate hearing for emergency
        injunctive relief if such registration statement is not filed
        before July 31, 2001, unless counsel to the

F-48



---



##### 



High Speed Net Solutions, Inc.


Notes to Consolidated Financial Statements (continued)



14.  Subsequent Events (continued)




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | Company advised the Company (as counsel has) that it is in the
	best interests of the Company and its shareholders to delay the
	filing of such registration statement;                                                                                                                                                                                                                                                                      
|
| |  | Mr. Dunavant, his spouse and his counsel agreed, for a
	two-year period from the date of the agreements, to vote the
	shares held by them in favor of and for the election of Board
	nominees by the Company and to vote such shares in a manner
	consistent with the recommendation of the Board with respect to
	certain extraordinary transactions (such as a tender offer, an
	exchange offer, merger or other business combination); and
|
| |  | the Company, on the one hand, and Mr. Dunavant and his
	counsel, on the other, executed mutual general releases with
	respect to any and all claims against each other, except with
	respect to the obligations and liabilities under such agreements.                                                                                                                                                                                       

At the meeting of the Companys Board of Directors held on
July 20, 2001, counsel to the Company advised the Board
that, in counsels opinion, it was in the best interests of
the Company and its shareholders to delay the filing of a
registration statement with the SEC to register the resale of
all the shares of common stock held by Mr. Dunavant, his
spouse and his attorney. Counsels views on this subject
took cognizance of, among other things, the critical importance
to the Company of:



| |   |                                                                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | becoming timely in its reporting obligations under the
	Securities Exchange Act of 1934, as amended (at the time the
	Companys quarterly report on Form 10-Q for the first
	quarter of 2001, to have been filed on or before May 15,
	2001, had not yet been filed); and                                 
|
| |  | clearing its Form 10 at the earliest opportunity possible,
	since the clearance of the Form 10 is a prerequisite to
	having the Companys common stock made eligible for
	quotation on the OTC Bulletin Board and thereby potentially
	opening up greater opportunities for the Company to raise
	capital.

The Company and its counsel, in accordance with the
June 29, 2001 settlement agreement, have kept
Mr. Dunavant, through his counsel, apprised of the
Companys contemplated timing with respect to the filing of
the registration statement in view of these considerations.
Further, the Company has initiated the process by which all of
its shareholders with registration rights, including
Mr. Dunavant, have been sent a notice seeking an indication
from such shareholders of their desire to have their shares
subject to such registration rights covered by the registration
statement, the number of such shares and their intended plan of
distribution. The Company currently anticipates that it will
file the registration statement with the SEC within a matter of
days after clearing the Form 10.

Settlement of the AIC
Litigation

The Company and AIC entered into a settlement agreement and
release, dated August 7, 2001, under which the Company has
agreed to pay the sum of $358,426, plus interest accruing at the
rate of 8% per annum from March 31, 2000 (the
Indebtedness) according to the following payment
schedule: (i) $20,000 upon execution of the settlement
agreement, (ii) $5,000 per month for a period of six months,
commencing one month after execution of the settlement
agreement, and (iii) $10,000 per month until the balance of the
Indebtedness is paid in full. The Company also executed a
consent order in favor of AIC providing for AICs entry of
a judgment by consent in the amount of the Indebtedness, less
any payments made under the settlement agreement, in the event
the Company defaults on its obligations under the settlement
agreement.

F-49



---



##### 



High Speed Net Solutions, Inc.


Notes to Consolidated Financial Statements (continued)



14.  Subsequent Events (continued)


The ENELF Litigation

On March 15, 2001, ENELF, LLC filed a civil lawsuit in the
United States District Court for Eastern District of Texas
alleging patent infringement by Microsoft Corporation, Texas
Instruments, Incorporated Aware, Inc. and Summus, Ltd. ENELF
alleged that MaxxNote, MaxxShow and PhotoID SDK infringed upon
ENELFs U.S. Patent Number 4,599,567 entitled Signal
Representation Generator ENELF sought to enjoin Summus,
Ltd. from making, selling, offering for sale, using, or
importing its wavelet-based video and image processing
technology. In addition, ENELF sought an unspecified amount of
monetary damages. The Company has filed an answer denying
ENELFs allegations, and seeking a declaratory judgment of
non-infringement, invalidity, and unenforceability. The Company
has recently entered into settlement discussions with ENELF, but
is prepared to provide a vigorous defense to this lawsuit. The
Company has not recorded a loss contingency relating to this
complaint because, in managements opinion, it is not
probable that a loss contingency exists and an amount cannot be
reasonably estimated.

Settlement Agreement with
Brad Richdale Affiliates

In June 2001, the Company entered into a settlement
agreement whereby it issued 250,000 shares of its restricted
common stock in full satisfaction of a $435,815 payable to
related parties. As a part of the settlement agreement, the
Company agreed to include these restricted common shares in its
next registration statement with the SEC covering the resale of
the shares. Also, as a part of the settlement agreement, the
Company obtained the voting rights of these shares over the next
two-year period.

F-50



---



##### 



Report of Independent Auditor

The Board of Directors and Shareholder



I have audited the accompanying balance sheet of Douglas May
& Co., Inc. as of December 31, 1999 and the related
statements of income and retained earnings and cash flows for
the year then ended. These financial statements are the
responsibility of the Companys management. My
responsibility is to express an opinion on these financial
statements based on my audit.

I conducted the audit in accordance with auditing standards
generally accepted in the United States. Those standards require
that I 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.
I believe that my audit provides a reasonable basis for my
opinion.

In my opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Douglas May & Co., Inc. at December 31, 1999
and the result of its operations and cash flows for the year
then ended, in conformity with accounting principles generally
accepted in the United States.

May 31, 2000





F-51



---



##### 



Douglas May & Co., Inc.

Balance Sheet

|                                           |                                                                                                      |              |         |         |  
|------------------------------------------ | ---------------------------------------------------------------------------------------------------- | ------------ | ------- | ------- | -
|                                           |                                                                                                      | December 31,
|                                           |                                                                                                      | 1999        
|                                           |                                                                                                      |             
|Assets                                     |                                                                                                      |              |         |        
|                                          
|                                          
|                                          
|                                          
|Current assets:                            |                                                                                                      |              |         |        
|                                          
|                                          
|                                          
|                                          
|                                           | Cash                                                                                                 |              | $       | 72,496  |  
|                                          
|                                          
|                                          
|                                          
|                                           | Advances to shareholder                                                                              |              |         | 51,859  |  
|                                          
|                                          
|                                          
|                                          
|                                           | Accounts receivable                                                                                  |              |         | 54,105  |  
|                                           |                                                                                                      |              |         |        
|Total current assets                       |                                                                                                      |              | 178,460 |        
|                                          
|                                          
|                                          
|                                          
|Property and equipment:                    |                                                                                                      |              |         |        
|                                          
|                                          
|                                          
|                                          
|                                           | Furniture, fixtures and equipment                                                                    |              |         | 82,025  |  
|                                          
|                                          
|                                          
|                                          
|                                           | Less accumulated depreciation                                                                        |              |         | (59,653 | )
|                                           |                                                                                                      |              |         |        
|                                           |                                                                                                      |              | 22,372  |        
|                                          
|                                          
|                                          
|                                          
|Deposits                                   |                                                                                                      |              | 2,345   |        
|                                           |                                                                                                      |              |         |        
|Total assets                               |                                                                                                      | $            | 230,177 |        
|                                           |                                                                                                      |              |         |        
|Liabilities and shareholders
	equity      |                                                                                                      |              |         |        
|                                          
|                                          
|                                          
|                                          
|Current liabilities:                       |                                                                                                      |              |         |        
|                                          
|                                          
|                                          
|                                          
|                                           | Accounts payable                                                                                     |              | $       | 30,093  |  
|                                          
|                                          
|                                          
|                                          
|                                           | Line of credit                                                                                       |              |         | 73,500  |  
|                                          
|                                          
|                                          
|                                          
|                                           | Deferred tax liabilities                                                                             |              |         | 22,000  |  
|                                           |                                                                                                      |              |         |        
|Total current liabilities                  |                                                                                                      |              | 125,593 |        
|                                          
|                                          
|                                          
|                                          
|Shareholders equity:                      |                                                                                                      |              |         |        
|                                          
|                                          
|                                          
|                                          
|                                           | Common stock, $.05 par value; 1,000 shares
	authorized,
	issued and outstanding at December 31, 1999 |              |         | 50      |  
|                                          
|                                          
|                                          
|                                          
|                                           | Additional paid-in capital                                                                           |              |         | 46,447  |  
|                                          
|                                          
|                                          
|                                          
|                                           | Retained earnings                                                                                    |              |         | 31,087  |  
|                                           |                                                                                                      |              |         |        
|Total shareholders equity                 |                                                                                                      |              | 77,584  |        
|                                           |                                                                                                      |              |         |        
|Total liabilities and shareholders equity |                                                                                                      | $            | 203,177 |        
|                                           |                                                                                                      |              |         |        

See accompanying notes.

F-52



---



##### 



Douglas May & Co., Inc.

Statement of Income and Retained Earnings

|                                       |  |              |         | 
|-------------------------------------- |  | ------------ | ------- | 
|                                       |  | Year ended  
|                                       |  | December 31,
|                                       |  | 1999        
|                                       |  |             
|Revenue                                |  | $            | 880,432 | 
|                                      
|                                      
|                                      
|                                      
|Cost of revenues                       |  |              | 567,937 | 
|                                       |  |              |         | 
|Gross profit                           |  |              | 312,495 | 
|                                      
|                                      
|                                      
|                                      
|General and administrative expenses    |  |              | 304,082 | 
|                                      
|                                      
|                                      
|                                      
|Interest expense                       |  |              | 4,903   | 
|                                       |  |              |         | 
|Income before taxes                    |  |              | 3,510   | 
|                                      
|                                      
|                                      
|                                      
|Income tax expense                     |  |              | 1,092   | 
|                                       |  |              |         | 
|Net income                             |  |              | 2,418   | 
|                                      
|                                      
|                                      
|                                      
|Retained earnings at beginning of year |  |              | 28,669  | 
|                                       |  |              |         | 
|Retained earnings at end of year       |  | $            | 31,087  | 
|                                       |  |              |         | 

See accompanying notes.

F-53



---



##### 



Douglas May & Co., Inc.

Statement of Cash Flows

|                                                                                   |                                              |                     |        |       |        |  
|---------------------------------------------------------------------------------- | -------------------------------------------- | ------------------- | ------ | ----- | ------ | -
|                                                                                   |                                              | Year ended         
|                                                                                   |                                              | December 31,       
|                                                                                   |                                              | 1999               
|                                                                                   |                                              |                    
|Operating activities                                                               |                                              |                     |        |      
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Net income                                                                         |                                              | $                   | 2,418  |      
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Adjustments to reconcile net income to net cash
	provided by operating activities: |                                              |                     |        |      
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                   | Depreciation                                 |                     |        | 7,214 |       
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                   | Changes in operating assets and liabilities: |                     |        |       |       
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                   |                                              | Accounts receivable |        |       | 32,367 |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                   |                                              | Accounts payable    |        |       | (2,701 | )
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                   |                                              | Deferred taxes      |        |       | 1,092  |  
|                                                                                   |                                              |                     |        |      
|Net cash provided by operating activities                                          |                                              |                     | 40,390 |      
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Investing activities                                                               |                                              |                     |        |      
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Purchases of property and equipment                                                |                                              |                     | (7,017 | )    
|                                                                                   |                                              |                     |        |      
|Net cash used in investing activities                                              |                                              |                     | (7,017 | )    
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Financing activities                                                               |                                              |                     |        |      
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Increase in advances to shareholder                                                |                                              |                     | (599   | )    
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Net proceeds from line of credit                                                   |                                              |                     | 23,500 |      
|                                                                                   |                                              |                     |        |      
|Net cash provided by financing activities                                          |                                              |                     | 22,901 |      
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Net increase in cash                                                               |                                              |                     | 56,274 |      
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Cash at beginning of year                                                          |                                              |                     | 16,222 |      
|                                                                                   |                                              |                     |        |      
|Cash at end of year                                                                |                                              | $                   | 72,496 |      
|                                                                                   |                                              |                     |        |      
|Supplemental disclosures of cash flows
	information                                |                                              |                     |        |      
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Cash paid for interest                                                             |                                              | $                   | 4,903  |      
|                                                                                   |                                              |                     |        |      

See accompanying notes.

F-54



---



##### 



Douglas May & Co., Inc.

Notes to Financial Statements

December 31, 1999

1.  Business and Organization

Douglas May & Co., Inc. (May or the
Company) provides media creation services that
include creative design assistance and commercial content
development, development of audio and video images, as well as
web site design and construction. May was incorporated in 1992
and is headquartered in Dallas Texas.

2.  Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with
general accepted accounting principals requires management to
make estimate and assumptions that effect the amounts reported
in the financial statements and accompanying notes. Actual
results could differ from those estimates.




Property and Equipment




Property and equipment are stated at cost. Depreciation was
calculated using the straight-line basis over the estimate
useful lives of the assets.

Income Taxes

Income taxes are accounted for using the liability method in
accordance with Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes.

Financial Instruments

The carrying amount of cash, accounts receivable and accounts
payable approximates fair value for these financial instruments.
Financial instruments that potentially subject the Company to
concentrations of credit risk consist of cash and accounts
receivable. The Company maintains its cash with financial
institutions and periodically performs evaluations of the credit
standings of those financial institutions. The Companys
customer base consists of companies operating in the United
States. The Companys exposure to credit risk with respect
to its trade accounts receivable is limited to the carrying
amount of the receivables. The Company does not require
collateral on these financial instruments.

Revenue Recognition

Revenue is recognized at the time the services are rendered
based on the terms of the individual contracts.

3.  Leases

The Company leases office space under a noncancelable operating
lease. The lease is for 65 months. Total rent expense under
the lease for the 1999 was $33,360.

F-55



---



##### 



Douglas May & Co., Inc.


Notes to Financial Statements (continued)

3.  Leases (continued)

The following is a schedule of future minimum lease payments as
of December 31:

|     |  |   |         | 
|---- |  | - | ------- | 
|    
|    
|    
|    
|2000 |  | $ | 40,032  | 
|    
|    
|    
|    
|2001 |  |   | 40,032  | 
|    
|    
|    
|    
|2002 |  |   | 43,772  | 
|    
|    
|    
|    
|2003 |  |   | 46,384  | 
|    
|    
|    
|    
|2004 |  |   | 46,572  | 
|    
|    
|    
|    
|2005 |  |   | 3,881   | 
|     |  |   |         | 
|     |  | $ | 220,673 | 
|     |  |   |         | 

4.  Line of Credit

The Company maintains a line of credit with a bank that matures
on January 9, 2000. Interest is payable monthly at prime
plus 2%. The line of credit is collateralized by all accounts
receivable and property and equipment and is guaranteed by the
sole shareholder of the Company. The outstanding balance at
December 31, 1999 was $73,500.

5.  Income Taxes




The Company accounts for income taxes under FASB Statement
No. 109, Accounting for Income Taxes
(FASB 109). Deferred income tax assets and liabilities are
determined based upon differences between financial reporting
and tax bases of assets and liabilities and are measured using
the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.




The components of the income tax provision (benefit) are
as follows:

|         |  |   |        |  
|-------- |  | - | ------ | -
|        
|        
|        
|        
|Current  |  | $ | 1,092  |  
|        
|        
|        
|        
|Deferred |  |   | (1,300 | )
|         |  |   |        |  
|Total    |  | $ | (208   | )
|         |  |   |        |  

Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of the
Companys net deferred income taxes are as follows:

|                         |  |   |         |  
|------------------------ |  | - | ------- | -
|                        
|                        
|                        
|                        
|Deferred tax liabilities |  | $ | (22,000 | )
|                        
|                        
|                        
|                        
|Cash to accrual          |  |   |        |  
|                         |  |   |         |  
|                         |  |   | (22,000 | )
|                         |  |   |         |  
|Total net deferred taxes |  | $ | (22,000 | )
|                         |  |   |         |  

7.  Subsequent Event

On July 10, 2000, High Speed Net Solutions, Inc.
(High Speed) acquired all of the issued and
outstanding common stock of the Company through the issuance of
183,070 shares of High Speed common stock valued
at $1,376,000.

F-56