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=============================================================================**SECURITIES AND EXCHANGE    COMMISSION    Washington, D.C. 20549**

**FORM 10-K**

| x | **ANNUAL REPORT PURSUANT TO          SECTION 13 OR 15(d)          OF THE SECURITIES EXCHANGE ACT OF 1934          For the Fiscal Year Ended: December 31, 2002** |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | **OR**                                                                                                                                                           |
|  ̈ | **TRANSITION REPORT PURSUANT          TO SECTION 13 OR 15(d)          OF THE SECURITIES EXCHANGE ACT OF 1934**                                                   |

**For the Transition Period  from              to             Commission File Number: 0-29625**

**SUMMUS, INC. (USA)**(Formerly 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,          Suite 600                                          |
| Raleigh, North Carolina          27601                                               |
| (919) 807-5600                                                                       |
|                                                                                      |
| (Address, including zip          code, and telephone number (including area code) of |
| registrant’s principal          executive offices)                              |
|                                                                                 |
| 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                                     |
|                                                                                      |
| (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 þ     No  ̈

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

Indicate by checkmark whether the Registrant is an  accelerated filer (as defined in Rule 12b-2 of the Act).   Yes þ     No  ̈

The aggregate market value of the  shares of common stock held by non-affiliates of the Registrant as of June 30,  2002 was  approximately $19,500,000 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. 

The number of shares outstanding of  the Registrant’s common stock, par value $.001 per share, as of March 15,  2003 was 57,403,703.

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**SUMMUS, INC. (USA)  FORM 10-K FOR THE FISCAL YEAR  ENDED DECEMBER 31, 2002  TABLE OF CONTENTS**

|         | **PAGE**                                                                                                  |
|--------------|-----------------------------------------------------------------------------------------------------------|
|         |                                                                                                      |   |
| **PART I**   |                                                                                                      |   |
|    |                                                                                                 |    |
| ITEM 1       | BUSINESS                                                                                                  |  1 |
|    |                                                                                                      |   |
| ITEM 2       | PROPERTIES                                                                                                |  16 |
|    |                                                                                                 |    |
| ITEM 3       | LEGAL PROCEEDINGS                                                                                         |  17 |
|         |                                                                                                      |   |
| ITEM 4       | SUBMISSION OF MATTERS TO VOTE        OF SECURITY HOLDERS                                                  |  17 |
|         |                                                                                                      |   |
| **PART II**  |                                                                                                      |   |
|         |                                                                                                      |   |
| ITEM 5       | MARKET FOR REGISTRANT’S        COMMON STOCK AND RELATEDSHAREHOLDER MATTERS                           |  18 |
|         |                                                                                                      |   |
| ITEM 6       | SELECTED FINANCIAL DATA                                                                                   |  20 |
|         |                                                                                                      |   |
| ITEM 7       | MANAGEMENT’S DISCUSSION AND        ANALYSIS OF FINANCIALCONDITION AND RESULTS OF        OPERATIONS   |  22 |
|         |                                                                                                      |   |
| ITEM 7A      | QUANTITATIVE AND QUALITATIVE        DISCLOSURES ABOUT        MARKET RISK                                  |  46 |
|         |                                                                                                      |   |
| ITEM 8       | FINANCIAL STATEMENTS AND        SUPPLEMENTARY DATA                                                        |  46 |
|         |                                                                                                      |   |
| ITEM 9       | CHANGES IN AND DISAGREEMENTS        WITH ACCOUNTANTS        ON ACCOUNTING AND FINANCIAL        DISCLOSURE |  46 |
|         |                                                                                                      |   |
| **PART III** |                                                                                                      |   |
|         |                                                                                                      |   |
| ITEM 10      | DIRECTORS AND EXECUTIVE        OFFICERS OF        THE REGISTRANT                                          |  47 |
|         |                                                                                                      |   |
| ITEM 11      | EXECUTIVE COMPENSATION                                                                                    |  52 |
|         |                                                                                                      |   |
| ITEM 12      | SECURITY OWNERSHIP OF CERTAIN        BENEFICIAL OWNERS        AND MANAGEMENT                              |  65 |
|         |                                                                                                      |   |
| ITEM 13      | CERTAIN RELATIONSHIPS AND        RELATED TRANSACTIONS                                                     |  68 |
|         |                                                                                                      |   |
| ITEM 14      | CONTROLS AND        PROCEDURES                                                                            |  68 |
|         |                                                                                                      |   |
| **PART IV**  |                                                                                                      |   |
|         |                                                                                                      |   |
| ITEM 15      | EXHIBITS, FINANCIAL STATEMENT        SCHEDULES, AND        REPORTS ON FORM 8-K                            | 69 |

 

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**FORWARD-LOOKING STATEMENTS**

This annual report on Form 10-K contains certain forward-looking statements that we believe are within the meaning of Section27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by thesafe harbors created by such acts. For this purpose, any statements that are not statements of historical fact may be deemed to beforward-looking statements, including the statements made in the section of this annual report under the caption "Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding our strategy, futureoperations, future expectations or future estimates, financial position and objectives of management. Those statements in thisannual report containing the words "believes," "anticipates," "plans," “should,”"expects", “intends” and similar expressions constitute forward-looking statements, although not allforward-looking statements contain such identifying words. These forward-looking statements are based on our current expectationsand are subject to a number of risks, uncertainties, and assumptions relating to our operations, results of operations, competitivefactors, shifts in market demand and other risks and uncertainties. Some of the most important factors that could prevent us fromachieving our stated goals include, but are not limited to, the following:

> - a lack of sufficient financial resources to implement our business plan, which has resulted in our receiving a "goingconcern" opinion from our independent auditors with respect to our audited financial statements as of and for the year endedDecember 31, 2002;
- our ability to generate sufficient working capital to meet our operating requirements;
- our future expense levels (including cost of revenues, research and development, sales and marketing, and general andadministrative expenses);
- our future revenue opportunities;
- our ability to develop and enter into strategic relationships with wireless service providers, semiconductor and devicedesigners, mobile and wireless device manufacturers and content providers;
- timely deployment by wireless service providers, semiconductor and device designers, and wireless device manufacturers of oursoftware applications in their networks and mobile information devices;
- the continued growth in demand for wireless and mobile usage;
- our new product development and acceleration of commercial deployment of such products;
- the future adoption of our current and future products, services, and technologies;
- the future growth of our customer base;
- technological competition, which creates the risk of our technology being rendered obsolete or noncompetitive;
- the lack of patent protection with respect to our technology; and
- potential infringement of the patent rights of third parties. 

Although we believe that the assumptions underlying ourforward-looking statements are reasonable, any of the assumptions could be inaccurate and actual results may differ from thoseindicated by the forward-looking statements included in this annual report.  In light of the significant uncertaintiesinherent in the forward-looking statements included in this annual report, you should not consider the 

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 inclusion of suchinformation as a representation by us or anyone else that we will achieve such results.* * We undertake no obligation topublicly update any forward-looking statements, whether as the result of new information, future events, or otherwise. You areadvised, however, to consult any further disclosures we make in our subsequent quarterly reports on Form 10-Q, current reports onForm 8-K, annual reports on Form 10-K, and other reports filed with the SEC. Also note that we provide the following cautionarydiscussion of risks, uncertainties, and assumptions relevant to our business in the “Factors That May Affect Our Business,Future Operating Results and Financial Condition” section of this annual report. These are factors that we think couldcause our actual results to differ materially from expected and historical results. Other factors besides those listedthere couldalso adversely affect us.

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**ITEM 1.         BUSINESS.**

**Overview**

Summus’ predecessor company,High Speed Net Solutions, Inc., was founded in 1984.  Summus, Ltd. was merged into High Speed in February 2001.  HighSpeed changed its name in February 2002 to Summus, Inc. (USA).  Our goal is to be the leading developer of applications andinformation processing tools that optimize the wireless multimedia experience.  Our solutions are developed using ourBlueFuelTM platform and will enable the evolution of mobile and wireless devices from communication devices to control devicesfor dynamically changing personal networks.  We have designed and developed a suite of compelling end-user applications builton our BlueFuel architecture; see “ - Our Products” below.  Our BlueFuel platform enables information mobility,management and exchange tasks on low-, mid- and high-tier cellular handsets over existing second generation (2G) wireless networksas well as 2.5G and 3G networks.  Our vision is to capitalize on the opportunity to seamlessly integrate all the resources(data, devices, and communication networks) the user depends on to carry out everyday tasks, wherever and whenever the user wantsto.

**The Market Opportunity**

 Market research sources projectsignificant growth in the mobile and wireless market.  Revenues in the multi-billions of dollars are predicted over the next2-4 years in several sectors within the mobile and wireless arena.  These sectors include streaming media, multimediaservices, location-based services and multimedia messaging.  Over the next ten years, Telecompetition, Inc., projects that themarket for advanced mobile and wireless services will exceed $275 billion.  Ultimate success in the mobile and wireless marketwill require overcoming two significant challenges:

> - developing and delivering compelling user experiences; and
- enabling the value chain through a strong business model, effective partnering strategies, and technical expertise.

***Compelling End-UserExperience***

 We believe the mobile andwireless market is presently underserved.  Currently, most mobile and wireless solutions offered fail to meet the needs andexpectations of the mobile end-user due to at least one of the following reasons:

> - Functionality focuses on delivering the PC/Internet experience to the cellular handset, not on creating functionality thatextends the reach of the user through information mobility and the “on-the-fly” decision-making.
- Solutions are defined narrowly to meet the needs of a specific functional niche (e.g., messaging or alerts), not on solutionsthat personalize the use, access, and processing of information.
- More bandwidth and specialized hardware are necessities for delivering solutions, rather than effective and efficient uses ofexisting resources.

We believe that a successful solution will need to address the above issues.  We anticipate solutions in the marketplace toaddress the following functional capabilities:

> - common user interface across activities;
- dynamic tracking and alerts for news, events, and activities;
- instant messaging;
- information management and messaging;

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> - remote decision support (comparative shopping, information resources, analysis, etc.);
- scheduling and calendar management;
- location-based services; and
- mobile commerce (m-commerce).

***Enabling the Value Chain***

The wireless and mobile value chain consists of all the elements necessary to bring a solution to the mobile end-user, includingapplications, content, network infrastructure, devices and network connection service.  No solution for the wireless andmobile environment can be developed in isolation;  all parts of the value chain must be considered.  The challenge increating a successful solution is to synchronize the elements of the value chain across companies to deliver the total mobile andwireless solution to the end-user.  Critical players include the builders and operators of the global communicationsinfrastructure, the information and content providers, content aggregators, and the mobile and wireless device manufacturers.

 **Our Strategy**

 To become a leading provider ofefficient information processing solutions for the mobile and wireless market, we intend to use our technology assets to buildsolutions that provide a compelling user experience for consumers in the mobile and wireless environment, leverage these assets andsolutions for growth by entering into strategic partnerships and commercial alliances, and employ a carefully designed intellectualproperty strategy to protect out market position, once established.

 Our strategy is to apply ourtechnology assets and experience with the objectives of:

> - exploiting the market opportunity for mobile and wireless solutions by delivering compelling end-user applications for remoteaccess to and processing of information resources via handheld devices;
- providing middleware products, which are a set of          Application Program Interfaces (“APIs”), tools, and underlying efficient connectivity components comprising theBlueFuel platform, that provide seamless integration with access points into the carrier “pipeline” for participants inthe value chain; and
- establishing BlueFuel as a leading architecture for efficient information processing through mobile and wireless platforms,thereby establishing  Summus as a leading provider of solutions, tools and services supporting BlueFuel. 

To achieve these objectives, our business model contemplates leveraging our technology assets to provide all participants in thevalue chain with an economic motivation to provide their respective pieces of the solution.  The partnering challenge is torecruit and enter into agreements with other companies to provide a total solution to the end-user. We have secured a numberof relationships across the value chain and continue to seek additional relationships to ensure that our products and services willbe compelling and available to end-users, as described below.

***Semiconductor and Device Designersand Manufacturers***

 Our relationship with semiconductorand device designers and manufacturers will revolve around embedding our BlueFuel components for more efficient content renderingusing the microprocessors or digital signal processors (DSPs) in digital cell phones and PDAs.

 We have designed and developed ourBlueFuel platform to support video and image delivery, multimedia messaging, resource management, mapping, as well as 3D graphicsdelivery and rendering, that is compatible with QUALCOMM's Binary Runtime Environment for Wireless (BREWTM) wireless

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 operating system.  BREW is an applications platform forwireless devices using a variety of air interfaces.  Among these are Code Division MultipleAccess (CDMA), which is expected to be the leading standard for third-generation, high-speed wireless voice and datacommunications; notwithstanding that GSM is currently the de facto standard in Europe and Asia, with a reported 824 millionsubscribers worldwide as of March 2003 (as reported by the GSM Association).  CDMA has a reported 146 million subscribersworldwide as of December 31, 2002 (as reported by the CDMA Development Group).  CDMA (1) has a greater network capacity, as aresult of adjusting the transmission rate when there is no voice or data on the channel, (2) rapid and smooth migration tohigh-speed data capability, thus minimizing service interruptions during technology upgrades, (3) growing international coverage,and (4) the highest transmission speed.  The BREW platform provides a standard programming environment that gives softwaredevelopers the tools to create compelling wireless applications and services that can be offered by wireless carriers to theircustomers.  QUALCOMM has established a multi-tiered membership program designed to support the developers of BREW-compatiblewireless applications.  We have become a “Select” level developer under that program.  Neither ourparticipation in, nor our status as, a Select developer within the BREW program imposes any obligations on QUALCOMM to enter into anyagreement with us related to our products.

 In conjunction with our strategy tosupport multiple mobile operating systems, we are working very closely with Nokia on integrating our products on its Series 40 andSeries 60 handsets.  Currently, we are packaging our technology with one of Nokia’s new Series 60 handsets, which isscheduled to be available on two U.S.-based carrier networks early in the second quarter of 2003.  Nokia is a key partner ofours and is one of the leading suppliers of handsets throughout theworld.

In January 2002, we entered into a strategic relationship for the wireless network and set-top box markets with SamsungElectronics America, Inc., a global leader in semiconductors, consumer electronics and digital convergence technology, thatstipulates that the parties will develop, market and generate business opportunities for the wireless network and set-top boxmarkets.  To date, no business opportunity has arisen from our proposals to Samsung.

*Content Providers*

 In seeking to build relationshipswith content providers, our approach will be to provide products for encoding and efficient storage, viewing, and manipulation ofmultimedia content for viewing on digital cell phones or PDAs.  Content providers are accustomed to traditional means ofmessage 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 have entered into contracts with various contentproviders to deliver, for example, news, weather, financial, sports and entertainment content, using our BlueFuel platform.

Our business development activities continue to expand with major content brands.  Throughout 2002 and the first quarter of2003, we have executed contracts with a variety of content providers to build applications utilizing our BlueFuel platform. Our agreements take one of two forms.  The first form of agreement is a revenue-sharing arrangement in which Summus developsthe application using a partner’s content, and the revenue, net of third-party platform and carrier fees, is split betweenSummus and the content partner.  Our share of net revenue from each of these applications ranges from 7% to 75%.  In thesecond form of agreement, Summus retains and records all revenue generated from the applications and pays the content provider amonthly fee based on a volume matrix of subscribers accessing that particular partner’s content. 

Content partners with which we have executed agreements and the status of each application developed using our BlueFuel platformare listed below:

> - ZIO Interactive - We incorporated aspects of our BlueFuel platform and are the primary distributor of ZIO’s mobile andwireless games in the U.S. market.  Currently, we have two games developed on the BREW platform - Nineball, a billiards game,and Ultimate Golf Challenge, a golf simulation game.  Both of these are available on the Verizon Wireless, ALLTEL, and Telstranetworks for a one-time purchase or through a monthly subscription.  Nineball and Ultimate Golf Challenge are expected to beavailable on the J2ME platform by the end of the second quarter of 2003, but they have yet to be tested and deployed on any carriernetwork in this format.

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> - *Iteris, Inc.*   – We have developed a traffic application called Real-Time TrafficTM, in which asubscriber can access traffic information from a cell phone.  This application provides access to live traffic reports formany major metropolitan areas in the United States.  For a monthly subscription price, subscribers can view traffic reportsfeaturing travel times, traffic incidents, freeway images and colorful maps so that they can avoid traffic congestion andefficiently plan their daily commute.  This application is currently available on the BREW platform and is awaiting deploymenton a carrier network.
- *FunCaster GreetingsTM* - This application enables a subscriber to use a wireless phone to send a personalizedgreeting card to any email address.  FunCaster Greetings is available on the BREW platform through the ALLTEL network and isawaiting deployment on additional BREW carrier networks.   FunCaster Greetings is also available on the J2ME platform buthas yet to be deployed on a carrier network in this format
- *Snapfish* – Snapfish Mobile – Powered by BlueFuelTM allows subscribers complete access to theirfilm and digital photos stored on the Snapfish.com website.  Subscribers are able to store, view, share and print digitalcamera photos via the Snapfish Mobile application.  Snapfish Mobile is available on the BREW platform through the VerizonWireless and ALLTEL networks and on the WAP platform on the Cingular Wireless network, as well as the AT&T Wireless mModeservice network.  Snapfish Mobile is also available on the J2ME platform, but has yet to be deployed on a carrier network inthis format.
- *ServiceObjects* – We have built two applications using content from ServiceObjects.  The first is PackageTrackerTM, which enables users to monitor their packages on three different shipping services: FedEx, UPS, and the UnitedStates Postal Service.  By entering the package tracking number, the application can tell a user when the package wasdelivered, who delivered it, and who signed for it - all from the user’s wireless phone.  The second ServiceObjectsapplication is ATM FinderTM, which offers users the ability to locate the nearest ATM directly from their mobile phone. Both applications are available on the BREW platform on the ALLTEL network and are awaiting deployment on additional BREW carriernetworks.  In addition, Package Tracker is offered as part of a bundled set of applications through Single Touch Interactive,Inc., a Mobile Virtual Network Operator.
- *FreeRealTime.com, Inc.* – We have developed Stock TrackerTM,  an application that provides 20-minutedelayed stock quotes directly to a subscriber’s mobile device. Stock Tracker provides a subscriber information on thelast trade, changes in stock price, volume, and the bid and asked prices of a particular stock.  This application is availableon the BREW platform through the Verizon Wireless and ALLTEL networks, and as part of a bundled set of applications through SingleTouch.  In addition, we are in the process of developing a real-time stock quoting application that will be available for theinvestor wanting enhanced stock services.    
- Astrology.com   – We are in the process of developing an application that will provide horoscope informationdirectly to the mobile phone.   This application is not commercially  available at this time.
- *The Associated Press* – We have developed the  AP Photo, News & Sports  application that provides current events and sports information through a cellular handset.  The subscriber logs in to the application to view aphoto slideshow with captions of the top news and sports stories from The Associated Press.  AP Photos, News & Sports isavailable on the BREW platform through the ALLTEL network and is awaiting deployment on additional BREW carriernetworks.   This application is also available on the J2ME platform, but has yet to be deployed on a carriernetwork.

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> - *ABCNEWS.com* – We have developed an  ABCNEWS Multimedia Headlines application that provides current events andsports information via a cellular handset. The subscriber logs in to view a photo slideshow with captions of the top news andsports stories from ABC News.  This application is currently being prepared for submission to the National Standards TestingLaboratory (NSTL) for certification testing on the BREW platform.
- *ESPN.com* – We have developed X Games Top Shots, an application that allows wireless subscribers to view and rankphotos showing the best tricks and stunts from the X Games and other action sports events on their mobile phones.  Users canchoose to view photos of their favorite athletes from the X Games, or specific categories such as skateboarding and snowboarding.This application is currently being prepared for submission  to NSTL for certification testing on the BREWplatform. 
- 123Greetings   - We are in the process of developing an application that will provide wireless subscribers with oneof the largest online selection of greeting cards available today, including invitations, birthday cards, holiday cards, words ofencouragement and more.  The 123Greetings.com mobile application will allow subscribers to choose an appropriate category,personalize a greeting, and send the card directly from their mobile phones while on the run, without having to return to acomputer.  This application is being internally tested for the J2ME platform.
- *TriBond Enterprises*– We are in the process of developing an application to replicate the popular board version ofthis game for the mobile phone.  No timetable has been established for the commercial availability of this application.
- *Agence-France Presse*(“AFP”) – We are in the process of developing an international news application forAFP that provides current events and sports information through a cellular handset.  We anticipate deployment of thisapplication on the J2ME and Symbian platforms prior to the end of the second quarter of 2003.
- *AccuWeather.com*– We are in the process of developing a weather application that provides highly accurate localizedweather reports with text and images. The application delivers five-day forecasts for more than 43,000 U.S. zip codes, plusinternational locations, including detailed information on temperature, precipitation, wind speed, visibility, humidity, UV index,pollen count and overall air quality. Satellite and regional radar images are updated every five to 15 minutes, providing bothstatic and animated graphics on changing weather patterns.  We anticipate deployment of this application on the BREW and J2MEplatforms prior to the end of the second quarter of 2003. 
- Unisys Corporation    - We are in the process of developing a weather application that will provide mobile userswith immediate access to real-time weather services specially tailored for local geographic areas.  The service will allowusers to access localized, near-distance radar images, track moving storm fronts, and monitor weather-related metrics for theirspecific location or any other location of their choice. The services will also provide an alert system to notify the user ofdeveloping storm conditions and weather-related hazards.  We expect deployment of this application on the BREW and J2MEplatforms prior to the end of the second quarter of 2003. 
- Fast Search & Transfer   - We are in the process of developing, as a feature within our ***exego***TMapplication, the capability to use a wireless phone to search the World Wide Web for a wider variety of multimedia.  Userswill have the ability to view the items they find through the search including images, and in the future other multimedia, on theirwireless phone.  Users can store and search content in a personal multimedia storage directory, accessible from their wirelessphone or their PC.  We expect deployment of this feature within ***exego*** on the BREW, J2ME and Symbian platformsprior to the end of the third quarter of 2003.
- *Sentinel* Vision - We are in the process of developing, in conjunction with our partner SentinelVision, a notificationfeature through our ***exego*** application that will alert a user to a security event at his/her residence along withassociated images.  We are exploring business cases for deployment and are scheduling testing with Sentinelequipment.  We anticipate deployment of this application on the BREW, J2ME and Symbian platforms prior to the end of2003.

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*Cellular Carriers*

 In building relationships withcellular carriers, we have focused on providing technology and products to provide the best user experience and facilitatemultimedia content transmission via specific carrier air interface networks (e.g., GSM, TDMA, CDMA) in conjunction with carrierdevice manufacturers.  We have launched several applications on multiple handsets with the Verizon Wireless and ALLTEL carriernetworks.  In addition, we have launched at least one product from our portfolio with AT&T Wireless and Cingular Wirelessand are completing trials with U.S. Cellular in the United States.  We have agreements with Telstra, an Australian-basedcarrier, to launch NineballTM, Ultimate Golf ChallengeTM and **exego**.  Our Nineball application is one of onlytwo applications that has been preloaded on a wireless phone launched by Telstra to help promote sales.  We are alsofinalizing our development to launch our Snapfish Mobile application with a European-based carrier in the second quarter of2003.  Our trial with the Scandinavian carrier NetCom to utilize our applications and technology to provide premium servicesto its enterprise customers has been put on hold while it establishes its marketing and business strategies for data-enabledservices.

We are also in discussions with several carriers regarding the rollout of our products using the J2ME and Symbianplatforms.  Our expectation is to have a subset of our products available on carriers supporting these additional platformsbefore the end of the second quarter of 2003.

Our expansion efforts are centered around securing contracts with multiple carriers before year-end 2003.  Theanticipated timeframe for rollout on these carriers will ultimately be within the carriers’ control.

***Mobile Virtual Network Operators***

Mobile Virtual Network Operators (MVNOs) represent an excellent early stage market opportunity for Summus toprovide a complete solution to the end-user.  An MVNO is a reseller of wireless carrier airtime and services.  Ourstandard offering to MVNOs includes a bundle of preloaded applications on targeted handsets as well as access to other Summusapplications and customized development.  In addition, Summus intends to offer itsmiddleware products to theMVNOs.   This will allow MVNOs to provide interoperability with carriers and simplified integration of new multimediacontent and services.  Our business model for MVNOs includes a guaranteed revenue stream to Summus for preloaded applicationsand revenue sharing with the MVNO for downloaded premium applications.  Price points for preloaded applications will bedetermined primarily by the type of applications included in each bundle.  We are structuring the business model for ourmiddleware products to be a combination of licensing fees and revenue sharing.   Currently, we have a contract in placewith one MVNO, Single Touch Interactive, Inc., which is offering the following preloaded wireless phones with the respectivepreloaded applications:

> - The Sports Mobile ProfessionalTM Preloaded Phone

|   | Ø | *My Mobile Office*, which is arebranding of our ***exego***application, is a suite of productivitytools that turns a wireless phone into a remote control device to importantelectronic files or pictures.  Each My Mobile Office user receives 5MB ofweb storage where important files and pictures can be stored and later accessedthrough their wireless phone.  Users can send and/or receive e-mails withattachments, view images, have instant messaging sessions while exchangingpictures, and access an address book that can be maintained from a website. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | Ø | *Package Tracker*  is a powerfulmobile application that allows a user to centrally manage package-trackingactivities across multiple carriers such as FedEx, UPS and the United StatesPostal Service.  By entering the package tracking number, the applicationcan tell a user when the package was delivered, who delivered it and who signedfor it - all from the user’s wireless phone.                                                                                                                                                                          |

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|   | Ø | *Stock Tracker*provides userswith 20-minute delayed quotes of any stock from any major exchange or index,including the NYSE, AMEX, NASDAQ, the Dow Jones Industrial Average, the Russell 2000, the S&P 500,the 10-yr and 30-yr treasury bonds and TheStreet.com index. Stock Tracker also provides the user information on the last trade, changes instock price, volume, and the bid and asked prices of a particular stock. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | Ø | *AP News & Sports Alerts*provides users frequent updates throughout the day on the top news and sportsheadlines.                                                                                                                                                                                                                                                                                                              |

> - World Wrestling EntertainmentTM Preloaded Phone

|   | Ø | *WWE Superstars* enables users to view the bio, images and logo of WWE Superstars.  They will also be able to listento and download WWE-branded ringtones/sportones to their WWE-branded phone.                                                                                                                                                                                                 |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | Ø | *WWE Alerts and Polls* provide users with instant alerts on the latest WWE events and fight results including Smackdown,RAW and Heat.  Users will receive information on upcoming pay-per-view TV events with compelling images and text. Also,as a part of some alerts, users can participate in wireless instant polls, where they can view real-time results right on theirphone.  |

##### Our Products

***Our BlueFuel Platform***

Summus’ BlueFuel architecture is the foundation upon which mobile and wireless activities can be effectively andefficiently executed and is the basis for all of our applications.  BlueFuel occupies a position in the mobile and wirelessinfrastructure similar to that of the operating system on a PC.  BlueFuel coordinates the interaction of information resourcesunder the technical challenges imposed by devices, networks, information content, and the end-user’s personalpreferences.  BlueFuel is a distributed architecture that operates within information-supplying appliances, network servers,storage devices, and end-user devices, including PDAs, handsets, and PCs.  Collectively, these are referred to as“information resources.”  BlueFuel is designed to bring the far reaches of the network-connected world under thecontrol of the end-user in a manner that is as easy as calling a friend on the telephone.  The components that comprise theBlueFuel architecture are the “glue” that binds the various elements of the value chain into a compelling end-usersolution and experience.

The mobile and wireless environment invokes several kinds of user activities:

> - immediate need (“I need the report update now!”);
- intersection of planned actions with information (“I will need the traffic report at 3:00.”); and
- sharing and collaboration (“I’ll send you the chart.  Please send me your comments.”).

 These kinds of activities are basedon a single basic operation:  the connection of two or more information resources via a set of specific activities. Theinterface into the BlueFuel architecture begins with a command to carry out a specific operation. The attributes of the informationresources are then coordinated, and the resources are connected to carry out the command in the most efficient way possible. To accomplish these tasks, the BlueFuel architecture depends on three primary components: BlueFuel information processing modules,the Efficiency EngineTM information resource manager, and BlueFuel utilities or applications, such as***exego***.

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The BlueFuel modules are computationally very efficient information-processing tools designed to extendthe performance of today’s mobile and wireless devices. The modules focus on adapting, manipulating, organizing, and encodinginformation in specific hardware and software environments to meet the efficiency requirements implied by the end-user'srequest.  It is the focused purpose of these modules that enables image processing five times faster than JPEG-2000, videoprocessing five times faster than MPEG-4, and graphic download times 100 times faster than JPEG-2000.  The module setcurrently includes BlueFuel Video, BlueFuel Image, BlueFuel Map,and BlueFuel Raster Graphics.  We plan toexpand the set to include an array of information resource tools dealing with many different types of information (text, graphics,animation, 3D, etc.) and many different kinds of devices (cameras, printers, pointing devices, etc.).  The Efficiency Enginetranslates the basic operation into the language of network connections, information formats, user preferences, and deviceconstraints.

The Efficiency Engine is an intelligent resource manager that chooses an efficient way of carrying out a particular activity,balancing the requirements of the network, the devices involved, and the preferences of the user. The Efficiency Engine also savesmemory and processing resources by selecting and using only the BlueFuel modules that are necessary for the requestedactivity.  For instance, if an image is transmitted to a BlueFuel device, the Efficiency Engine only loads the image-decodingcomponent of the architecture, leaving other modules alone, thus selecting an optimized use of device resources to display theimage.

Utilities and applications establish the interface between user and solution or function.  They integrate the many aspectsof a particular solution or basic operation into a mobility-configured, easy-to-use end-user tool.   Summus’ firstsuch utility/application, ***exego***, enables the end-user to remotely access, copy and process content between two ormore information resources.  A defining feature of these applications is instant, "wherever-whenever" access andcontrol of information resources.  These applications make possible such activities as using a cellular handset to move filesfrom a PC to the local fax machine for printing, viewing a personal web-cam from a wireless handset, or finding the lowest pricefor a best-selling novel by surveying local bookstore inventories from a pager.

The commercial importance of the innovations in BlueFuel is that they have the potential to create the market opportunity forcarriers, content providers, handset makers and chipset providers to deliver wireless multimedia sooner (on the current 2G network)and on a much wider range of devices than with other competing technologies.  By driving a lower cost profile for wirelessdevices (and therefore lower end-user price points), BlueFuel can drive additional volume opportunities for wireless multimediaservices.

Our BlueFuel platform addresses features that participants in this market have identified as key to delivering on theoverall value proposition, including:

> - cool-processing focused (i.e., addressing size, display, battery life, power dissipation and memory constraints orlimitations);
- form factor and application adaptive (i.e., enabling multimedia capability on a broad array of mobile and wireless devices, suchas PDAs, smart phones and cell phones);
- technology agnostic and wireless telephony standards sensitive (i.e., compatible with a broad variety of mobile and wirelesssoftware 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 contentcreation);

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> - always-on/on-the-fly decision support (i.e., access to content and information anywhere, anytime, which is expected to bepossible 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 enablethe 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 thethird-generation wireless network).

Although the rapid and significant technological changes occurring within the wireless communications industry may dictate a changein our product development strategy, we anticipate that our current product and technology portfolio will provide a solid base fromwhich to grow.  Our BlueFuel platform consists of the following components: :

> - *The Efficiency Engine* is a system component designed to efficiently route, store and monitor information flow (traffic)in a network. The Efficiency Engine saves memory and processing resources by selecting and using only those BlueFuel modules thatare necessary for the requested activity.  Our architecture makes it possible to efficiently transmit and view content overcurrent and future wired or wireless networks.
- *BlueFuel**Server* is designed for optimized multimedia delivery over wired and wireless networks and utilizes theEfficiency Engine to deliver content to both wired and wireless end-user devices.  It is also responsible for assemblingcontent, interpreting end-user directives and anticipating their wishes.  BlueFuel Server supports Summus' BlueFuelarchitecture as well as industry standard formats.
- *BlueFuel Modules* are pluggable and upgradeable software modules for processing multimedia information such as video,image, graphics, animation, 3D, map, and others needed to deliver BlueFuel application solutions.  BlueFuel modules allowapplication developers to build Superfast, SuperthinTMmultimedia applications for gaming, enterprise solutions, security andsurveillance, digital cameras, and m-commerce, to name a few.  BlueFuel modules support multimedia content provided fromthird-party servers as well as MPEG4 and other formats.  The BlueFuel Modules include:
- *BlueFuel  Image* — Software enabling image applications on mobile phones and other wirelessdevices.
- *BlueFuel**Map* —In conjunction with a third-party mapping source, this module will provide users the abilityto access, view and interact with traffic maps for metropolitan areas.  This module will enable high quality color ormonochrome display of street-level and highway-level maps with text and landmark icons.  In addition, the BlueFuel Map modulewill enable unlimited panning and zooming of the map, as well as the ability to "click-through" to specific locations,landmarks or points-of-interest to obtain additional information such as address, phone number, or other relevant information.
- *BlueFuel**Video* — Video compression software for multimedia applications.  This software will enable thedelivery of multimedia content faster and more efficiently than other methods available today.  The BlueFuel Video softwarewill decode and render content on existing and next-generation devices in smaller file sizes and at faster speeds than prevailingtechnologies.  Because of its efficiency, mobile handsets will be optimized to deliver better video quality, even withlow-bandwidth connection speeds, while at the same time conserving battery power.  We anticipate marketing BlueFuel Video, inconjunction with wireless carriers and manufacturers of cell phones and PDAs, primarily to content providers.

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> - *BlueFuel Raster Graphics*-          Graphic image compression software for multimedia applications.           The software delivers high quality images faster at lower          computational complexity than other graphic image-type compression          technologies, such as GIF or PNG for the mobile environment.  The          software is currently used to support several of our graphic images          based applications, such as FunCaster Greetings.  
- *BlueFuel**Create* is a content creation tool designed specifically for optimized user experience for specific typesof devices in both the wired and wireless market.  BlueFuel Create will run primarily in a PC environment and take advantageof the Efficiency Engine’s operating environment to provide content for devices on both wired and wireless networks. Inaddition, a subset of BlueFuel Create may be available in specific devices to take advantage of content compression within thedevice. This creation tool will support our proprietary technology as well as industry standard formats. We anticipate marketingBlueFuel Create to content providers.
- *Presenter* is a complete solution that enables users to view PowerPoint slides on their internet browsers, PDAs and cell phonesand share the slideshows with others.
- *XML Encoder* is a tool that converts text XML into binary XML and back, presents visual results after executing ABP pageson XML Servers and creates .h files to help with parsing in BlueFuel browsers. 
-   *XML Designer* enables non-technical users to create pages that can be displayed by BlueFuel clients for prototypingapplications in BREW, J2ME, and WinCE platforms.

***Our Applications* **

***exego***

We have developed ***exego***, an information management and exchange application.  ***exego*** is ourfirst BlueFuel-based end-user application for the mobile and wireless market.  The application is currently available on theBREW, J2ME, Symbian and Pocket PC platforms and combines the powerful features of e-mail addressing and instant messaging with highquality image management and rendering to enable end-users to instantly exchange text and images from a data repository to acellular handset or between cellular handsets, and to send images and text via e-mail.  We have agreements with two carriersto preload ***exego*** on a specific Symbian device.  The ***exego*** application is accompanied by aweb-based interface that provides image upload and editing features through the data repository service.  The***exego*** website currently offers the following set of core features:

> - instant messaging between ***exego*** subscribers, including exchange of both text and media messages;
- multimedia messaging compatibility;
- e-mail addressing, including the capability to send and receive multimedia emails;
- high quality image editing, management, and rendering;
- slideshow creation;
- content organization in the user's own customizable media directory;
- address book for storage of contact information; and
- customizable profile and settings for managing the user's account and customizing features.

We act as the application service provider and provide the infrastructure to host and deliver the transactions for ourapplication subscribers.  We outsource infrastructure required to run our service with a managed hosting company.  Thecompany we entered into a strategic alliance with will supply the necessary computer hardware, network, facilities, disasterrecovery and monitoring required to run a 24/7 service for a monthly fee. 

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*Content Provider Applications
Summus has developed several products and services for its content partners using our BlueFuel platform.  Theseapplications are described above in “— Content Providers.”

*Photo ServicesAPI*

Our Photo Services  API is targeted at on-line photo-portal services interested in establishing a mobilepresence. It provides an open, extensible, tailorable interface to the BlueFuelphoto imaging services middleware.

 The API offers a selection of optionsto support the various needs of both the on-line photo portal partner and mobile photo imaging services.  Ease ofextensibility, customization, and seamless backwards compatibility are major features of the API.  The interface is based onSOAP and XML, and therefore offers flexibility and extensibility within individual API calls in support of those goals.
- Extensibility -- The API allows easy addition of new calls as future enhancements become available.  Thisis achieved by allowing photo portal partner implementations to specify exactly which API calls they support.
- Customization-- The API is flexible in regards to exactly which subset of the overall functionality aparticular photo portal partner chooses to implement.  Photo portal partners do not need to implement every call in the API,but rather only those that are necessary to support their desired functionality.
- Backward Compatibility-- The API and middleware are designed to support older implementations in thepresence of newer extensions. Thus, photo portal partners are not forced to make upgrades to existing implementations in order tomatch the latest API extensions unless they desire to take advantage of the enhanced functionality.

***Legacy Products***

 In addition to our products aimed atthe wireless and mobile market, we have legacy proprietary commercial software products for complex imaging, informationmanagement, object recognition and multimedia compression with existing applications in the fields of mobile and wirelesscommunications and information processing. Our current product portfolio in this area includes:
- Wavelet Image Software Developers Kit (SDK) Version 4.1 — This product allows software developers to incorporate ourwavelet compression technology within their applications.  Software developers can compress images into smaller file sizes toenable faster downloads without significantly degrading image quality.  Optimizing limited storage capabilities and lowerbandwidth connections, products incorporating the Wavelet Image SDK can provide viewers with greater viewing enhancement, includingimage magnification or enlargement, the flexibility to control the compression ratio which determines speed and quality, and theability to select specific areas or regions of interest for greater levels of detail.  The Wavelet Image SDK was updated toinclude support for JPEG2000, an international still image compression standard approved in January 2001.  The Wavelet ImageSDK will be updated to support rendering of JPEG2000 images as well as advanced features available only through the our waveletimplementations.
- Photo ID Software Developers Kit (SDK) Version 2.0 — This product provides all the standard features of the Wavelet ImageSDK with the addition of specialized compression technology to handle portrait-style images — ideal for smartcard, barcodingand identification and security applications.

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***Future Products***

*BlueFuel SDK*

Our BlueFuel SDK enables software companies other than Summus to develop server applications, standalone games, and multiplayergames that can be used on a variety of wireless devices.

*Personal ServerTM*

Our Personal Server enables a user to view, share, email and publish documents stored on his or her home PC,connected to the Internet, from a mobile device.  This PC application provides all the functions and features needed toenable  a user’s PC for secure management and access through  their mobile device.  This product is expectedto be commercially available by the end of the third quarter of 2003.

 *Multimedia Messaging Services (MMS)*

Summus has recently developed an MMS client for the BREW platform. This MMS solution will enable BREW handsets to exchangemultimedia messages with other MMS handsets, including non-BREW MMS handsets (e.g., WAP).  The Summus MMS solution can alsoprovide MMS messaging capability for legacy BREW handsets already in the market that are not MMS enabled. This will allow carriersto reach a larger user base for MMS messaging.  Summus plans to incorporate its MMS solution into its BlueFuel platform andwill also provide it as extensions for third-party application developers.  We expect this to be available before the end ofthe second quarter of 2003.

*Middleware*

Summus is assembling various packages comprising components of the BlueFuelplatform.  These packages offer various sets ofAPIs, tools, and underlying efficient connectivity components that enable content providers, carriers, handset manufacturers andapplication developers to provide solutions to the end-user.  The packages are constructed to meet the specific challenges andneeds of each of these participants in the value chain, with the intent of providing eachparticipant a unique middleware package thatreduces the complexities of deploying/distributing content and information to mobile devices to a standard set of interfaces andtools.  The middleware packages reduce time-to-market and risk for the relevantparticipants.

The value proposition of the BlueFuelmiddleware is based on the observation that content does not have value independentof distribution.  Without efficient, compelling methods for content distribution (particularly in the mobile environment),consumers will not use or want to access the content in the volumes that make content access profitable.  This"distribution" component includes the integration, in a mobile efficient manner, of various other distributioncapabilities already in existing standards or the mobile infrastructure.  BlueFuelmiddleware brings together content anddistribution in a manner that serves the mobile end-user and creates value to the individual players in the value chain.

In general, middleware is everything that connects “content” to the end-user, except the carriers’distribution “pipeline.”  Some parts of the middleware already exist, e.g.,MMS, Short Message Service (SMS), Session Initiated Protocol (SIP), BREW, J2ME, distribution channels,adding value to content, routers, IP, simpler interaction with content, more efficient processing of information, etc., andtherefore do not need to be developed by Summus.  However, the BlueFuel middleware must integrate and exploit theseexisting middleware pieces as necessary to meet market needs and constraints.  Within the BlueFuel platform the followinggeneral areas provide access to the value chain:
- APIs, e.g., photo services,          Location Based Services (LBS), and BlueFuel          user interfaces;
- Tools & toolkits, such as Software Development Kits (SDKs);          and

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- Servers and services, turnkey solutions available to customers (value chain          participants) so they can get up and runningsooner.

**Sales and Marketing**

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

 Our lack of financial resources,which has dictated that most of our energies be dedicated to marketing efforts in the U.S., has hampered our ability to fullycapitalize on our marketing strategy, which is focused primarily on increasing awareness of the capabilities of oursolutions and developing relationships with content providers, wireless carriers and Internet portals.  We are also engaged in promoting ourbrand name and creating demand for our software and services.  We market our products through industry trade shows, pressreleases, public relations initiatives, and our website.  In addition, we are actively working with a number of tradepublications and industry analysts to educate the market on the deployment and benefits of our technology.

 In an effort to expand our operationsto Asia, where the wireless network infrastructure is currently more developed than it is in North America, we have recentlyentered into a marketing agent agreement for the representation of Summus in the China market.  As we expand and securerelationships in different parts of the world, we will consider opening regional offices to support our business development, salesand technical resources targeted toward the European and Asian markets.
 **Competition  **
 Our financial and operating successdepends, among other things, on the success of our existing and anticipated products and services. If those products and servicesfail 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 expectcompetition to persist and intensify in the future.

 Our primary competition with respectto the ***exego*** application are the additional photo applications from RunMedia, infrastructure provider Lightsurf, aswell as our own Snapfish Mobile application.  In addition, existing simple messaging services and multimedia messagingservices are entering the marketplace from Nokia, LightSurf, OpenWave, as well as specific carrier offerings.***exego***offers several key advantages relative to these competitors, such as multimedia versus text, moreefficient file formats (requiring, for example, fewer computer cycles, less memory, and less bandwidth), and personal creativitytools MMS compatibility, as well as providing cross-carrier compatibility at a greatly reduced cost to theend user.  Moregenerally, we 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, LightSurf Inc., PacketVideo Corporation,Sharp, Curitel 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 systemfor mobile information devices;
- developers of streaming media technologies such as Apple Computer, Emblaze Systems, RocketMobile and RealNetworks, Inc.;
- developers of multimedia compression technology;

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- 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 toembed on the hardware they already produce;
- providers of wireless software applications and content aggregation, such as JAMDAT, eMbience Solutions, and Digital Orchid, aswell as the content providers, which may capitalize on their existing market share and expand their product offerings; and
- developers of wireless multimedia applications such as Thin Multimedia, Oplayo, and PacketVideo, which are developingcompetitive streaming products and are aggressively entering international markets where we plan to have our presence. They alsofocus upon selling player, server, and authoring tools rather than value-added applications.

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.

**Research andDevelopment**

 The market for our services is, andis likely to remain, characterized by rapid technological change and evolving industry standards, making timely product innovationscritical. The introduction of products embodying new technology and the emergence of new industry standards could render existingproducts obsolete and unmarketable. We believe that our future success will depend on our ability to provide software andtechnologies to meet specific market demands, license and/or develop and market new products and enhancements to existing productson a cost-effective and timely basis in response to customer requirements, as well as market trends and demand. Accordingly, ourbusiness plan provides for us to continue to invest significantly in research and development.

 We will need to continue tointroduce, on a timely basis, new products and product upgrades to add new features, functionality and technology that our targetcustomer base desires. Introducing new technology involves numerous technical challenges, substantial amounts of personnelresources and frequently requires months to complete.  No assurances can be provided that we will be able to successfullycomplete the development of currently planned or future products in a timely and efficient manner, that the integration of newtechnology will not degrade the responsiveness and speed of our existing products or that, once integrated, such technology willfunction as expected.

 Due to the complexity of ourproducts, internal quality assurance testing and customer testing of pre-commercial releases may reveal product performance issuesor desirable feature enhancements that could lead us to postpone the release of products or product upgrades. We cannot guaranteethat current or enhanced versions of our products will be free of significant software defects or bugs. Despite our testing, andtesting by third parties, current or future products may contain serious defects. Serious defects or errors could result in lostrevenue or delay in market acceptance of our products and could seriously harm our credibility and materially affect the marketacceptance and sales of our products. In addition, the reallocation of resources associated with any postponement of the release ofproducts or product upgrades would likely cause delays in the development and release of other future products or enhancements toour currently available products. The occurrence of these types of problems could materially adversely affect our business, resultsof operations and financial condition.

 Errors in our products may also becaused by defects in third-party hardware or software incorporated into our products. If so, we may be unable to fix these defectswithout the cooperation of third-party providers. Because these defects may not be as significant to these providers as they are tous, 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 inpotential product liability claims. Even if unsuccessful, a product liability claim brought against us would likely betime-consuming, costly and harmful to our reputation.

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**Intellectual Property Rights**

Currently, we have not been awarded any patents.  We have filed for two(2) patents. One is in the video compression technology area, which incorporated six (6) of our previous provisional patents and for which weabandoned three (3) of our previous provisional patents that contained redundantinformation to the video patent.  The other is in the mobile mapping data area, whichincorporated  two (2) of our previous provisional patents. We have decided not to proceed on five (5) other provisional patents at this time, but the relevant and important information contained in theseprovisional patents is  protected through trade secret andconfidentiality agreements.  Thus, we have two (2) remainingprovisional patents that we have filed, and are working to develop into formalpatent applications.  In addition to patents, we rely on copyright andtrademark laws, trade secrets, confidentiality provisions and other contractualprovisions to protect our proprietary rights. These measures, which require theexpenditure of substantial resources, afford our intellectual property onlylimited protection because our competitors and third parties independently maydevelop similar technologies or may infringe our intellectual property.  Wecurrently have twenty trademarks protected by common law trademark marking (tm)and are in the process of securing registered marks in the United States forthese marks.

We regard our copyrights, trademarks, trade secrets and similar intellectualproperty as critical to our success and attempt to protect our rights by relyingon patent, trademark, service mark, copyright and trade secret laws andrestrictions on disclosure and transferring title and other methods. We havefiled United States trademark applications for various components and conceptsupon which the BlueFuelTM platform depends.  There can be no assurancesthat these steps will be adequate to protect our intellectual propertycompletely, that we will be granted the patents we submit, that we will be ableto secure trademark registrations for all of our marks in the United States orother countries or that third parties will not infringe upon or misappropriateour copyrights, trademarks, service marks and similar proprietary rights

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

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

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

 From time to time, third parties haveasserted and may assert exclusive patent, copyright, trademark and other intellectual property rights to technologies and relatedstandards that are important to us or to third party providers of technology to us. We and/or such third party providers oftechnology may increasingly face infringement claims as the number of competitors in our industry segment grows and thefunctionality of products and services in different industry segments overlaps. As of the date of annual report, we do not have anyintellectual property infringement claims or suits against us of any kind. However, we may be party to additional litigation in thefuture. Any third-party claims, with or without merit, could be time-consuming to defend, result in costly litigation, divertmanagement's attention and resources or require us to enter into royalty or licensing agreements. Such royalty or licensingagreements, if required, may not be available on terms acceptable to us, if at all. A successful claim of infringement against uscould harm our future competitiveness and profitability.

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**Government Regulation**

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

 We are not otherwise currentlysubject to direct federal, state, or local government regulation, other than regulations that apply to businesses generally. Thetelecommunications 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, theeffects 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 onwhich service providers conduct their business may impede our plans for the deployment of our technology.

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

**Employees**

 As of March 28, 2003, we had 35full-time employees, including 5 in marketing and sales, 20 in research and development (including product development) and 10 incorporate operations and administration. We also have engaged 20 consultants, 1 in marketing, 18 in product development (of which14 are in Croatia and 2 in Sweden) and 1 in administration.  We are not subject to any collective bargaining agreements andbelieve that our relationship with our employees is good. Our success depends to a significant extent upon the performance of ourexecutive officers and other key personnel.

**Available Information**

 Our Internet website address is www.summus.com.  Our annual report on Form 10-K, quarterly reports on Form 10-Q, currentreports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Securities ExchangeAct of 1934 are available through our internet website as soon as reasonably practicable after we electronically file such materialwith, or furnish it to, the Securities and Exchange Commission.  All of our public filings may also be obtained by accessingthe Commission’s website at www.sec.gov.   Our internet website and the informationcontained therein or connected thereto are not intended to be incorporated into this annual report on Form 10-K.

**ITEM 2.          PROPERTIES.* ***

Our principal executive offices are located at Two Hannover Square, 434 Fayetteville Street, Suite 600, Raleigh, North Carolina27601.  We occupy 12,078 square feet of leased space at such location.  Our lease for this space, representing ourprincipal executive offices, expires October 31, 2006.  The current annual base rent for such space is approximately $248,388and will increase to approximately $261,432 by the last year of the term.  

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**ITEM 3.         LEGAL PROCEEDINGS**.

**AT&T**

 On June 7, 2002, AT&TCORP. filed a civil lawsuit in the United States District Court for the Eastern District of North Carolina against Summus.  Inthis suit, AT&T claims that it is entitled to payment in the amount of $231,910 for telephone calls and services rendered toSummus.    In March 2003, the Company and AT&T CORP. settled the claim between them, whereby both parties agreed toreduce the total amount owed by Summus to AT&T CORP. to $120,000.  This reduced amount is to be paid by Summus over an18-month period, without interest, commencing in March 2003.

**Holland & Knight**

 On February 27, 2003, Holland& Knight LLP (“H&K”) filed a civil lawsuit in the Superior Court for the District of Columbia againstSummus.  In this suit, H&K claims that it is entitled to $867,268, plus interest, for services rendered to Summus.     Summus is in the process of filing an answer to this lawsuit.
**Bowne**
On February 25, 2003, Bowne of New York City, LLC(“Bowne”) filed a civil lawsuit in the Supreme Court of the State of New York in the County of New York againstSummus.  In this suit, Bowne claims that it is entitled to $276,374, plus interest, for services rendered to Summus. Summus is in the process of filing an answer to this lawsuit.

**Porter Novelli**

** **On December 12, 2002, Porter Novelli filed a civilsummons in Wake County General District Court of Justice in the State of North Carolina, claiming that it is entitled payment inthe amount of $18,886 for past services rendered toSummus.  We were granted an indefinite extension of time to file an answerto this complaint while negotiations for settlement areunder way.  We are currently attempting to negotiate a resolution tothis matter. ** **

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

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

 
****
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**PART II**

**ITEM 5.          MARKET FOR REGISTRANT'S COMMON STOCK AND RELATEDSHAREHOLDER MATTERS.**

**Market Information**

Our common stock, par value $.001 per share, currently trades on the Over-the-Counter Bulletin Board®.   For theperiod of October 24, 2000 through November 15, 2001, our common stock was quoted through the Pink Sheets®.  The followingtable provides information about the high and low bid per share quotations of our common stock for each full quarterly periodduring the two years ended December 31, 2002 and 2001, and for the first quarter of 2003 through March 26, 2003, on the OTCBulletin Board® and on the Pink Sheets®, as provided by the National Quotation Bureau, Inc.  These quotations reflectinter-dealer prices without markup, markdown or commissions and may not necessarily represent actual transactions.

**2001**

**  Low **

**   High **

     First Quarter

$2.50

$4.30

     Second Quarter

$2.50

$5.75

     Third Quarter

$1.30

$4.50

     Fourth Quarter

$1.30

$2.60

**2002**

**  Low **

**  High **

     First Quarter

$1.15

$2.55

     Second Quarter

$0.61

$1.39

     Third Quarter

$0.24

$0.6

     Fourth Quarter

$0.37

$0.57

**2003**

**  Low **

**  High **

      First Quarter(through March 26, 2003)

$0.35

$0.52

On March 26, 2003, the closing sale price for ourcommon stock as reported on the OTC Bulletin Board® was $0.37.  As of March 15, 2003, we had approximately 57,403,703shares of common stock outstanding and approximately 524 shareholders of record.

We have never declared or paid any cash dividends on our common stock and do not anticipate paying any cash dividends in theforeseeable future.  We anticipate that we will retain earnings, if any, to finance the growth and development of ourbusiness.  Therefore, we do not expect to pay cash dividends on our common stock for the foreseeable future.  Any futuredetermination to pay cash dividends will be at the discretion of our Board of Directors and will depend upon our financialcondition, operating results, capital requirements, plans for expansion, restrictions imposed by any financing arrangements andwhatever other factors that our Board of Directors determines are relevant. 

Summus’ 8% Series A Convertible Preferred Stock accrues semi-annual dividends at a rate of 8% per annum of the initialliquidation price of $1,000 per share on each of April 1 and October 1, plus accrued and unpaid dividends.  These dividendsare cumulative from the date of original issue, which was February 28, 2000, and shall be payable when, as, and if declared by ourBoard of Directors.  Any dividends payable on the Series A preferred stock may be paid in additional shares of Series Apreferred stock at our option.

**Penny Stock**

Our common stock is subject to the provisions of Section15(g) and Rule 15g-9 of the Securities Exchange Act of 1934 (the "Exchange Act"), commonly referred to as the "pennystock 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.

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 The SEC generally defines penny stockto be any equity security that has a market price less than $5.00 per share, subject to certain exceptions.  If our commonstock is deemed to be a penny stock, trading in the shares will be subject to additional sales practice requirements onbroker-dealers who sell penny stocks to persons other than established customers and "accredited investors" (generally,an individual with a net worth in excess of $1,000,000 or an annual income exceeding $200,000 or $300,000 together with his or herspouse).  For transactions covered by this rule, a broker-dealer must make a special suitability determination for thepurchaser and have received the purchaser's written consent to the transaction prior to sale.  The rule also requires thedelivery, prior to the transaction, of a risk disclosure document mandated by the SEC relating to the penny stock market.  Thebroker-dealer must also disclose the commissions payable for the transaction, current quotations for the stock, and, if applicable,the fact that it is the sole market maker in the stock.  Consequently, the rule may adversely affect the ability ofbroker-dealers to sell our securities and may adversely affect the ability of shareholders to sell their shares in the secondarymarket.

**Recent Sales of Unregistered Securities**

From October 1, 2002 through December 31, 2002, we issued an aggregate of   1,800,000 shares of our common stock toapproximately 33 persons in connection with capital raising, the exercise of warrants and for services rendered. Thesesecurities were not registered under the Securities Act of 1933. Except as noted below, the issuances of the securities describedbelow were issued in transactions deemed to be exempt from registration under the Securities Act in reliance on Rule 506 ofRegulation D, promulgated pursuant to the Securities Act of 1933, as transactions by an issuer not involving any public offering.All of such securities are deemed to be "restricted securities" as defined in Rule 144(a)(3) under the Securities Act.Except as noted below, no commissions were paid in connection with any of the issuances.

***Stock Issuances for Cash***

From October 1, 2002 to December 31, 2002, we issued anaggregate of 1,501,438 shares of common stock to 22 accredited investors, all unaffiliated with Summus, for a price per shareranging from $.40 to $.55, and issued warrants to purchase, at an exercise price of $1.40 to $1.57 per share, an additional2,969,034 shares of common stock, for aggregate consideration of $712,253.  In connection with the issuance of these shares,we issued 12,916 shares of our restricted common stock, as commissions, to the placement agents involved in such sales and cashcommissions of $29,427 to a director of Summus.  The names of the purchasers and the number of shares purchased are asfollows:

**Name of Purchaser**

**Number of Shares**

Jere A. Ayers

10,000

William B. Bandy

106,383

Diane Burube

21,191

Denise Boisvert

13,075

Gina M. Cimino

200,000

Douglas D. Cline

212,766

David W. DeWitt

30,000

Kim Quy Do

31,915

Pete Eenkhoorn

30,000

Donald C. Gonterman

30,000

Louis Gosselin

10,638

Neil R. Guenther

178,129

Halifax Estate Ltd. Partnership - Mike Gardner

56,383

Martin Knol

31,915

Stuart Mainse

100,000

Eric Raeber

75,000

Stephan Charles Schnyder

121,277

Michel Schnyder

56,383

William L. Tankersley

31,915

Richard L. Vanstory

80,000

Richard Vasquez

50,000

Russell C. Vick, Jr.

25,532

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During November and December 2002, the Company issued 189,624 shares of its common stock upon the exercise of outstandingwarrants.  The Company received $79,813 in proceeds from the exercise of these warrants.

*Stock Issuances for Services Rendered*

 On December 2, 2002, Summus issued55,555 shares of common stock to National Capital Companies, Inc., and certain of its affiliates in connection with a consultingagreement.
During October, November and December 2002, Summus issued40,467 shares of common stock to Mark Baric for consulting services.
**ITEM 6.          SELECTED FINANCIAL DATA**.
On February 16, 2001, Summus (formerly High Speed NetSolutions, Inc.) acquired all the assets and operations of Summus, Ltd. under the terms of an asset purchase agreement, datedOctober 30, 2000, as subsequently amended.  In legal form, the transaction was effected by Summus issuing shares of its commonand Series B convertible preferred stock, and other equity interests, in exchange for the net assets of Summus, Ltd. Thistransaction has been accounted for as a capital transaction of Summus, Ltd., accompanied by a recapitalization. As a result of thetransaction, the historical financial statements of Summus, Ltd. are, for accounting purposes, deemed to be those ofSummus.

The following selected historical annual financial data hasbeen derived from the financial statements of Summus (notwithstanding that such selected historical annual financial data has beenlabeled as that of Summus, Ltd.). The financial statements for each of the three years ended December 31, 2002, 2001 and 2000, havebeen audited by Ernst & Young LLP, independent auditors, as indicated in their report included elsewhere in this annual reporton Form 10-K, which includes an explanatory paragraph which expresses substantial doubt about our ability to continue as a goingconcern.

The financial data set forth below should be read inconjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" andour audited financial statements and notes, which are contained elsewhere in this annual report. 

 We have presented all amounts, except"per share" amounts, in dollars.
****
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**SUMMUS, INC. (USA)SELECTED FINANCIAL DATA**
 
**1998**
 
**1999**
 
**2000**
 
**2001**
 
**2002**

**Consolidated Statement of Operations Data:**
          
Revenues

$

 556,638 

$

515,216 

$

1,068,658 

$

 749,758 

$

       406,952 

Costs of revenues
  
 271,701 
  
281,254 
  
398,326 

   
299,554 
   
182,109 

Selling, general and administrative expenses
  
 2,720,152 
  
3,797,067 
  
6,180,862 
   
7,740,867 
  
6,155,416 

Non-cash compensation and consulting
 
— 
 
2,670,050 
 
2,127,962 
 
956,321 
 
1,251,992 

Research and development
 
  421,685 
 
1,356,686 
 
1,159,833 
 
952,605 
 
918,948 

Non-cash settlements
 
— 
 
— 
 
— 
 
1,132,352 
 
— 

Loss before Other income (expense)
 
(2,856,900)
 
(7,589,841)
 
(8,798,325)
 
(10,331,941)
 
(8,101,513)

Other income (expense):
          
   Gain on sale of stock of equity       investee(1)
 
— 
 
2,314,390 
 
3,680,065 
 
— 
 
— 

   Participation in loss of equity      investee(2)
 
— 
 
(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 
 
(56,570)
 
(469,571)

           Total other income (expense)
 
(24,324)
 
(1,257,139)
 
(2,652,956)
 
(56,570)
 
(469,571)

Loss from continuing operations
 
 (2,881,224)
 
(8,846,980)
 
(11,451,281)
 
 (10,388,511)
 
(8,571,084)

Loss from operations of   discontinued Rich Media Direct   business(3)
 
— 
 
— 
 
— 
 
(135,798)
 
— 

Loss on disposal of Rich Media Direct   Business(3)
 
 — 
 
— 
 
— 
 
(215,500)
 
— 

Netloss
 $
 (2,881,224)

 $
(8,846,980)

 $
(11,451,281)

 $
(10,739,809)

 $
(8,571,084)

Net loss applicable to common shareholders:
          
   Netloss

 $
 (2,881,224)

 $
 (8,846,980)

 $
 (11,451,281)

 $
 (10,739,809)

 $
(8,571,084)

   Preferred stock dividends
 
— 
 
— 
 
— 
 
(153,700)
 
(183,039)

Net loss applicable to common shareholders

 $
 (2,881,224)

 $
 (8,846,980)

 $
(11,451,281)

 $
(10,893,509)

 $
(8,754,123)
           
Per share amounts (basic and diluted):
          
Loss applicable to common shareholders from      continuingoperations

 $
(0.09)

 $
(0.27)

 $
(0.35)

 $
(0.30)

 $
(0.19)

Loss applicable to common shareholders from   discontinuedoperations
 
— 
 
 — 
 
 —  
 
 (0.01)
 
 — 

Netloss

 $
(0.09)

 $
(0.27)

 $
(0.35)

 $
(0.31)

 $
(0.19)
                
Weighted average shares of common stock    outstanding giving effect tothe  recapitalization
 
 32,581,200 
 
 32,820,110 
 
 32,938,803 
 
 34,730,337 
 
 47,149,301

 
  
**December 31**

**  **

**1998**

**1999**

**2000**

**2001**

**2002**

**Balance Sheet Data:**
     
Cash

$   137,038

$    647,704

$     208,495 

$      115,992 

$       25,990 

Total assets

   726,764

7,382,646

1,406,271 

1,003,524 

701,174 

Total shareholders equity (deficit) 

$  316,828

$ 3,345,692

$ (4,653,812)

$ (5,708,495)

$ (4,464,054)

**_________________________**

(1)

 Gain on sale of stock of investee during 1999 and 2000 reflects thegain Summus, Ltd. realized upon the sale of common shares of Summus  (whose legal name was then High Speed Net Solutions,Inc.) it acquired in 1999.

(2)

 Participation in loss of equity investee during 1999 and 2000reflects Summus, Ltd.’s share of Summus’s losses for 1999 and 2000. During 1999 and 2000, Summus, Ltd. accountedfor its investment in Summus  using the equity method of accounting.

(3)

 During 2001, Summus disposed of its Rich Media Direct businessand accordingly reported the operating activity as discontinued operationsin 2001.
****
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**ITEM 7.          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION                        AND RESULTS OF OPERATIONS.**

 The following discussion containsforward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipatedin these forward-looking statements as a result of certain factors, including the risk factors included in this report in thesection entitled “Factors That May Affect Our Business, Future Operating Results and Financial Condition.” Thefollowing discussion is qualified in its entirety by, and should be read in conjunction with, the more detailed information in ourconsolidated financial statements and the notes thereto appearing elsewhere in this annual report on Form 10-K.

**Overview**

 During the first quarter of 2002 andfor the year ended December 31, 2001, we derived our revenues primarily from research and development contracts for governmentagencies in the areas of complex imaging and object recognition, the core of Summus, Ltd.’s business activities prior to therecapitalization transaction in February 2001.  Such revenues represented 29% and 67% of Summus’ revenues in 2002 and2001, and 60% of Summus, Ltd.’s revenues in 2000, respectively.  During the first quarter of 2002, we shifted our focusfrom providing governmental contract services to the development of solutions for the mobile and wireless markets.

**Key Developments in 2002**

*Focus on Mobile and WirelessMarket; Development of BlueFuel*

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

Summus’ strategy is to begin with the development of its own BlueFuel applications while creating the demand andimplementing the infrastructure systems and products to support device manufacturers, wireless carriers and emergingstandards.  As these systems and products propagate, Summus’ program for third-party development using the BlueFuelplatform will expand the portfolio of end-user services accessed through mobile devices.

*Applications Developmentand Relationships with Leading Wireless Carriers*

Summus continues to position itself as a supplier of solutions that can run on multiple wireless platforms supporting the mobileand wireless marketplace.  Summus has developed wireless applications utilizing BlueFuel, Summus’ Superfast, Superthinplatform designed for efficient and easy interaction with information in the mobile environment.  BlueFuel can be madeavailable on the BREW, JavaTM 2  Micro Edition (J2ME TM), Symbian OS, PocketPC, Palm OS and WirelessApplication Protocol (WAP) wireless operating systems or platforms. 

During the second quarter of 2002, Summus launched its first commercial application, ***exego***,over the VerizonWireless carrier network.  Subsequent to the initial launch of ***exego***, Summus has launched 8 other wirelessapplications over the Verizon Wireless and ALLTEL carrier networks and at least one wireless application over the AT&T Wirelessand Cingular Wireless carrier networks through the date of this annual report.  Additionally, Summus is completing fieldtrials regarding the deployment of several wireless applications with U.S. Cellular.  See the disclosure under the caption“Item 1. Business” in this report for a description of  Summus’ commercial applications.

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In addition to the wireless carriers mentioned in the preceding paragraph, Summus has developed relationships with several otherdomestic and international carriers regarding the future deployment of our wireless applications.  All of the carriers who arecurrently deploying our applications for whom we have agreements are not contractually committed to do so. 

*Forging Relationships with Content Providers*

Our business development activities continue to expand with major content brands.  Throughout 2002 and the first quarter of2003, we have signed contracts with a variety of content providers to develop applications utilizing our BlueFuel platform.  Our agreements take one of two forms.  The first form of agreement is a revenue-sharing arrangement where Summus develops anapplication using a partner’s content and the revenue, net of third-party platform and carrier fees, is split between Summusand the content partner.  In the second form of agreement, a monthly fee is paid by Summus to the content partner for contentbased on a volume matrix, and Summus retains and records all net revenue generated by the application.  See the disclosureunder the caption “Item 1. Business-Content Providers” in this report for a description Summus’ content partnerrelationships.

*Adapting Applications for Multiple Handsets*

One of the keys to Summus’ efforts to establish itself in the wireless market is making its applications available onmultiple handsets.  During 2002, several applications developed by Summus have been successfully tested on over 15 differenthandsets supporting the BREW, J2ME, Symbian or the WAP platforms.   We plan to continue to port our applications to newhandsets as they become available to the carriers.

**Results of Operations**

 The acquisition of Summus,Ltd.’s assets and operations in February 2001 was accounted for as a Summus, Ltd. capital transaction, accompanied by arecapitalization.  By accounting for the transaction as such, the transaction is effectively viewed as the issuance of stockby Summus, Ltd. in exchange for the net monetary assets of Summus.  The accounting for the transaction is quite similar tothat resulting from a reverse acquisition, except that no goodwill or other intangible assets are recorded.  As a result ofthe transaction, the historical financial statements of Summus, Ltd., for accounting purposes, are deemed to bethose of Summus.

 The following discussion and analysisof our results of operations and financial condition should be read in conjunction with our financial statements and related notesincluded in this report.

**Year ended December 31, 2002 compared to Year ended December 31, 2001**
*Revenues.  Total revenuesdecreased $342,806 to $406,952 in the year ended December 31, 2002, down 45.7% from $749,758 in the year ended December 31, 2001.The decrease in revenues primarily resulted from a shift in the Company’s focus from providing governmental contract servicesand the commercial licensing of technology to developing solutions for the mobile and wireless market during the first quarter of2002.

During the first quarter of 2002, most of the Company’s resources were used to provide governmental contract servicesgenerating revenues of $118,343 and to license technology generating license fees of  $84,476.  All revenue earned duringthe year ended December 31, 2001 resulted from providing governmental contract services and licensing technology.

Commencing in the second quarter of 2002, the Company’s resources were dedicated to the development of solutionsfor the mobile and wireless markets.  Revenues earned from providing these services totaled $204,133, which included $100,000earned under a strategic partnership agreement where the Company provided its expertise to assist its partner in the development ofmarket and business plans and opportunities in the wireless and mobile market, $55,980 earned under non-recurring engineeringagreements and licensing agreements, and $48,153 earned from the deployment of wireless applications.

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*Cost of Revenues.  Totalcost of revenues decreased $117,445 to $182,109 in the year ended December 31, 2002, down 39.2% from $299,554 in the prior year.The decrease in cost of revenues primarily resulted from a shift in the Company’s focus from providing governmental contractservices and the commercial licensing of technology to developing solutions for the mobile and wireless market during the firsthalf of 2002.

Costs of providing governmental contract services and license fees during the first quarter of 2002 and for the year endedDecember 31, 2001 were comprised primarily of salaries and related costs of providing government contract services.  Specificcosts of license-fee revenue have historically been insignificant and not separately maintained.

 Commencing in the second quarter of2002, costs of revenues were primarily comprised of direct costs associated with the sale and delivery of our solutions for themobile and wireless market.  These costs consisted primarily of fixed costs consisting of monthly third-party hostingfees.

 Gross Profit.  Total grossprofit decreased $225,361, or 50.1%, to $224,843 for the year ended December 31, 2002, compared with $450,204 for the year endedDecember 31, 2001. The decrease in gross profit primarily resulted from a shift in the Company’s focus from providinggovernmental contract services and the commercial licensing of technology to developing solutions for the mobile and wirelessmarket during the second quarter of 2002.

Gross profit resulting from governmental contract services and commercial licensing of technology during the year ended December31, 2002 totaled $138,973 or 68.5% compared to $450,204 or 60.1% in the prior year. The increase was primarily attributable to morelicense-fee income earned in the year ended December 31, 2002 compared to the prior year. License-fee income generates a highergross profit percentage compared to contract revenues.

Gross profit resulting from the development and deployment of solutions for the mobile and wireless market during the year endedDecember 31, 2002, totaled $85,870, or 42.1%.  The gross profit resulting from these activities is a result of deducting coststhat are primarily fixed in nature, primarily third-party hosting fees, from the related earned revenue.
*Selling, General andAdministrative 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, 2002, were $6,155,416, compared to $7,740,867 for theyear ended December 31, 2001. The decrease in selling, general and administrative expenses during the year ended December 31, 2002,as compared to the prior year, reflect the cost reduction efforts during 2002, offset by additional cost associated with thelaunching of first commercial applications in the mobile and wireless market.  Selling, general and administrative expensesfor the year ended December 31, 2001, include legal and administrative costs associated with the Company’s efforts to regainits listing status on the OTC bulletin Board.  Similar costs were not incurred in 2002.
*Non-Cash Compensation. Non-cash compensation for the year ended December 31, 2002 was $364,000 compared to $956,321 for the prior year. Non-cashcompensation for the year ended December 31, 2002 of $364,000 reflects $202,642 of amortization of deferred compensation resultingfrom stock options granted in prior years, at prices below the fair value of the underlying common stock. The remaining amount of$161,358 reflects stock options that were granted to an employee, who was also a director of Summus, with exercise prices below theestimated fair value of the underlying common stock.

Non-cash compensation for the year ended December 31, 2001, was $956,321. During the year ended December 31, 2001, stockoptions, net of forfeitures, were granted to employees with exercise prices below the fair market value of the underlying commonstock resulting in total compensation of $864,164, of which $754,164 was charged to expense during the year ended December 31,2001. The remaining amount, $110,000, has been classified as deferred compensation and is being charged to expense as futurevesting of the stock options occurs. The remaining amount of non-cash compensation for the year ended December 31, 2001 of $202,157reflects the amortization of deferred compensation resulting from stock options granted during the year ended December 31, 2000,with exercise prices below the fair value of the underlying common stock.

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*Research andDevelopment.  Research and development costs for the year ended December 31, 2002, were $918,948 compared to $952,605 forthe prior year. The decrease in these costs was due primarily to a reduction in the staffing level during 2002 compared to theprior year.  Included in the research and development costs in 2001, is $337,451 in previously capitalized softwaredevelopment costs that were written off in the fourth quarter of 2001.

*Non-Cash ConsultingExpense. * Non-cash consulting expense for the year ended December 31, 2002, in the amount of $887,992 is attributable tothe following: (1) the issuance of 394,567 shares of  unregistered common stock and453,532 options and warrants topurchase  unregistered common stock to consultants for services valued at $765,477; (2) stock options granted to three newmembers of our Advisory Board during the year ended December 31, 2002, resulting in non-cash consulting expense of $97,515; and (3)a stock option granted to a member of our Advisory Board for consulting services resulting in non-cash consulting expense of$25,000. during the year ended December 31, 2002.  The value, as determined using the Black-Scholes pricing model, of thestock options granted to consultants, including the members of the Board of Advisors, was recorded using the fair value method ofaccounting.

*Non-Cash Settlements. * Non-cash settlements for the year ended December 31, 2001, in the amount of $1,132,352, areattributable to the settlement of claims of Van Ernst Jakobs N.V. valued at $1,051,915 and the settlement of the ENELF LLC lawsuitvalued at $80,437.  For further disclosure, see footnote 17 to the audited consolidated financial statements included in thisreport. 

*Net Interest Income (Expense).* Net interest expense for the year ended December 31, 2002, was $469,571, compared to netinterest expense of $56,750 for the corresponding period of the prior year. Net interest expense for the year ended December 31,2002, includes interest costs associated with capital lease obligations and note payable agreements of $49,321, plus the followingitems associated with the convertible debentures issued on July 19, 2002:
- $190,000, relating to the value, as determined by the Black-Scholes pricing model, of the 1,724,138 warrants issued to thedebenture holders;
- $189,655, relating to the value of the beneficial conversion feature associated with the convertible debentures;
- $39,310, relating to placement agent fees, consisting of a cash commission of $30,000 and a warrant to purchase 51,724 shares ofcommon stock that was valued at $9,310 using the Black-Scholes pricing model; and
- $1,285, relating to interest expense incurred while the debentures remained outstanding based on the stated rate of 6% perannum.  At the Company’s election, these interest costs were paid through the issuance of shares of common stock basedon the conversion rate of $0.29, resulting in the issuance of 4,430 shares of common stock.

The value of the warrants issued to the debenture holders was initially recorded as a discount to the $500,000 face value of thedebentures.  This discount was to be amortized to interest expense over the term of the debentures. Since all of thedebentures were converted into common stock during the year ended December 31, 2002, the total value assigned to the warrants wasfully amortized to interest expense during the year. The beneficial conversion feature was recorded since the conversion price ofthe debentures was below the fair market value of our common stock on the date the convertible debentures were issued. Thisnon-cash charge was recorded immediately as interest expense because the debentures were convertible upon issuance.

Net interest expense for the year ended December 31, 2001, includes interest costs associated with capital leaseobligations and note payable agreements of $56,750.

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*Loss from Discontinued Rich MediaDirect Operations.  Summusrecorded a loss from operations of its "Rich Media Direct" business of$135,798, as well as a loss on disposal of these operations of $215,500, for the year ended December 31, 2001. Our divestiture ofthis business includes the sale of Douglas May & Co. to Mr. May on September 19, 2001.

  *               Net Loss.*  As a resultof the factors discussed above, the net losses for the years ended December 31, 2002 and 2001 were $8,571,084 and $10,739,809,respectively.

**Year ended December 31, 2001 compared to Year ended December 31, 2000**
*Revenues. Total revenuesdecreased $318,900 to $749,758 in the year ended December 31, 2001, down 29.8% from $1,068,658 in the year ended December 31, 2000.The decrease in revenues was due to a decrease in commercial license fee revenue as well as a decline in the level of governmentalcontract services rendered.
*Costs of Revenues.  Totalcosts of revenues decreased $98,772 to $299,554 in the year ended December 31, 2001, down 24.8% from $398,326 in the prior year.Costs of contracts and commercial license fees for the year ended December 31, 2001 and 2000 were comprised primarily of salariesand related costs of providing government contract services.  Specific costs of license-fee revenue have historically beeninsignificant and not separately maintained.

 Total gross profit decreased$220,128, or 32.8%, to $450,204 for the year ended December 31, 2001, compared with $670,332 for the year ended December 31, 2000.The decrease was primarily attributable to less license-fee income in the year ended December 31, 2001, compared to the prior year.License-fee income generates a higher gross profit percentage compared to contract revenues.
*Selling, General andAdministrative 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, 2001, were $7,740,867, compared to $6,180,862 for theyear ended December 31, 2000. The increase in selling, general and administrative expenses primarily reflects the effects of theSummus, Ltd. asset acquisition in February 2001.
*Non-Cash Compensation. Non-cash compensation for the year ended December 31, 2001 was $956,321 compared to $2,127,962 for the prior year. During the yearended December 31, 2001, stock options, net of forfeitures, were granted to employees with exercise prices below the fair marketvalue of the underlying common stock resulting in total compensation of $864,164, of which $754,164 was charged to expense duringthe year ended December 31, 2001. The remaining amount, $110,000, was classified as deferred compensation and is being charged toexpense as future vesting of the stock options occurs. The remaining amount of non-cash compensation for the year ended December31, 2001 of $202,157 reflects the amortization of deferred compensation resulting from stock options granted during the year endedDecember 31, 2000, with exercise prices below the fair value of the underlying common stock. For the year ended December 31, 2000,amortization of deferred compensation, resulting from the issuance of stock options with exercise prices below the fair value ofthe underlying common stock, was $2,127,962. The decrease in amortization of deferred compensation recorded in the year endedDecember 31, 2001, as compared to the prior year from options granted in year 2000 is primarily the result of the reversal ofdeferred compensation from forfeited stock options during 2001, plus the large number of fully vested options granted during theyear ended December 31, 2000.
*Research andDevelopment.  Research and development costs for the year ended December 31, 2001, were $952,605 compared to $1,159,833for the prior year. The decrease in these costs was due primarily to the reduced staffing level in the first half of 2001 comparedto the prior year.  Included in the research and development costs in 2001, is $337,451 in previously capitalized softwaredevelopment costs that were written off in the fourth quarter of 2001.

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*Non-Cash Settlements. Non-cash settlements for the year ended December 31, 2001, in the amount of $1,132,352, are attributable to the settlement ofclaims of Van Ernst Jakobs N.V. valued at $1,051,915 and the settlement of the ENELF LLC lawsuit valued at $80,437.  Forfurther disclosure, see footnote 17 to the audited consolidated financial statements included in this report. 
*Gain on Sale of Stock of EquityInvestee.  Gain on the sale of stock of equity investee for the year ended December 31, 2000, was $3,680,065. In 1999,Summus, Ltd. acquired shares of Summus common stock, which it later sold to third parties. During the year ended December 31, 2000,Summus, Ltd. sold 1,000,000 shares of Summus common stock for gross proceeds of $4,493,428, resulting in a gain on sale of$3,680,065.
*Participation in Loss of EquityInvestee.  Participation in loss of equity investee for the year ended December 31, 2000, was $6,356,932. In 1999, Summus,Ltd. acquired a significant ownership interest in Summus.   Summus, Ltd. accounted for its investment in Summus using theequity method of accounting. Under the equity method of accounting, Summus, Ltd. adjusted its investment in Summus for its share ofSummus' losses subsequent to the date of Summus, Ltd.'s initial investment. During 2000, Summus, Ltd.'s investment inSummus was reduced to zero as a result of Summus, Ltd.'s sales of shares of Summus common stock and through Summus, Ltd.'srecognition of its share of the losses of Summus.
*Net Interest Income(Expense).  Net interest expense for the year ended December 31, 2001, was $56,570, compared to net interest income of$23,911 for the prior year. Net interest expense for the year ended December 31, 2001, related to interest costs associated withcapital lease obligations and note payable agreements. The net interest income in the year ended December 31, 2000, resulted fromearnings on cash balances generated from the sale of shares of Summus common stock, net of interest costs on capital leaseobligations and note payable agreements.
*Loss from Discontinued Rich MediaDirect Operations.  Summusrecorded a loss from operations of its "Rich Media Direct" business of$135,798, as well as a loss on disposal of these operations of $215,500, for the year ended December 31, 2001. Our divestiture ofthis business includes the sale of Douglas May & Co. to Mr. May on September 19, 2001.

*Net Loss.*  As a resultof the factors discussed above, the net losses for the years ended December 31, 2001 and 2000 were $10,739,809 and $11,451,281,respectively.

**Liquidity and Capital Resources**

 As of December 31, 2002, we had$25,990 of cash on hand, negative working capital of approximately $5.0 million, and approximately $5.2 million in currentliabilities.  During 2002, we funded our operations primarily through the sale of 9,053,167 shares of our restricted commonstock and warrants to purchase 17,779,104 shares of common stock to individual accredited investors, for gross cash proceeds of$6,439,307and through the issuance of 6% convertible debentures and warrants to purchase 1,724,138 shares of common stock for grossproceeds of $500,000.  We anticipate that the sale of our equity securities will continue to represent the primary source ofour liquidity until we obtain funding from institutional sources and generate positive cash flow from operations.  We arecurrently discussing funding with various institutional investment groups; however, we cannot guarantee that we will be able toraise the necessary capital or that, if we do so, it will be on favorable terms. We may have to sell equity at below market rates,and any future sales of our capital stock to finance our business plan will dilute our existing shareholders' ownership. Ourcontinuation as a going concern depends on our ability to generate sufficient cash flow to meet our obligations on a timely basis,to obtain additional financing as may be required and ultimately to attain profitability.  In light of our financial conditionand operating losses, our auditors have included in their report on our audited consolidated financial statements an explanatoryparagraph which expresses substantial doubt about our ability to continue as a going concern.

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During the time period from November 15, 2002 through March 15, 2003, we have not paid 6 of our regularly scheduled bi-monthlypayrolls to certain executives of our management team, totaling $151,548. Two (2) of the regularly scheduled bi-monthly payrolls in 2002 and one (1)regularly scheduled bi-monthly payroll in 2003 tothe remaining employees of Summus, totaling $287,781 were not paid.  In addition, we owe consultants $433,000 for services provided toSummus during the period from November 2001 through March 15, 2003.  As of the date of this filing, these amounts remain unpaid and are recorded as accrued liabilities in the period theywere incurred.  Commencing August 15, 2002, the Company adopted an alternative compensation arrangement for its executives.Under the terms of the new arrangement, electing executives may receive a portion of their annual cash compensation in the form offully vested stock options.  The stock options will have an exercise price equal to the fair market value of theCompany’s’ common stock based on the closing prices of the common stock at the end of each respective payrollperiod.  The amount of compensation to be received in stock options (the “target compensation”) is to bedetermined by the participating executive based on increments of 5% commencing with a minimum level of 15% of theparticipant’s annual compensation.  The number of shares underlying each option will be determined by dividing thedollar value of the target compensation by the closing price at the end of each respective payroll period.  Once this electionis made, it will remain effective for a minimum of three months and can be terminated early at the full discretion of the Company.Beginning on August 15, 2002, five executives elected to participate in this alternative payment plan at reduced salary levelsranging between 25% and 35% of the participant’s annual compensation. Through the date of this filing, four executives havecontinued to participate in this arrangement. As of December 31, 2002, the Company has issued 241,431 fully vested stock optionswith exercise prices ranging between $0.25 and $0.48 per share relating to this arrangement. 

Through the end of 2002, we had entered into settlement agreements or arrangements with several of ourvendors under which suchvendors have agreed to our payment of less than the amounts due, the extension of payment terms by between 9-36 months and/or thesatisfaction of the amounts due through a combination of cash and stock.  Due to our limited resources, we have not been ableto make all of the required payments established under settlement agreements previously arranged with certain vendors.  Wecontinue to communicate with our vendors to keep them informed of our situation and discuss payment arrangements amiable to bothparties under the current circumstances.  Additionally, as of March 15, 2003, we had approximately$4.4 million in currentliabilities, of which $3.3 million were greater than 90 days old. 

As of the date of this annual report, we are a party to three unsettled lawsuits, whereby the claimants have sued us fornon-payment of services provided to Summus.  The aggregate value of these claims is $1,162,528, plus interest.  Summus isin the process a filing an answer to each of these claims.

Summus entered into a settlement agreement dated August 7,2001, with Analysts International Corporation ("AIC"), which provided us with computer programming services during1999-2000.  Under the terms of the settlement agreement, we agreed to pay the sum of $358,426, plus interest accruing at therate of 8% per annum from March 31, 2000 according to the following payment schedule: (i) $20,000 upon execution of the settlementagreement, (ii) $5,000 per month for a period of nine months, commencing one month after execution of the agreement, and (iii)$10,000 per month thereafter until the balance of the indebtedness is paid in full.  We have not made any payments under thissettlement agreement since September 30, 2002, and therefore we are in default under the terms of this settlement agreement. Upondefault, AIC must notify Summus in order to activate a 3-day cure period.  As of the date of this filing, we have not receivednotification from AIC.  If Summus is unable to cure the default within the cure period, an automatic default judgment willmade against Summus.

 The success and growth of ourbusiness is dependent in large part on our ability to partner and develop relationships within the wireless industry. In order forus to execute on our business plan, we anticipate that it will require approximately $10 million in working capital within the next12 months to complete the domestic rollout of our operations, as well as the expansion of our operations to Europe and Asia, wherethe wireless network infrastructure is currently more developed than it is in North America. We are currently discussing fundingwith various institutional investment groups; however, we cannot guarantee that we will be able to raise the necessary capital orthat, 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 ourcapital stock to finance our business plan will dilute our existing shareholders' ownership.  Additionally, during thefirst quarter of 2003, our capital raising efforts included the sale of our restricted stock, along with the re-pricing of warrantsthat were previously issued.  During the first quarter of 2003, we issued 2,483,531 shares of restricted common stock,warrants to purchase an additional 316,000 shares of common stock, and repriced 3,324,502 previously issued warrants for proceedsof $1.2 million.

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 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 in research and development personnel to ensure the continued development of our technology and itscompatibility 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 managementtechnology.
*Cash Flow used in OperatingActivities.  Net cash used in operating activities was $6,794,822 in the year ended December 31, 2002, compared to$6,970,481 in the prior year. The decrease in net cash used in operating activities was primarily due to a greater reduction inaccounts payable and accrued expense balances through cash payments as compared to the prior year, offset by an increase in unpaidsalaries and related costs.
*Cash Flow from InvestingActivities.  Net cash used in investing activities was $91,212 in the year ended December 31, 2002, representing computerequipment purchases.  Net cash provided by investing activities was $36,438 in the year ended December 31, 2001, representing$7,480 in computer equipment purchases and $43,918 of cash acquired in the Summus, Ltd. asset acquisition. 

*Cash Flow from Financing Activities.*  Net cash provided by financing activities was $6,796,052 in the year endedDecember 31, 2002, compared to net cash provided by financing activities of $6,661,520 in the prior year. Net cash provided byfinancing activities in the year ended December 31, 2002, related to:
- the sale of 9,053,167 shares of our common stock, along with warrants to purchase an additional 17,779,104 shares of commonstock, at exercises prices ranging from $0.48 to $4.00 per share (all such securities being "restricted securities" asdefined in Rule 144) to accredited investors, along with cash collections on a stock subscription receivable totaling $10,000,generating aggregate proceeds of $6,449,307;
- The issuance of 6% convertible debentures, along with warrants to purchase an additional 1,724,138 shares of common stock, atexercise prices ranging from $0.47 to $0.59 per share (all such securities being “restricted securities” as defined inRule 144) to accredited investors, generating aggregate gross proceeds of $500,000;
- $92,563, consisting of $12,750 in proceeds from the exercise of stock options for 290,300 shares of common stock of and $79,813in proceeds from the exercise of stock purchase warrants for 189,624 shares of common stock; and
- $245,818 in principal payments on capital lease obligations and note payable agreements.
- Net cash provided by financing activities in the year ended December 31, 2001, related to:
- the sale of 2,978,390 shares of our common stock, along with warrants to purchase an additional 6,175,658 shares of commonstock, at exercises prices ranging from $2.40 to $5.25 per share (all such securities being "restricted securities" asdefined in Rule 144) to accredited investors, generating aggregate proceeds of $6,396,912;
- $2,521, representing proceeds from the exercise of stock options for 6,043 shares of common stock;
- $540,000, representing the proceeds of a loan from Summus extended under the terms of the Asset Purchase Agreement. Upon theclosing of the Summus, Ltd. asset acquisition, the indebtedness was cancelled in its entirety;

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- $202,913 in principal payments on capital lease obligations; and
- $75,000 in cash payments in partial settlement of the Dunavant loss contingency.  See Note 17 to the consolidated financialstatements included in this annual report. 

**New Accounting Pronouncements**

In January 2002, we adopted Statement of Financial Accounting Standards No. 144, “*Accounting for the Impairment orDisposal of Long-Lived Assets*” (“SFAS 144”).  This Statement addresses financial accounting andreporting for the impairment or disposal of long-lived assets and supersedes Statement No. 121, “*Accounting for theImpairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of*,”and the accounting and reportingprovisions of APB Opinion No. 30, “*Reporting the Results of Operations for a Disposal of a Segment of aBusiness*.” The adoption of SFAS 144 did not have a significant effect on the operating results, cash flows or financialposition of the Company.

In August 2001, the FASB issued Statement of Financial Accounting Standards 143, “*Accounting for Asset RetirementObligations*” (“SFAS 143”).   SFAS 143 requires an entity to record a liability for an obligationassociated with the retirement of an asset at the time that the liability is incurred by capitalizing the cost as part of thecarrying value of the related asset and depreciating it over the remaining useful life of that asset.  The standard iseffective for financial statements for fiscal years beginning after June 15, 2002, and will be adopted by the Company in fiscal2003.  The Company does not expect the adoption of SFAS 143 to have a material impact on the Company’s results ofoperations, financial position or cash flows.

In April 2002, the FASB issued Statement of Financial Accounting Standards 145, “*Rescission of FASB Statements No. 4,44, and 62, Amendment of FASB Statement No. 13, and Technical Corrections*” (“SFAS 145”).  SFAS 145requires gains and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than asextraordinary items as previously required under Statement 4.  Extraordinary treatment will be required for certainextinguishments as provided in APB 30.  SFAS 145 also amends Statement 13 to require certain modifications to capital leasesbe treated as a sale-leaseback and modifies the accounting for sub-leases when the original lessee remains a secondary obligor (orguarantor).  In addition, SFAS 145 rescinded Statement 44 addressing the accounting for intangible assets of motor carriersand made numerous technical corrections.  SFAS 145 is effective for all fiscal years beginning after May 15, 2002, and will beadopted by the Company on July 1, 2003.  The Company does not expect the adoption of SFAS 145 to have a material impact on theCompany’s results of operations, financial position or cash flows.

In July 2002, the FASB issued Statement of Financial Accounting Standards 146, “*Accounting for Costs Associated withExit or Disposal Activities”* (“SFAS 146”).  SFAS 146, which superseded EITF Issue 94-3, “LiabilityRecognition for Certain Employee Termination Benefits and Other Cost to Exit an Activity (including Certain Costs Incurred in aRestructuring),” requires that a liability for a cost associated with an exit or disposal activity be recognized when theliability is incurred.  Under Issue 94-3, a liability for an exit cost was recognized at the date of an entity’scommitment to an exit plan.  The provisions of this Statement are effective for exit or disposal activities that are initiatedafter December 31, 2002.  The Company does not expect the adoption of SFAS 146 to have a material impact on theCompany’s results of operations, financial position or cash flows.

In December 2002, the FASB issued Statement of Financial Accounting Standards 148, *“Accounting forStock-Based Compensation – Transition and Disclosure”* (“SFAS 148”).  SFAS 148 provides transitionguidance for companies that adopt the fair value method for stock-based employee compensation and has certain disclosure provisionsthat are effective as of December 31, 2002.  Due to Summus continuing to apply the intrinsic value provisions of APB 25, theadoption of SFAS 148 did not have any impact on its net loss or financial position.  The disclosures required by SFAS 148 areincluded in the audited financial statements included in this annual report.

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In November 2002, the FASB issued FIN 45, which expands previously issued accounting guidance and disclosure requirements forcertain guarantees. FIN 45 requires companies to recognize an initial liability for the fair value of an obligation assumed byissuing a guarantee.  The provision for initial recognition and measurement of the liability will be applied on a prospectivebasis to guarantees issued or modified after December 31, 2002.  We do not expect the adoption of FIN 45 to have a materialimpact on our results of operations, financial position or cash flows.

In January 2003, the FASB issued FIN 46, *Consolidation of Variable Interest Entities. * FIN 46 requires certainvariable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do nothave the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance itsactivities without additional subordinated financial support from other parties.  We will be required to adopt the provisionsof FIN 46 at the beginning of its 2004 fiscal year for entities existing at January 31, 2003, however FIN 46 will apply to all newvariable interest entities created or acquired after January 31, 2003.  We donot expect the adoption of FIN 46 to have amaterial impact on the our results of operations, financial position or cash flows.

**Description of Critical Accounting Policies**

 The preparation of ourfinancial statements in conformity with accounting principles generally accepted in the United States requires us to make estimatesand judgments that affect our reported amounts of assets and liabilities, revenues and expenses.  We have identified thefollowing critical accounting policies that affect the more significant estimates and judgments used in the preparation of ourfinancial statements.  On an ongoing basis, we evaluate our estimates, including those related to the matters describedbelow.  These estimates are based on the information that is currently available to us and on various other assumptions thatwe believe to be reasonable under the circumstances.  Actual results could vary from those estimates under differentassumptions or conditions.

*Valuation of Equity Instruments*

 We have utilized our equitysecurities, including common stock and options/warrants to purchase common stock, to pay for services and to settle obligationsowed to or claimed by creditors. The issuance of equity instruments as payment for services rendered to Summus results in therecording of non-cash compensation or consulting expense as the services are performed.  We utilize the Black-Scholesoption-pricing model to determine the value of options or warrants issued as payment for services.  Underlying theBlack-Scholes option-pricing model are several assumptions that are evaluated by management and include: (1) a dividend yield; (2)a common stock volatility factor; (3) the risk-free interest rate; and (4) the expected life of the option or warrant. Managementevaluates each of these assumptions on a periodic basis in order to determine the value of the equity instruments used as paymentfor services as well as to record the associated expense.  As conditions change, our evaluation of the assumptions underlyingthe Black-Scholes option-pricing model may change resulting in differing values of equity instruments issued for services betweenreporting periods.  In a similar manner, when stock options or warrants are used to settle obligations owed to or claimed bycreditors, we utilize the Black-Scholes option-pricing model to value the options or warrants.  If equity instruments areissued for claims that we have not yet recorded, the value of the equity instrument will be charged to expense when the settlementoccurs.  If the equity instruments are issued for a recorded liability, the value of the equity instruments will be used toremove the recorded liability and any difference in value between the recorded liability and the equity instruments would becharged or credited to the statement of operations.

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*Revenue Recognition*

Contractsand license fees

During the first quarter of 2002 and for the years ended December 31, 2001 and 2000, we derived our revenues primarily fromresearch and development contracts for governmental agencies and the commercial licensing of our technology.  We recognizedrevenue on these contracts at the time services were rendered based upon the terms of individual contracts.  Regarding thecommercial licensing of our technology, we followed the provisions of AICPA Statement of Position 97-2, “*Software RevenueRecognition*”, as amended by AICPA Statement of Position 98-9 “*Modification of SOP No. 97-2 Software RevenueRecognition with Respect to Certain Transactions*.” Revenue from software license fees is generally recognized upondelivery provided that a contract has been executed, the vendor fee is fixed or determinable, no significant vendor obligations oruncertainties surrounding customer acceptance remain, and collection of the resulting receivable is deemed probable.

Wireless applications and contracts

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

During 2002, the Company entered into a strategic partnership agreement related to the mobile and wireless markets. Revenue earned under this agreement was recognized ratably over the year ended December 31, 2002, as the services wereprovided.

Periodically, we enter into non-recurring engineering arrangements with ourcontent partners.  Generally, under the terms of theseagreements, we receive funding upfront to complete projects. The funding we receive upfront is recorded as deferred revenue and isrecognized as revenue under the terms of the individual arrangements.  Deferred revenue represents amounts received for whichthe Company has not yet completed its contractual obligations. 

 

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**FACTORS THAT MAY AFFECT OUR BUSINESS, FUTURE OPERATINGRESULTS AND FINANCIAL CONDITION**

You should carefully consider the risksdescribed below together with all of the other information included in this annual report on Form 10-K. The risks anduncertainties described below are not the only ones facing our company. If any of the following risks actually occurs, ourbusiness, financial condition or operating results could be harmed. In such case, the trading price of our common stock coulddecline, and investors in our common stock could lose all or part of their investment.

Ø

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

 We require substantial workingcapital to fund and sustain our business operations. For us to implement our business plan, we anticipate that we will needapproximately **$**10 million to $15 million in working capital in the next twelve months**. ** At present wehave no arrangements or commitments for any financing.  If adequate funds are not available or are not available on acceptableterms, we may be unable to develop further or enhance our products and services, take advantage of future opportunities, respond tocompetitive pressures or continue in business.

Ø

**We have been and remain in default for non-payment under several contracts with previous and existing vendors andprofessional service providers and such parties have sought payment through litigation or otherwise.**

 As of March 15, 2003, we hadapproximately $4.4 million in current liabilities, of which approximately $3.3 million were greater than 90 daysold.  Of this amount, 3 former service providers have filed suit against us seeking payment of $1.2 million,plus interest (See Item 3.Legal Proceedings in this Annual Report.).  As of March 15, 2003, due to our limited resources, we are in default onseveral settlement agreements or arrangements with former vendors and servicesproviders.  Under these settlement agreements, such vendors had agreed to our payment of less than the initial amountsdue, the extension of payments terms by between 9-36 months and/or the satisfaction of amounts due through a combination of cashand stock.  There can be no assurance that we will be able to generate sufficient fundsin order to become current under these settlement agreements and arrangements andmaintain the scheduled payments thereafter.  During thefirst quarter of 2003, we were released from approximately $890,000 in unpaid legal fees from a former law firm.

 If the cash flow from our operatingand financing activities is insufficient, we may be required to continue to take actions such as delaying or reducing capitalexpenditures, attempting to restructure or refinance debt, seeking to have creditors agree to payment in the form of our commonstock or other equity securities in lieu of cash, selling assets or operations, or taking measures to reduce our expenses. Any orall of these actions may not be sufficient to allow us to service our debts and other obligations, avoid litigation by creditors orcontinue in business.

Ø

**We are in arrears in the payment of certain salary owed to our employees and fees owed to consultants.**

During the time period from November 15, 2002 through March 15, 2003, we have not paid 6 of our regularly scheduled bi-monthlypayrolls to certain executives of our management team, totaling $151,548. Two (2) of the regularly scheduled bi-monthly payrolls in 2002 and one (1)regularly scheduled payroll in 2003 tothe remaining employees of Summus, totaling $287,781 were not paid.  In addition, we owe consultants approximately $433,000 for servicesprovided to Summus  during the period from November 2001 through March 15,2003.  As of the date of this filing, these amounts remain unpaid.   The loss of a portion of ouremployees or consultants could have an adverse effect on our ability to operate and harm our business.  As of the date of thisreport, Summus has not had any significant loss of its employees or consultants or any interruption of its businessactivities. 

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Ø

**Our past and potential future issuances of equity securities have diluted and may continue to materially dilute the interestsof holders of our common stock.**

 Because of severe liquidityconstraints, we have issued equity securities in several instances in lieu of effecting payment in cash of amounts due (or allegedto be due) vendors, consultants, current and former officers and directors, and shareholders.  By way of example only:
- In July 2002, we amended our note payable agreement with PlusStation to provide for an adjustment in the payment terms, wherebywe issued 235,000 shares of our restricted common stock with registration rights to repay $87,500 of the outstanding balance of thenote.
- During 2002, we entered into various consulting agreements that provide for the issuance of restricted common stock oroptions/warrants to purchase restricted common stock primarily on a monthly basis as the services are performed by the consultants.In 2002, 53,699 restricted common shares and 186,032 options/warrants to purchase restricted common stock were issued toconsultants in 2002, valued at $32,300 and $123,135, respectively.
- During 2002, we entered into various agreements with firms to provide professional services, under which we paid for theservices through the issuance of 140,000 our restricted common stock and warrants to purchase 252,500 of restricted common stock,for an aggregate value of $544,081, which was charges to non-cash consulting expense in 2002.

 In addition, we have the ability toissue options and other stock-based awards under our Amended and Restated 2000 Equity Compensation Plan to directors, officers,employees and consultants, and have reserved up to 8,500,000 shares of our common stock under the plan, 7,556,175 of which havebeen granted as of December 31, 2002.  We also have outstanding warrants exercisable for 30,658,477 shares of our common stockas of December 31, 2002.

Issuances of certain shares of our common stock or otherequity interests have been at (or are exercisable for) a price that represents a discount to the then traded value of our commonstock. In any event, past and anticipated future issuances of additional shares of our common stock or other equity interests haveand will continue to dilute the proportional ownership interests of existing shareholders.

Ø

**If we are successful in raising additional capital through the issuance of equity securities, our shareholders may experiencesubstantial dilution.**

Our primary source of funding for our operations comes fromthe issuance of shares of our common stock in private placements to investors.  On February 27, 2002, our shareholdersapproved an amendment to our amended and restated certificate of incorporation to increase the number of shares of common stockauthorized for issuance from 50,000,000 to 100,000,000.  This action was taken to ensure that shares of our common stock wouldbe available for future issuance in the event our Board of Directors deems it necessary or advisable for purposes of, among otherthings, raising additional capital through the sale of equity securities to fund our business operations, acquiring other companiesor their assets or attracting strategic partners and/or candidates for a business combination which can assist us in generating arevenue stream from the commercial deployment of our technology.  If we are successful in our capital raising efforts,existing shareholders will almost certainly experience dilution of their percentage ownership interests in Summus.  Inaddition, the new equity securities may have rights, preferences or privileges senior to those of existing holders of shares of ourcommon stock.

 If we raise additional capital inconjunction with entering into strategic alliances or licensing our technology to wireless carriers, wireless and mobile devicemanufacturers, or content providers, we may be required to relinquish some rights to our technologies or products, or grantlicenses on terms that are not favorable to us.

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 As of March 15, 2003, we have57,403,703 shares of our common stock issued and outstanding, 7,673,379 shares reserved for issuance upon the exercise of stockoptions that have been granted, and 30,974,477 shares reserved for issuance upon the exercise of warrants issued by Summus. In order to raise additional capital, we will have to ask our shareholders for an increase in the number of authorizedshares.  There can be no assurance that our shareholders will approve such increase in our number of authorized shares.

Ø

**We have incurred substantial losses and expect to continue to incur substantial net losses for the foreseeablefuture.**

 We have generated (and expect tocontinue to generate in the foreseeable future) operating losses and negative cash flow. We had net losses, including non-cashcharges for stock-based employee compensation, of approximately $8.6 million and $10.9 million for the fiscal years ended December31, 2002 and December 31, 2001, respectively. As of December 31, 2002, we had an accumulated deficit of $43.1 million and a workingcapital deficit of $5.0 million.  As a result, we will need to generate significant revenues to be profitable in thefuture.  In light of our financial condition and operating results, our auditors have included in their report on ourconsolidated financial statements an explanatory paragraph, which expresses substantial doubt about our ability to continue as agoing concern.

Ø

**We have a limited operating history and have achieved limited revenues from our operations.**

We have a limited operating history and have generatedlimited revenue from our operations.  Our prospects must be considered in light of the risks, expenses and difficultiesfrequently encountered by growing companies in new and rapidly evolving markets.  We will need to increase significantly ourrevenues to achieve and maintain profitability. We believe that increasing our revenues will depend in large part on our abilityto:
- raise additional capital;
- deploy our BlueFuel  platform, product suite, and applications;
- generate significant revenue from the sale of our applications using our BlueFuel platform and licensing of BlueFuel  andrelated products and services;
- maintain and enhance our brand name;
- establish and maintain broad market acceptance for our products and then increase our market share based upon the timing,strength and success of our sales efforts and our ability to enter into strategic and commercial alliances;
- convert the acceptance for our products and services into direct and indirect sources of revenue;
- develop effective marketing and other promotional activities to penetrate our target customer base;
- develop and maintain strategic and commercial relationships that balance our current and long-term ability to capitalize on ourtechnology and solutions approach;
- generate and sustain substantial revenue growth while maintaining reasonable expense levels; and 
- continue to timely and successfully develop new products, product features and services and increase the functionality andfeatures of existing products and services; 

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 If our revenues grow more slowly thananticipated or if operating expenses increase more than expected, or are not reduced sufficiently, we may never achieveprofitability.  If we achieve profitability, we cannot be certain that we will be able to sustain or increase thatprofitability in the future.

Ø

**Our limited operating history makes it difficult to evaluate our business and prospects.**

 For the fiscal year ended December31, 2002, we had revenues of $406,952, of which $204,133 relates to the wireless and mobile market.  We have only a limitedoperating history upon which you may evaluate our business and prospects. You should consider our prospects in light of theheightened risks and unexpected expenses and difficulties frequently encountered by companies in an early stage ofdevelopment.  These risks, expenses and difficulties, which are described further in this “Risk Factors” section,particularly apply to us because the mobile and wireless market (i.e., the market for remote access and processing of informationresources via small handheld wireless devices) is very much in its infancy and is likely to rapidly evolve.

 Successfully commercializingBlueFuel, our applications using BlueFuel, as well as our other current and contemplated products will entail significant sales andmarketing, competitive, technological and financing risks.  Although we have launched several wireless applications, ourprimary operations during 2002 have mainly been limited to organizing and staffing Summus, conducting research and development,product development and testing.  We believe our efforts to negotiate and enter into strategic relationships will enable us tomarket and deploy our products on a commercial basis.  These operations provide limited information for you to consider inassessing an investment in our common stock.

Ø

**Our operating results are likely to fluctuate significantly, which may cause our stock price to fluctuate.**

  As a result of our relativelybrief operating history and the rapidly changing and uncertain nature of the markets in which we compete, our quarterly and annualrevenues and operating results are likely to fluctuate from period –to period, and period-to-period comparisons are notlikely to be meaningful. These fluctuations are caused by a number of factors, many of which are beyond our control. Our futureoperating results could fall below the expectations of public market analysts or investors, which would likely significantly reducethe market price of our common stock. Fluctuations in our operating results will likely increase the volatility of our stockprice.

  Our research and developmentand sales and marketing efforts, and other business expenditures generally, are partially based on predictions regarding certaindevelopments for wireless handset availability and carrier deployment of data services.  To the extent that these predictionsprove inaccurate, our revenues may not be sufficient to offset our expenditures, and our operating results may be harmed.

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Ø

**The price of our common stock has been and may continue to be volatile.**

 The trading price of our common stockhas been and is likely to continue to be highly volatile.  Our stock price could be subject to wide fluctuations in responseto factors such as:
- actual or anticipated variations in quarterly operating results;
- announcements of technological innovations, new products or services by us or our competitors;
- changes in financial estimates or recommendations by securities analysts;
- the addition or loss of strategic relationships or relationships with our key customers;
- conditions or trends in the wireless markets;
- announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capitalcommitments or of significant new product developments or changes in business strategy;
- legal, regulatory or political developments;
- additions or departures of key personnel; and
- general market conditions

  In addition, the stock marketin general, and the OTC Bulletin Board and the market for wireless, wireless-related and technology companies in particular, haveexperienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performanceof these companies.  These broad market and industry factors have in the past and may in the future reduce our stock price,regardless of our operating performance.

Ø

**We have issued stock options with exercise prices below market value which have resulted and will continue to result in therecording of compensation expense and, in turn, an increase in our net losses.**

 In the years ended December 31, 2002and 2001, we awarded stock options to our employees and directors exercisable for 397,531 shares and 651,879, respectively, of ourcommon stock at exercise prices below market value on the date of grant. For the years ended December 31, 2002 and 2001, weincurred compensation expense related to the stock option grants and share issuances in the amount of $364,000 and $956,321,respectively.

 As of December 31, 2002, we havedeferred compensation of $227,132 that will be amortized to expenses over the two years ending December 31, 2004. Our earnings/(netloss) will be decreased/(increased) by the corresponding amount of compensation expense in each of the stated years. We may alsocompensate our employees and directors through the grant of options or warrants to purchase our common stock in the future, whichmay have a dilutive effect on our earnings.

Ø

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

 Of the 57,403,703 shares of ourcommon stock outstanding as of March 15, 2003, an aggregate of 31,463,857 shares are freely tradable without restriction in thepublic market unless the shares are held by "affiliates," as that term is defined in Rule 144(a)(1) under the SecuritiesAct of 1933.

 In addition, as of March 15, 2003,there were outstanding warrants to purchase 30,974,477 shares of our common stock, and options to purchase 7,673,379 shares of ourcommon stock, 5,745,456 of which were fully vested.

 We currently have effective aregistration statement on Form S-1 in which we have registered 11,637,012 shares of our restricted common stock and 20,334,701shares underlying warrants to purchase shares of our common stock.  We are also contractually obligated to register approximately7,239,969 additional shares of restricted common stockthat were previously not freely tradable and an additional 11,239,290 shares underlying warrants and options, such securities to becovered by a registration statement on Form S-1 to be filed with the SEC. 

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The market price of our common stock could declineas a result of sales of a large number of shares of our common stock in the market after this offering, or the perception that suchsales could occur. These sales might also make it more difficult for us to sell equity securities in the future at a price that wethink is appropriate, if at all.  A large volume of sales by the selling shareholders could have a significant adverse impacton the market price of our common stock.

Ø

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

            The market for our software and technologies is new andrapidly evolving. Wireless service providers are only beginning to offer commercial services that could result in utilization ofour software and, as a result, we cannot assess current or future demand for remote management of resources, the creation andinteraction with multimedia content via cellular handsets and other mobile devices, and enhanced quality of remote communications.We also do not know whether this market will be large enough to sustain our business. We may not be able to develop and introducesoftware, software enhancements or services that respond to market demands, technology developments, increased competition orindustry standards on a timely basis, or at all. If this market does not evolve in the manner or in the timeframe that weanticipate, or if we are unable to respond to new market developments promptly, our business and prospects may suffer. 

Ø

**The success of our business will greatly depend on our ability to develop and enter into strategic relationships withwireless service providers, wireless software developers, semiconductor and device designers, wireless device manufacturers andcontent providers.**

 Our business will depend on ourability to develop relationships and enter into agreements with companies in key industry groups, including:
- wireless service providers that we expect will deploy our technology and products to deliver multimedia content and services totheir subscribers;
- wireless software providers who will use our BlueFuel platform to develop third-party mobile software;
- semiconductor and device designers and manufacturers that we expect will embed our technology and products in their products toenable the viewing of multimedia content; and
- content providers that we expect will rely on our technology and products to deliver multimedia content over wirelessnetworks.

   We will need to enter intocontractually binding agreements with wireless service providers, device manufacturers, and content providers in order to generateany significant revenues from our technology and product applications.  If we are unable to establish a sufficient number ofstrategic relationships and enter into contractual arrangements on terms commercially favorable to us, our business, revenue, andprospects are likely to be adversely affected.

Ø

**Our business will depend on wireless service providers deploying our BlueFuel****software and related applications, andon their subscribers' demand for such applications.**

 Our success will depend heavily ontimely deployment by wireless service providers of our applications using our BlueFuel product suite in their networks. Wirelessservice providers may not deploy, or may be slow in deploying, our software due to a number of factors including the availabilityof competing products, lack of subscriber demand, as well as interoperability, implementation, support or maintenance concerns. Inaddition, if our current applications with wireless service providers are unsatisfactory, they may not deploy our software or mayrequire costly or time-consuming modifications to our software before deployment.

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

Ø

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

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

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

Ø

**If we fail to commercialize ourBlueFuel platform, or to develop and commercialize additional enhancements tosuch platform, we may not be able to compete effectively and our business will suffer.**

Our BlueFuel platform is new and has only recently beencommercially deployed. Our success depends on our ability to commercially release our software based on our technology in a timelymanner. Our success also depends on our ability to develop and commercialize new enhancements to our technology in a timely manner.If we fail to successfully commercialize our software and technology, or to develop new software and technology, we will not beable to compete successfully.

Ø

**We may not successfully develop new products and services.**

Our growth depends on our ability to continue to develop leading edge wireless delivery and distribution products andservices.  Our business and operating results would be harmed if we fail to develop products and services that achievewidespread market acceptance or that fail to generate significant revenues or gross profits to offset our development and operatingcosts.  We may not timely and successfully identify, develop and market new product and service opportunities.   Ifwe introduce new products and services, they may not attain broad market acceptance or contribute meaningfully to our revenues orprofitability.  In addition, competitive or technological developments may require us to make substantial, unanticipatedinvestments in new products and technologies, and we may not have sufficient resources to make these investments.  If we areunable to be a technological leader in our market, our business is likely to be harmed.

Ø

**We have in the past experienced delays in carrier testing and deployment and product releases, and we may similarlyexperience delays in the release of products and upgrades in the future.**

 We will need to continue tointroduce, on a timely basis, new products and product upgrades to add new features, functionality and technology that our targetcustomer base desires. No assurances can be provided that we will be able to successfully complete the development of currentlyplanned or future products in a timely and efficient manner. Due to the complexity of these products, internal quality assurancetesting and customer testing of pre-commercial releases may reveal product performance issues or desirable feature enhancementsthat could lead us to postpone the release of products or product upgrades. In addition, the reallocation of resources associatedwith any such postponement would likely cause delays in the development and release of other future products or enhancements to ourcurrently available products. This could have a material adverse effect on our results of operations.

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Ø

**We face intense competition as a solutions provider in the wireless telecommunications industry.**

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

Ø

**If we are unable to compete effectively with existing or new competitors, our resulting loss of competitive position couldresult in price reductions, fewer customer orders, reduced margins and loss of market share, and our results of operations andfinancial condition would suffer.**

We compete in the handheld device, operating system software and wireless services markets. The markets for these products andservices are highly competitive, and we expect competition to increase in the future. Some of our competitors or potentialcompetitors have significantly greater financial, technical and marketing resources than we do. These competitors may be able torespond more rapidly than Summus to new or emerging technologies or changes in customer requirements. They may also devote greaterresources to the development, promotion and sale of their products.

Certain competitors may have longer and closer relationships with the senior management of enterprise customers who decide whichproducts and technologies will be deployed in their enterprises.  Moreover, these competitors may have larger and moreestablished sales forces calling upon potential enterprise customers and therefore could contact a greater number of potentialcustomers with more frequency.  Consequently, these competitors could have a better competitive position than we do, whichcould result in potential enterprise customers deciding not to choose our products and services, which would adversely impact ourbusiness, results of operations and financial condition.

Ø

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

 The wireless communications industryis experiencing rapid and significant technological change. This change includes the increase in pace of upgrades in existingwireless systems, evolving and constantly changing industry standards, ongoing improvements in the capacity and quality of digitaland compression technologies, and changes in consumer needs and preferences. Alternative technologies may develop for the provisionof wireless services and other compression technologies to wireless services that are superior to those that we plan to offer tothe 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 newproducts and services that can compete successfully. There can be no assurance that we will select and develop appropriatetechnology and products on a timely basis. Our failure to develop or obtain appropriate technology could adversely affect ourability to be competitive.

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Ø

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

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

 Errors in our products may also becaused by defects in third-party hardware or software incorporated into our products. If so, we may be unable to fix these defectswithout the cooperation of third-party providers. Because these defects may not be as significant to these providers as they are tous, 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 inpotential product liability claims. Even if unsuccessful, a product liability claim brought against us would likely betime-consuming, costly and harmful to our reputation.

Ø

**If we endeavor to expand our limited presence in international markets we will become subject to additional businessrisks.**

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

Ø

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

 The wireless communications industryis 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 environmentsgoverning 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 radiofrequency allocations are all subject to significant government regulation. Government regulation may have an adverse effect on thewireless telecommunications companies to which we plan to market and sell our products and services under development.  Delaysin receiving required regulatory approvals and licenses or the enactment of new and adverse regulatory requirements may adverselyaffect our ability to offer our technology and other new products and services. In addition, legislative, judicial and regulatoryagency actions could negatively affect our ability to offer new technologies to wireless telecommunications companies.

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Ø

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

 We may acquire technologies orcompanies 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;
- 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.

Ø

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

Currently, we have not been awardedany patents.  We have filed for two (2) patents.  One is in the videocompression technology area, which incorporated six (6) of our previousprovisional patents and for which we abandoned three (3) of our previousprovisional patents that contained redundant information to the videopatent.  The other is in the mobile mapping data area, which incorporated  two(2) of our previous provisional patents.  We have decided not to proceed onfive (5) other provisional patents at this time, but the relevantand important information contained in these provisional patents is protected under trade secrets and by confidentiality agreements.  Thus, wehave two (2) remaining provisional patents that we have filed, and are workingto develop into formal patent applications.  These patent applications maynot be granted or, if granted, the resulting patents may be challenged orinvalidated.  In addition to patents, we rely on copyright and trademarklaws, trade secrets, confidentiality provisions and other contractual provisionsto protect our proprietary rights. These measures, which require the expenditureof substantial resources, afford our intellectual property only limitedprotection because our competitors and third parties independently may developsimilar technologies or may infringe our intellectual property. Infringement isdifficult to detect and costly to prevent. With respect to the protection of ourproprietary rights internationally, the laws of some foreign countries may notprotect our proprietary rights adequately. In addition, we will not have patentprotection in countries where we do not file patent applications. Thus, themeasures we are taking to protect our proprietary rights in the United Statesand abroad may not be adequate and our business may be harmed as a result.

Ø

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

The wireless equipment and software industries are subject tofrequent intellectual property litigation. As the number of entrants into our target market increases, the likelihood ofinfringement claims also increases. We may unknowingly be infringing the intellectual property of others. In addition, becausepatent applications can take many years to be approved, there may be one or more patent applications now pending that could lead toinfringement actions against us if issued in the future. If we are unable to successfully defend against a product infringementclaim, 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 devotesignificant time and resources to litigation, which could also harm our business.

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Ø

**Our Directors and Executive Officers beneficially own approximately 33.83% of our stock; their interests could conflict withyours; significant sales of stock held by them could have a negative effect on our stock price; shareholders may be unable toexercise control.**

As of March 15, 2003, our executive officers, directors and affiliated persons beneficially owned approximately 33.83% of ourcommon stock. Bjorn Jawerth, our Chief Executive Officer and Chairman of the Board, beneficially owns approximately 25.81% of ourcommon stock.  As a result, our executive officers, directors and affiliated persons will have significant influence to:
- elect or defeat the election of our directors;
- amend or prevent amendment of our articles of incorporation or bylaws;
-  effect or prevent a merger, sale of assets or other corporate transaction; and 
- control the outcome of any other matter submitted to the shareholders for vote.

Management’s stock ownership may discourage a potential acquirer from making a tender offer or otherwise attempting toobtain control of Summus, which in turn could reduce our stock price or prevent our shareholders from realizing a premium over ourstock price.

Ø

**We depend on key personnel to operate our business.**

 Our future success depends on thecontinued services and performance of our senior management, in particular, our Chief Executive Officer, Dr. Bjorn Jawerth, andother key scientific, technical and managerial personnel.  The loss of the services of any member of our senior management orother key employees could cause significant disruption in our business and have a material adverse effect on us.  We haveemployment agreements with certain members of senior management but we do not currently maintain any "key person" lifeinsurance. Our future success also depends on our ability to identify, attract, hire, train, retain and motivate other highlyskilled technical, managerial, operations, sales and marketing and customer service personnel. Competition for qualified personnelis intense. If we do not succeed in attracting new personnel or retaining and motivating our current personnel, our business couldbe harmed. For information on our key personnel, please see “Item 10. Directors and Executive Officers of theRegistrant".
 
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Ø

**Our failure to attract, train or retain highly qualified personnel could harm our business.**

Our success also depends on our ability to attract, train and retain qualified personnel in all areas, especially those withmanagement and product development skills.  In particular, we must hire additional experienced management personnel to help uscontinue to grow and manage our business, and skilled software engineers to further our research and development efforts.  Attimes, we have experienced difficulties in hiring personnel with the proper training or experience, particularly in technical andmedia areas. Competition for qualified personnel is intense, particularly in high-technology centers such as the Research Triangle,where our corporate headquarters are located.   If we do not succeed in attracting new personnel or in retaining andmotivating our current personnel, our business could be harmed.

In making employment decisions, particularly in the high-technology industries, our current employees and prospective jobcandidates often consider the value of stock options they hold or that they may receive in connection with their employment. As a result of recent volatility in our stock price, we may be disadvantaged in competing with companies that have not experiencedsimilar volatility or that have not yet sold their stock publicly.

Ø

**Our common stock is subject to "penny stock" rules that may hamper a shareholder’s ability to sell shares ofsuch stock in the secondary trading market.**

 Federal regulations under theSecurities Exchange Act of 1934 (the "Exchange Act") regulate the trading of so-called "penny stocks," whichare generally defined as any security not listed on a national securities exchange or NASDAQ, priced at less than $5.00 per shareand offered by an issuer with limited net tangible assets and revenues. Since our common stock currently trades on the OTC BulletinBoard at less than $5.00 per share, our common stock is a "penny stock" and may not be traded unless a disclosureschedule explaining the "penny stock" market and the risks associated with such stock is delivered to a potentialpurchaser prior to any trade.

 In addition, because our common stockis 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 Rule 15g-9 under the Exchange Act. Under this rule, broker-dealers must take certainsteps prior to selling a "penny stock," which include:
- 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.

Because of these requirements, many broker-dealers are unwilling to sell penny stocks at all.

 If these "pennystock" rules are not followed by the broker-dealer, the investor has no obligation to purchase the shares. The application ofthese comprehensive rules will make it more difficult for broker-dealers to sell our common stock.  Accordingly, you may havedifficulty in selling shares of our common stock in the secondary trading market. These rules could also hamper our ability toraise funds in the primary market for our common stock.

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Ø

**Special Note Regarding Forward-Looking Statements**

 We have made forward-lookingstatements in this document, all of which are subject to risks and uncertainties. When we use words such as“anticipate,” “expect,” “intend,” “plan,” “believe,” “seek”and “estimate” or similar words, we are making forward-looking statements.  Forward-looking statements includeinformation concerning our possible or assumed future business success or financial results. Such forward-looking statementsinclude, but are not limited to, statements as to our expectations regarding:
- a lack of sufficient financial resources to implement our business plan, which has resulted in our receiving a "goingconcern" opinion from our independent auditors with respect to our audited financial statements as of and for the year endedDecember 31, 2002;
- our ability to generate sufficient working capital to meet our operating requirements;
- our future expense levels (including cost of revenues, research and development, sales and marketing, and general andadministrative expenses);
- our future revenue opportunities;
- our ability to develop and enter into strategic relationships with wireless service providers, semiconductor and devicedesigners, mobile and wireless device manufacturers and content providers;
- timely deployment by wireless service providers, semiconductor and device designers, and wireless device manufacturers of oursoftware applications in their networks and mobile information devices;
- the continued growth in demand for wireless and mobile usage;
- our new product development and acceleration of commercial deployment of such products;
- the future adoption of our current and future products, services, and technologies;
- the future growth of our customer base;
- technological competition, which creates the risk of our technology being rendered obsolete or noncompetitive;
- the lack of patent protection with respect to our technology; and
- potential infringement of the patent rights of third parties. 

You should note that an investment in our common stock involves certain risks and uncertainties that could affect our futurebusiness success or financial results. Our actual results could differ materially from those anticipated in these forward-lookingstatements as a result of certain factors, including those set forth in “Factors That May Affect Our Business, FutureOperating Results and Financial Condition” and elsewhere in this annual report on Form 10-K.

We believe that it is important to communicate our expectations to our investors. However, there may be events in thefuture that we are not able to predict accurately or over which we have no control. Before you invest in our common stock, youshould be aware that the occurrence of the events described in the “Factors That May Affect Our Business, Future OperatingResults and Financial Condition” and elsewhere in this annual report on Form 10-K could materially and adversely affectour business, financial condition and operating results.  We undertake no obligation to publicly update any forward-lookingstatements for any reason, even if new information becomes available or other events occur in the future.
****
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**ITEM 7A.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT****MARKET RISK.**

We do not use any derivative financial instruments forhedging, 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 filedwith this report are set forth in the "Index to Consolidated Financial Statements and Schedule" following Part IV of thisannual report.

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

Not Applicable.
****
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**PART III**

**ITEM 10.              ****DIRECTORS AND EXECUTIVEOFFICERS OF THE REGISTRANT.**

**Board of Directors**

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

 **Name**

 **Age**

**First YearElectedAsDirector**

 **TermExpires**

Bjorn D. Jawerth  

50

2000

2003

Richard F. Seifert 

52

1999

2003

Herman Rush(1)

71

2000

2002

George H. Simmons

52

2002

2003

Neil R. Guenther

49

2003

2003
_______________________________(1) Mr. Rush resigned from the Board of Directors on August 19, 2002.
**Advisory Board Members **

 Our Board of Directors has anadvisory board.  The current members of the advisory board are Hyun Byun and Bob Bruggeworth.  Members of the advisoryboard are appointed through resolution of the Board and consult and advise the Board and our senior officers as to, among otherthings:
- entering into strategic alliances or other business relationships for purposes of commercially deploying our products andtechnology;
- financing of our operations;
- starting or discontinuing a line of business; and
- establishing, acquiring and selling other companies or participating interests in other companies.

At the request of the Board, members of the advisory board may attend Board meetings and participate in such meetings, but theyhave no vote.  Members of the advisory board will not be deemed to be directors of Summus and will not be subject to anyfiduciary or similar duties to Summus solely by virtue of membership on the advisory board.  Each member of the advisory boardis required to execute a confidentiality and non-disclosure agreement with Summus and will be considered an “insider”of Summus, subject to our insider trading policies. 

**Executive Officers**

 The following table providesinformation regarding our executive officers, the capacity in which they serve Summus, when they assumed office, and theirages.

**Name**

**Office**

**Officer Since**

**Age**

Bjorn D. Jawerth

Chief Executive Officer,President, Chief Scientist

2001

50

Gary E. Ban

Chief Operating Officer

2001

39

Robert S. Lowrey

Chief Financial Officer, VicePresident of Finance

2000

42

Christopher E. Kremer

Executive Vice President ofSales and Business Development

2001

45

Leonard Mygatt

Executive Vice President,Advanced Technology

2001

42

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**Business Experience of Directors, Officers, Advisory Board Members, and Other Key Employees**
**Bjorn D. Jawerth has been onour Board of Directors since February 2000 and has served as Chief Executive Officer (initially, as a Co-Chief Executive Officer),President and Chief Scientist since February 2001.  In 1991, Dr. Jawerth founded Summus Ltd. and was its chairman andpresident until its acquisition by Summus in February 2001.  With more than 30 years of experience as a consultant in theareas of image processing and finite element analysis, Dr. Jawerth has more than 90 publications to his credit in books andrefereed journals.  He has won and administered numerous grant awards from both industry and government agencies such as IntelCorporation, the Office of Naval Research, the Air Force Office of Scientific Research, the Army’s NVESD, the NSF andDARPA.  His research interests include computational harmonic analysis and partial differential equations, image processingand pattern recognition.  Until the fall of 2000, Dr. Jawerth was the David W. Robinson Palmetto Professor, professor ofmathematics and adjunct professor of computer science at the University of South Carolina.  He currently holds a part-timeposition at the professor level at Chalmers University of Technology in Gothenburg, Sweden.  Dr. Jawerth receivedmaster’s degrees in mathematics, statistics, technical physics and electrical engineering and also a doctorate in mathematicsfrom the University of Lund and from the Lund Institute of Technology, Lund, Sweden.

**Neil R. Guenther** was appointed to our Board of Directors in February 2003.  Dr. Guenther has been a shareholder ofAnesthesiology Associates of Wisconsin since 1992 and has served as the President of its Board of Directors since January2002.  Dr. Guenther received his Bachelor of Science degree from the University of Wisconsin in 1977 and his medical degreefrom the Medical College of Wisconsin in 1983.  Dr. Guenther is a member of the National Association of CorporateDirectors. 

**George H. Simmons** was appointed to our Board of Directors in March 2002.  Until November 2003, Dr. Simmons was VicePresident and General Manager of the Multiservice Access Technology business in Lucent Technologies.  Prior to thisassignment, Dr. Simmons held the position of R&D Operational Excellence VP in Switching and Access Solutions where he wasresponsible for R&D process improvement.  He also worked in Beijing, China, where he held the position of Network WirelessVP and was responsible for marketing, sales, installation and customer technical support of wireless infrastructureequipment.  Dr. Simmons graduated from Michigan State University with a bachelor’s degree in Electrical Engineering in1973 and a Ph.D. in electrical engineering in 1981.  He obtained his master’s degree in electrical engineering from theUniversity of Michigan in 1974 and a master’s in management from Kellogg School of Management, Northwestern University in1991.
**Richard F. Seifert hasbeena member of our Board of Directors since February 1999. He was our Vice President of Operations from March throughNovember 1999.  Upon the closing of the Summus, Ltd. asset acquisition, he assumed the position of Co-Chief ExecutiveOfficer.  In November 2001, Mr. Seifert voluntarily resigned as co-Chief Executive Officer to assume the position of ExecutiveVice President of Corporate Development, a position in which he focused his energies on establishing strategic alliances and otherbusiness relationships to enable us to commercially deploy our technology and generate revenue.  In July 2002, Mr. Seifertresigned as Executive Vice President of Corporate Development.  From 1995 through February 1999, Mr. Seifert was aself-employed marketing consultant. Mr. Seifert has a degree in business administration from Montgomery County College and PennState University.
**Herman Rush was a member ofour Board of Directors since March 2000.  Mr. Rush resigned from the Board of Directors on August 19, 2002.  Since 1999,Mr. Rush has been Chairman of the Board and Chief Executive Officer of Infotainment International, Inc., and related companies thatdevelop and produce content for the Internet.  Since 1998, Mr. Rush has been a partner in Rush Cooperman Associates, LLC, anInternet development and production company. In November 2000, he became the CEO of Internet Program Providers, Inc., an Internetdistribution/syndication company. Mr. Rush served as Executive Producer of “The Montel Williams Show” for televisionfrom 1990 through 1997 and currently is a consultant to the program. Mr. Rush is a former President and CEO of the ColumbiaPictures Television Group (1980-1988) and a former CEO of Coca-Cola Telecommunications, Inc. (1988-89).

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**Gary E. Ban joined Summus asour 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 joiningSummus, Ltd. in September 1999, Mr. Ban held a variety of executive-level management positions establishing direction andoperational implementation for business, financial and engineering systems integration.  From November 1996 through August1999, Mr. Ban served as Director of Customer Integration for ABB Power T&D Inc.'s electricity metering group, where he wasresponsible 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 inestablishing a consulting business offering re-engineering process management focused on enterprise resource planning. Mr. Banholds an M.B.A. from Duke University and a bachelor's degree in industrial management and an associate applied science degreein computer engineering from the Milwaukee School of Engineering.

**Robert S. Lowrey** has been our Chief Financial Officer and Vice President of Finance since June 2000.  Prior tojoining Summus, Mr. Lowrey served as a senior audit manager for Ernst & Young LLP in Raleigh, North Carolina, from November1993 to May 2000.  In this role, Mr. Lowrey had an active role in the accounting work associated with initial publicofferings, secondary offerings of equity and debt, and merger and acquisition transactions.  Prior to his association withErnst & Young, Mr. Lowrey served as the chief financial officer of Florida Dental Care, a full-service provider of dentalcare.  Mr. Lowrey is a certified public accountant licensed in the state of North Carolina.  He holds a bachelor’sdegree in accounting from Grove City College in Grove City, Pennsylvania.

**Christopher E. Kremer** washired as Executive Vice President of Sales and Business Development in October 2001.  Mr. Kremer heads Summus' sales andbusiness development functions. Prior to his association with Summus, Mr. Kremer held various senior level executive positions withMotorola, Inc., including Senior Director, Program Management, Cellular Technology and Product Realization Group (March 1999 toFebruary 2001); Senior Director, Business Operations, CDMA Division (February 1998 to March 1999); and Vice President of Sales andMarketing for the Transmission Products Division (August 1996 to February 1998). Mr. Kremer is a graduate of Eastern KentuckyUniversity, where he received a bachelor's degree in business administration in 1980.

**Leonard T. Mygatt, III** has been our Executive Vice President, Advanced Technology, since our acquisition of Summus,Ltd.'s assets in February 2001.  In this position Mr. Mygatt is responsible for technical development and strategy,maintaining technical and standards awareness, providing technical review of new and competitive technologies, managing andprotecting the Company's intellectual property, and technical support for business development, contracts, and proposals. Mr. Mygatt began with Summus, Ltd. in December 1995 and held various management and technical roles in developing Summus,Ltd.'s technical capabilities and business.  Prior to his association with Summus, Ltd., Mr. Mygatt was employed byMagnavox Electronic Systems Company, where he served as a project leader for the design, development and production of advancedtactical data link systems and as a project manager and leader for a research and development project investigating image and videocompression.  Mr. Mygatt received a bachelor's degree in electrical engineering from the University of California at SanDiego in 1983.

**Hyun Byun** brings over 20 years of experience in marketing and business development to our Board of Advisors workingexclusively with Samsung. Mr. Byun currently is the U.S. director of new business development for Samsung Electronic Co. Ltd. In this role, he has created the office for Samsung’s digital convergence team and has been instrumental in developingstrategic partnerships with America Online (AOL) as well as content development partnerships with RealNetworks, BMG and UMG. Previously, Mr. Byun served in the Samsung group chairman’s office as senior manager where he directed 37 Samsung affiliates(including Samsung Electronics and Samsung Investment).  In 1988, Mr. Byun transferred to the United States from Korea todevelop Samsung Information Systems America, where he was the marketing manager for Samsung Brand Desktop and Notebook andcoordinated sales and marketing for the network (Novell) product sales.

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**Robert A. Bruggeworth** was appointed to our Board of Advisors in June 2002. He is currently the Chief Executive Officer ofRF Micro Devices, Inc.  Previously, Mr. Bruggeworth served as the president of RF Micro Devices wireless products group. Before joining RF Micro Devices, Mr. Bruggeworth was employed by AMP, Inc., from July 1983 to June 1999, serving most recently asvice president of global computer and consumer electronics.

**Andrew L. Fox** was our Chief Executive Officer from August 2000 through February 2001 and our acting President and ChiefExecutive Officer from August 1999 through August 2000.  Mr. Fox served as a director of Summus from January 2000 to November2001. Mr. Fox was Executive Vice President of Sales and Marketing for Summus, Ltd. from August 1999 through January 2000.  Inmid-November 2001, Mr. Fox assumed the position as Summus’ Vice President of Strategic Relationships.  From December1996 through June 1999, Mr. Fox was Senior Marketing Manager of RealNetworks, a provider of software products and services forInternet media delivery and a pioneer of streaming media systems enabling the creation, real-time delivery and playback of audio,video and multimedia content on the Web.  From June 1991 through November 1996, he was a Sales and Marketing Manager forIBM's Wireless Data Division and a Product Manager at IBM's Networking Hardware Division.  Mr. Fox has a M.B.A. fromDuke University's Fuqua School of Business in Durham, North Carolina, and an undergraduate degree in computer science andelectrical engineering from Duke University's School of Engineering.

**Jiangying Zhou** was appointedour Vice President of Research in May 2001.  She had previously served as Director of Research and Development at Summus and,before that, at Summus, Ltd.  Prior to joining Summus, Ltd. in March 1998, Dr. Zhou was a research scientist at PanasonicInformation and Networking Technologies Laboratories, Princeton, New Jersey, where she conducted research in the areas of imageanalysis, information retrieval and document processing. Dr. Zhou received her Ph.D. in Electrical Engineering from the Universityof New York at Stony Brook in 1993. She received her M.S. degree (1985) and B.S. degree (1982), both in computer science, fromFudan University, Shanghai, China. Dr. Zhou has taught in the computer science department of Fudan University.  She haspublished 30 papers in international journals and conferences and has given many talks at international conferences.  She isalso the owner of five U.S. patents. Dr. Zhou is currently the co-chair for the SPIE/IS&T Document Recognition Conference. Shealso served as session chair and as referee for several international conferences and journals, including the SPIE DocumentRecognition Conference, the Fifth International Conference on Document Analysis and Information Retrieval, IEEE Transaction onPattern Recognition and Machine Intelligence, Journal of Computer Vision, Graphics, and Image Processing, and Journal of ElectronicImaging.  Dr. Zhou's research interests include video/image analysis, pattern recognition, information retrieval,character recognition, and document processing.

**Family Relationships**

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

**Board of Directors and Committees of the Board of Directors**

 Our Board of Directors is responsiblefor establishing broad corporate policies and for our overall performance.  During the fiscal year ended December 31, 2002,the Board of Directors held 4 meetings.  The Board of Directors has an Audit Committee, Finance Committee, CompensationCommittee, and Nominating Committee. 

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 During the fiscal year endedDecember 31, 2002, the Company’s Audit Committee met 4 times.  Its members during the last fiscal year wereGeorge H. Simmons and Herman Rush.  Mr. Rush resigned from the Board of Directors of the Company on August 19, 2002.  OurAudit Committee’s current members are Neil R. Guenther and George H. Simmons.  The Audit Committee reviews theCompany’s auditing, accounting, financial reporting, and internal control functions and makes recommendations to the Board ofDirectors for the selection of independent accountants.  In addition, the Audit Committee monitors the quality of theCompany’s accounting principles and financial reporting, as well as the independence of and the non-audit services providedby the Company’s independent accountants.  The Audit Committee discusses with the auditors their independence andobtains at least annually the auditors’ written statement describing their independent status.

 During the last fiscalyear, the Compensation Committee met 1 time.  Its members during the last fiscal year were George H. Simmons and HermanRush.  Mr. Rush resigned from the Board of Directors of the Company on August 19, 2002.  The CompensationCommittee’s current members are Neil R. Guenther and George H. Simmons.  The Compensation Committee determines, reviews,approves, and reports to the Board of Directors on all elements of the compensation for the Company’s executive officersincluding salaries, bonuses, stock options, benefits, and other compensation arrangements.

Summus established a Nominating Committee and Finance Committee in March 2003.  The Nominating Committee shall considercandidates for the Board of Directors of the Corporation and shall make all nominations for Directors to the full Board ofDirectors.  The Finance Committee is responsible for providing oversight and coordination of all of our financingactivities.  The Nominating and Finance Committee are both composed of George H. Simmons and Neil R.Guenther.   

During the last fiscal year, no Directors attended fewer than seventy-five percent (75%) of the aggregate of the total number ofmeetings of the Board of Directors held during the period they served as Directors and the total number of meetings held by thecommittees of the Board of Directors during the period that they served on any such committees of the Board of Directors. 

**Section 16(a) Beneficial Ownership Reporting Compliance**

 Section 16(a) of the Exchange Act of1934, as amended (the “Exchange Act”), and related regulations of the Securities and Exchange Commission, require ourdirectors, officers and beneficial owners of more than 10% of our common stock (collectively, “reporting persons”) tofile with the SEC initial reports of ownership and reports of changes in ownership of any and all classes of equity securities ofSummus.  The reporting persons are required by SEC regulations to furnish us with copies of all such filings. 

 Based on our review of the copies offilings received by us with respect to the year ended December 31, 2002, we believe that all reporting persons complied with theSection 16(a) filing requirements.
 
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**ITEM 11.        EXECUTIVE COMPENSATION**.

**Executive Compensation**

 The following table provides certainsummary information concerning the compensation paid during the fiscal years ended 2002, 2001, and 2000 to (i) the Chief ExecutiveOfficer and (ii) to each of the four other most highly compensated executive officers of the Company (based on salary and bonusreceived during the last fiscal year) who were serving as executive officers of the Company at the end of the last fiscal year andwhose aggregate compensation exceeded $100,000 (the “Named Executive Officers”).    

**Summary Compensation Table(1)**

 

**AnnualCompensation**

**Long-termCompensation Awards**

 

**Name andPrincipal Position**

**FiscalYear**

**Salary ($)**

**Restricted StockAwards ($)**

**SecuritiesUnderlyingOptions (#)(2)**

**All OtherCompensation ($)**

Bjorn D. Jawerth

2002

$282,782     

$29,988**(11)**

929,603**(8)**

$4,415     

Chief Executive

2001

$326,261     
 
512,000    

$3,391     

Officer **(3)**
           
Gary E. Ban

2002

$144,552     

$15,250**(11)**

464,803**(9)**

$1,185     

Chief Operating

2001

$143,887     
 
18,919    

$1,153     

Officer **(4)**
           
Robert S. Lowrey

2002

$123,397     

$13,172**(11)**

89,828**(7)**

$75,000**(14)**

Chief Financial

2001

$141,459     
 
306,107       
  
Officer **(5)**

2000

    76,416     
 
100,000       
       
Christopher E. KremerExecutive Vice

20022001

$156,657     $75,212**(12)**

$17,340**(11)**

44,612**(10)**375,000        

$2,257

President, Sales and
     
Business Development**(6)**
           
Leonard Mygatt

2002

$119,932     

$5,983**(11)**

40,105        

$2,441

Executive Vice

2001

$109,648     
 
348,462          

$2,333

President, Advanced
     
Technology**(13)**
     
 

(1)

The aggregate amount of perquisites andother personal benefits, if any, did not exceed the lesser of $50,000 or 10% ofthe total amount of salary and bonus for any year for any of the Named ExecutiveOfficers and has therefore been omitted.

(2)

The options granted are without tandemstock appreciation rights, and we did not grant any stock appreciation rights toany of the Named Executive Officers.

(3)

Dr. Jawerth became Co-Chief ExecutiveOfficer on February 16, 2001, and Chief Executive Officer in November 2001.

(4)

Mr. Ban became Chief Operating Officeron February 16, 2001.

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(5)

Mr. Lowrey became Chief FinancialOfficer and Vice President of Finance on June 1, 2000.

(6)

 Mr. Kremer became Executive Vice President, Sales and Business Development on October 1, 2001. 

(7)

 44,255 of these options were granted pursuant to the Company’s Alternative Compensation Plan in lieu of cashcompensation owed to him.   

(8)

 103,266 of these options received by Dr. Jawerth in 2002 were granted pursuant to the Company’s AlternativeCompensation Plan in lieu of cash compensation owed to him. 

(9)

 51,634 of these options received by Mr. Ban in 2002 were granted pursuant to the Company’s Alternative CompensationPlan in lieu of cash compensation owed to him.

(10)

 27,164 of these options received by Mr. Kremer in 2002 were granted pursuant to the Company’s AlternativeCompensation Plan in lieu of cash compensation owed to him.

(11)

 These amounts were paid to the Dr. Jawerth and Messrs. Ban, Lowrey, Kremer, and Mygatt by the issuance of 29,988, 15,250, 13,172,17,340, and 5,983 restricted shares, respectively, of the Company’s common stock in lieu of cash compensation forsalary owed to them.  The restrictions on these shares will lapse on April 25, 2003. 

(12)

 $40,679 of the cash compensation was paid to Mr. Kremer as a consultant to the Company before he became an executiveofficer.

(13)

 Mr. Mygatt became an Executive Vice President, Advanced Technology on February 16, 2001. 

(14)

 In settlement of a $75,000 bonus to which Mr. Lowrey was contractually owed under the terms of his employment contract with      Summus,  he received 75,000 shares of common stock and warrants to purchase 150,000 shares of Summus common stock.  Thesewarrants have an exercise price of $2.00 per share.

 

 

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**Option Grants During Last Fiscal Year**

 The following table sets forthinformation concerning options to purchase shares of common stock granted during the fiscal year ended December 31,2002, to theNamed Executive Officers.

**Name**

**Number ofSecuritiesUnderlyingOptions/SARsGranted (#) (1)(4)**

**Percent ofTotalOptions/SARsGranted ToEmployees InFiscal Year(3)**

**ExerciseOr BasePrice($/Sh)**

**ExpirationDate**

**Grant Date****Present Value ($)(8)**

Bjorn D. Jawerth

106,337**(5)**

3.365%

$1.44

3/08/12

$93,577
 
720,000**(6)**

22.783%

$1.44

5/23/12

$636,600
 
11,761**(2)**

0.372%

$0.31

7/31/12

$1,999
 
10,417**(2)**

0.330%

$0.35

8/15/12

$1,979
 
14,583**(2)**

0.461%

$0.25

8/30/12

$2,042
 
9,854**(2)**

0.312%

$0.37

9/13/12

$1,971
 
9,115**(2)**

0.288%

$0.40

9/30/12

$2,005
 
7,595**(2)**

0.240%

$0.48

10/15/12

$1,975
 
8,892**(2)**

0.281%

$0.41

10/31/12

$1,956
 
7,595**(2)**

0.240%

$0.48

11/15/12

$1,975
 
8,102**(2)**

0.256%

$0.45

11/29/12

$2,026
 
7,757**(2)**

0.245%

$0.47

12/13/12

$2,017
 
7,595**(2)**

0.240%

$0.48

12/31/12

$1,975
        
Gary E. Ban

53,169**(5)**

1.682%

$1.44

3/08/12

$46,789
 
360,000**(7)**

11.390%

$1.44

5/23/12

$316,800
 
5,880**(2)**

0.186%

$0.31

7/31/12

$1,000
 
5,208**(2)**

0.165%

$0.35

8/15/12

$990
 
7,292**(2)**

0.230%

$0.25

8/30/12

$1,021
 
4,927**(2)**

0.156%

$0.37

9/13/12

$985
 
4,557**(2)**

0.144%

$0.40

9/30/12

$1,003
 
3,798**(2)**

0.120%

$0.48

10/15/12

$987
 
4,446**(2)**

0.141%

$0.41

10/31/12

$978
 
3,798**(2)**

0.120%

$0.48

11/15/12

$987
 
4,051**(2)**

0.128%

$0.45

11/29/12

$1,013
 
3,879**(2)**

0.123%

$0.47

12/13/12

$1,009
 
3,798**(2)**

0.120%

$0.48

12/31/12

$987
      
Robert S. Lowrey

45,573**(5)**

1.442%

$1.44

3/08/12

$40,104
 
5,040**(2)**

0.159%

$0.31

7/31/12

$857
 
4,464**(2)**

0.141%

$0.35

8/15/12

$848
 
6,250**(2)**

0.198%

$0.25

8/30/12

$875
 
4,223**(2)**

0.134%

$0.37

9/13/12

$845
 
3,906**(2)**

0.124%

$0.40

9/30/12

$859
 
3,255**(2)**

0.103%

$0.48

10/15/12

$846
 
3,811**(2)**

0.121%

$0.41

10/31/12

$838
 
3,255**(2)**

0.103%

$0.48

11/15/12

$846
 
3,472**(2)**

0.110%

$0.45

11/29/12

$868
 
3,324**(2)**

0.105%

$0.47

12/13/12

$864
 
3,255**(2)**

0.103%

$0.48

12/31/12

$846
      
Christopher E. Kremer

17,448**(5)**

0.552%

$1.44

3/08/12

$15,354
 
4,340**(2)**

0.137%

$0.48

10/15/12

$1,128
 
5,081**(2)**

0.161%

$0.41

10/31/12

$1,118
 
4,340**(2)**

0.137%

$0.48

11/15/12

$1,128
 
4,630**(2)**

0.147%

$0.45

11/29/12

$1,158
 
4,433**(2)**

0.140%

$0.47

12/13/12

$1,153
 
4,340**(2)**

0.137%

$0.48

12/31/12

$1,128
    
 Leonard Mygatt

40,105

1.269%

$1.44

3/08/12

$35,292

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(1) All of the above options are subject to the terms of the Company’s Amended and Restated2000 Equity CompensationPlan.  All options granted to the Named Executive Officers are exercisable only as they vest.  

(2) These options were granted to the Named Executive Officers in lieu of cash compensation owed to them pursuant to theiremployment agreements with the Company.  All of these options were fully vested on their date of grant.

(3**)** The cumulative percent of total stock options granted to Dr. Jawerth, and Messrs. Ban, Lowrey, Kremer, andMygatt  in 2002, relative to all options granted by the Company in 2002 were 29.413%, 14.705%, 2.843%, 1.411%, and 1.269respectively.

(4) All options were granted at an exercise price equal to the fair market value of the Company’s common stock on the dateof grant. 

(5) These options vested on their date of grant. 

(6) 300,000 of these options were fully vested at their date of grant.  The remaining vest at the rate of 60,000 quarterlyfor the next seven quarters from the date of grant.

(7) 150,000 of these options were fully vested at their date of grant.  The remaining vest at the rate of 30,000 quarterlyfor the next seven quarters from the date of grant.

(8) The values in this column have been prepared using the Black-Scholes model.  The calculations made pursuant to thismodel assume (a) a volatility of 1.789 for the first and second fiscal quarter grants and 1.379 for third and fourth fiscal quartergrants; (b) a risk-free rate of return of 5.00% for first quarter grants, 4.5% for second quarter grants, 3.2% for third quartergrants, and 3.0% for fourth quarter grants (c) a dividend yield of 0%, and (d) an expected option life of five years.

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

 The following table sets forthinformation concerning the number and intrinsic value of stock options held by the Named Executive Officers on December 31, 2002.Year-end values are based on the fair market value of $0.49 per share as of December 31, 2002, as reported on the OTC BulletinBoard System.  They do not reflect the actual amounts, if any, which may be realized upon the future exercise of remainingstock options and should not be considered indicative of future stock performance.  No Named Executive Officer exercised anyoptions during the fiscal year ended December 31, 2002.

**        Name**

**Number ofSecuritiesUnderlyingUnexercised Optionsat Fiscal Year-End (#)**

**Value of UnexercisedIn-the-Money OptionsatFiscal Year-End ($)**

 

**Exercisable** 

**Unexercisable**

**Exercisable**

**Unexercisable**

Bjorn D. Jawerth

1,129,603

300,000

$10,497

$0

Gary E. Ban

333,722

150,000

$5,248

$0

Robert S. Lowrey

462,601

33,334

$4,498

$0

Christopher E.  Kremer

198,842

250,000

$810

$0

Leonard Mygatt

223,614

164,953

$0

$0
**Employment Agreements**
*Employment Agreementwith Bjorn D. Jawerth*

 On February 16, 2001, Summus enteredinto a three-year employment agreement with Bjorn D. Jawerth, our Chief Executive Officer.  Under his employment agreement,Dr. Jawerth received:
- an initial base salary of $350,000, which is to be increased on an annual basis by at least 10%; however, Dr. Jawerth has nottaken any increase in cash compensation to this initial base salary.  As of February 16, 2003, Dr. Jawerth was to receive anannual salary of $423,500 pursuant to his agreement; however, Dr. Jawerth elected on July 31, 2002, to reduce his cash compensationtemporarily to $262,500 on an annual basis to help lower the Company’s current cash consumption.  The difference betweenthe original contract amount of $350,000 and the current cash salary amount is paid to Dr. Jawerth on a bi-monthly basis in theform of options to buy common stock under the Company’s Alternative Compensation Plan.  These options are priced at theclosing market price of the Company’s common stock at the end of each bi-monthly pay period.       The difference betweenthe current salary amount of $423,500 owed to Dr. Jawerth and the original base salary of $350,000 in his employment agreement isbeing deferred and accrued by the Company until the Board of Directors and Dr.      Jawerth determine when and how this accrued amount may be paid;

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- performance bonuses and options as are generally available to other senior management and Board members (including awards underour Amended and Restated 2000 Equity Compensation Plan), as determined by the Compensation Committee of the Board;
- a car allowance of $750/month (Dr. Jawerth has subsequently agreed to forego his      allowance.); and
- health insurance, and other benefits.

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

Under the terms of the Asset Purchase Agreement, Summus agreed to use reasonable commercial efforts to assist Dr. Jawerth in theprivate sale of up to 1,666,667 shares of Summus common stock held by him (representing $2.5 million in value) at a per share priceof not less than $1.50 per share. No assurance can be provided that we will be able to attract such an investment or that we willbe able to provide assistance to Dr. Jawerth to effect a private sale of his shares.  In addition, under the terms of Dr.Jawerth’s employment agreement, Summus is obligated to issue 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 as described above.  These optionswill be exercisable during the second through fifth year after issuance.  As of March 31, 2003, no shares subject to thisagreement have been sold.

 The Board of Directors may terminate Dr. Jawerth's employment at any time (i) after his “disability” (as defined in his employment agreement), (ii) for “cause” (as defined in his employment agreement), or (iii) without cause.  For purposes of his employment agreement, "cause" is defined as Dr. Jawerth's material breach of his employment agreement.  Prior to any termination for cause arising out of his alleged breach of his employment agreement, Dr. Jawerth shall be given written notice by the Board, following a majority vote of the Board, specifying the nature of the alleged breach and shall have twenty (20) business days in which to cure, or commence to cure, such breach.  If he effects such a cure or commences such a cure within the twenty (20) business day period, his employment, salary and benefits shall continue in full force and effect.  If Summus materially breaches this agreement, it shall have the same right to have the breach described in writing by Jawerth and the same twenty (20) business day cure period.
     If  Summus terminates Dr. Jawerth's employment without cause or for disability, or if Dr. Jawerth terminates his employment for “good reason” (as defined in his employment agreement), he shall be 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;
- the immediate vesting of all stock options granted to him; and 
- health benefits for one year at no greater cost to him than the cost he paid forsuch benefits immediately prior to his termination.

 
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For purposes of Dr. Jawerth’s employment Agreement, "good reason" is defined as:- a change in Dr. Jawerth's status, title, position or responsibilities whichrepresents an adverse change from his status, title, position orresponsibilities in effect immediately prior thereto; the assignment to Dr.Jawerth of any duties or responsibilities that are inconsistent with his status,title, position or responsibilities; or any removal of Dr. Jawerth from or failureto reappoint or reelect him to any such  position, status or title, exceptin connection with the termination of his employment for cause;
- a net reduction in the number of research scientists of his researchlaboratories as of the date of his employment agreement by more than fifteenpercent (15%) in any  year, except for resignations which are not promptedby management or which are approved or instructed by Dr. Jawerth, and for whichpositions the Company is rehiring;
- a net reduction in the fully funded budget of his laboratories for the coreresearch team in any six month period by more than ten percent (10%), by morethan five percent (5%) over any one year period, and by more than two andone-half percent (2 1/2%) over any two year period;
- the Invention Awards Program of Summus is changed without the approval of Dr.Jawerth; 
- the Board hires a chief executive officer who has not been approved by Dr.Jawerth; or
- a change of control occurs; for purposes of Dr. Jawerth’s employment agreementa “change of control” is defined as: 
- any person or entity becoming  the beneficial owner at least  fortypercent (40%) of the total voting power of Summus’ voting securities; 
- the approval by Summus’ shareholders of a merger, share exchange,consolidation or reorganization involving Summus and any other corporation orother entity that is not controlled Summus, the result of which is that lessthan fifty percent (50%) of the total voting power of the outstanding votingsecurities of Summus or of the successor corporation or entity after suchtransaction is held by the holders of Summus’ voting securities immediatelyprior to such transaction;
- the approval by the shareholders of a liquidation or dissolution of Summus, orthe approval of the sale or other disposition by Summus of all or substantiallyall of its assets, other than a transfer to a subsidiary of Summus);
- the cessation of the individuals who constitute the Board of Directors of Summusduring any period of twenty-four (24) consecutive months (the "IncumbentDirectors") to constitute at least two-thirds (2/3) of the Board ofDirectors; provided, however, that a director who is not a director at thebeginning of such period shall be deemed to be an Incumbent Director if suchdirector is elected or recommended for election by at least two-thirds (2/3) ofthe directors who are then Incumbent Directors, or if Dr. Jawerth votes for theelection of such director.

                   In the eventDr. Jawerth terminates his employment without good reason, he shall be entitledto receive an amount equal to two weeks of his then current salary for each yearof service under this Agreement.  He shall also be entitled to all health benefits for three (3) months at no greater cost to him than the cost hepaid for such benefits immediately prior to his termination.  In addition,if Dr. Jawerth terminates his employment without good reason, he shall return toSummus all stock options granted to him under his employment agreement.  

If Summus Company terminates Dr. Jawerth's employment for cause, he shall be entitled to receive two (2) weeks of his then current salary as severance pay.
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Under hisemployment agreement, Summus granted Dr. Jawerth, personally, a non-exclusive, non-transferable, world-wide license, without right tosublicense, to make and use New Technology (as defined in the Inventions AwardPlan) that is developed during the twelve months following the closing (the“Closing”) of the asset purchase agreement between Summus, Ltd. and HighSpeed Net Solutions, Inc.  Any rights of Dr. Jawerth under this license aresubject to his fiduciary obligations as a director and/or officer of Summus. This license shall terminate on the later of the date twelve months from theClosing or such later date as may be set by the Board, excluding Dr. Jawerth. If  Summus ceases to be a going concern prior to the license terminationdate, the license shall be perpetual and shall include the rights to sell andoffer to sell products and services using the licensed New Technology, and theright to sublicense such New Technology.

*Employment Agreements with Messrs.Ban, Lowrey, and Kremer*

 Summus entered into employmentagreements with each of Gary E. Ban, Robert S. Lowrey, and Christopher E. Kremer.  Messrs. Ban’s and Lowrey’semployment agreements are dated as of February 16, 2001, and Mr. Kremer’s is dated as of October 1, 2001. Theemployment agreements name Mr. Ban as the Chief Operating Officer; Mr. Lowrey as Chief Financial Officer; and Mr. Kremer asExecutive Vice President of Sales and Business Development, at annual base salaries as follows:

Name ofExecutive
Annual Base Salary
Gary E.Ban
$175,000
Robert S.Lowrey
$150,000
Christopher E.Kremer
$150,000
Mr. Kremer'soriginal annual salary as stated in his employment agreement was $200,000. Mr. Kremer agreed to reduce his annual salary to $150,000.

 Messrs. Ban and Lowrey elected onJuly 31, 2002, and Mr. Kremer elected on October 15, 2002, to reduce their cash compensation temporarily to help lower theCompany’s current cash consumption.  Messrs Ban, Lowrey, and Kremer are currently receiving cash compensation of$131,250, $112,500, and $100,000, respectively, on an annual basis.  The difference between the contract amount identified inthe table above for each of Messrs. Ban, Lowrey, and Kremer and their current cash salary amount is paid to them on a bi-monthlybasis in the form of options to buy common stock of the Company under the Company’s Alternative Compensation Plan. These options are priced at the closing market price of the Company’s common stock at the end of each bi-monthly pay period.

Under the terms of each of the employment agreements, the Board of Directors will, on an annual basis, review eachexecutive’s base salary in light of the base salaries paid to other executives of Summus and each executive’sperformance.  It may, in its discretion, increase the executive’s base salary by an amount deemed appropriate by theBoard.   In addition to his base salary, the Board, in its discretion, may pay the executive a bonus commensurate with otherbonuses paid to employees of Summus and take into account the total compensation paid to executives of other companies which wouldbe competitive for the executive’s services.

 Under their employment agreements,each of Messrs. Ban and Lowrey were also to receive a one-time bonus equal to 50 percent of his annual base salary, payable asmutually agreed between Summus and Mr. Ban or Mr. Lowrey, as applicable.  This bonus is equal to $75,000 in Mr.Lowrey’scase and $87,500 in Mr. Ban’s case.  These bonus amounts wereowed to each of Messrs. Ban and Lowrey as of February 16, 2001.   Mr. Lowrey entered into an amendment to his employment agreement in which heagreed to accept 75,000 restricted shares of the Company’s common stock and 150,000 warrants to purchase shares of commonstock; these warrants have an exercise price of $2.00 per share.  Mr. Banwas to receive his bonus amount in cash within six-months of May 23, 2002, basedon available funds.  Since funds were not available to pay Mr. Ban thisamount, he has the option, in his sole discretion, of waiting until Summus hasavailable funds to pay him this bonus amount or receiving restricted shares ofSummus common stock and warrants, based on terms offered to third partyinvestors of Summus, for the unpaid bonus amount owed to him.  As of thedate of this annual report, Mr. Ban has not received any cash payments relatedto this bonus amount.

 Each of these executives’employment agreements provided the executive with an automobile allowance of $600 per month.  Each executive has agreed toforego his automobile allowance. 

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 The employment agreements withMessrs. Ban, Lowrey and Kremer each have a term of three years.  Notwithstanding its stated term, the Board may terminate anyof the employment agreements at any time (i) after the executive’s “permanent disability” (as defined in theagreement), (ii) for “cause” (as defined in the agreement), (iii) without cause, or (iv) upon Summus, ceasing to engagein business.  For purposes of each of the employment agreements, “cause” is defined to mean (i) activeparticipation in fraudulent conduct against Summus, a conviction of or a plea of guilty or *nolo contendere* with respect to afelony involving theft or moral turpitude, an act or series of deliberate acts which were not taken in good faith by the executiveand which, in the reasonable judgment of the Board, results or will likely result in material injury to the business, operations orbusiness reputation of Summus, or an act or series of acts constituting willful malfeasance or gross misconduct; a substantial andcontinual refusal to perform the duties assigned to the executive; excessive absenteeism; or the executive’s voluntaryresignation without “good reason.”

 If Summus terminates theexecutive’s employment without cause, or the executive terminates the employment for “good reason” (as defined inthe agreement), the executive is entitled to receive:
- in the case of Messrs. Ban and Lowrey, a severance payment equal to what would have been his base salary, payable at such timesas his base salary would have been paid if his employment had not been terminated (or, at the election of the executive, in a lumpsum without discount), for up to six months; in the case of Mr. Kremer, he is to receive 40,000 shares of Summus common stock;
- in the case of Messrs. Ban and Lowrey, a *pro rata* portion of the bonus applicable to the calendar year in which thetermination occurs, but no less than a *pro rata* portion of the executive’s bonus for the preceding calendar year;
- in the case of Messrs. Ban and Lowrey, acceleration of the vesting of 100% of the unvested portion of his stock options or otherstock-based awards, together with the right to exercise such stock options or awards for a period equal to the greater of theremaining term for exercising such options or awards under the applicable agreement and/or plan, or one year following the date oftermination;
- other benefits, payable within 90 days after the date of the termination, accrued by him up to and including the date oftermination;
- in the case of Messrs. Ban, and Lowrey, continuation of the insurance provided by Summus for up to six months or a lump sumpayment of an amount equal to the fair value of such insurance; and
- reimbursement of all expenses incurred by the executive under the terms of the agreement. 

 For purposes of each of theemployment agreements, “good reason” is defined to include a reduction in the executive’s base salary orincentive compensation; a material reduction in position, duties and responsibilities; a change in the location of Summus’sheadquarters; or a material breach of the employment agreement.

 If Summus terminates theexecutive’s employment for “cause” or the executive terminates his employment without “good reason,”Summus has no further obligations to the executive except:
- as may be provided by the terms of retirement and other benefits plans;
- with respect to unpaid base salary and other benefits accrued and earned through the date of termination;
- any benefits provided by insurance policies; and
- reimbursement for all expenses incurred in accordance with the agreement prior to the date of termination.

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 In addition, termination forcause shall result in the executive’s immediate forfeiture of all unvested stock rights, stock options and other unvestedincentives and awards previously granted to him.

 If Summus terminates theexecutive’s employment upon a “cessation of business,” Summus is obligated to pay the executive his base salaryand provide the same health insurance benefits to which he is entitled until the earlier of (i) the expiration of the remainingportion of the term of the agreement or (ii) the expiration of the three-month period following the date of termination. Summus may make such payments in accordance with its regular payroll schedule or in a single lump sum payment, at its option.

 If the executive’s employmentis terminated as a result of a “change in control,” the executive is entitled to receive:
- in the case of Messrs. Ban, Lowrey and Kremer, severance compensation equal to what would have been his base salary, payable atsuch times as his base salary would have been paid if his employment had not been terminated (or, at the election of the executive,in a lump sum without discount), for the longer of 18 months or the remainder of what would have been the term of theagreement;
- in the case of Messrs. Ban, Lowrey and Kremer, a pro rata portion of the bonus applicable to the calendar year in which suchtermination occurs, but no less than a pro rata portion of the executive’s bonus for the preceding calendar year;
- in the case of Messrs. Ban, Lowrey and Kremer, acceleration of the vesting of 100% of the unvested portion of his stock optionsor other stock-based awards, together with the right to exercise such stock options or awards for a period equal to the greater ofthe remaining term for exercising such options or awards under the applicable agreement and/or plan or one year following the dateof termination;
- other benefits, payable within 90 days after the date of the termination, accrued by him up to and including the date oftermination;
- continuation of the insurance provided by Summus for up to six months or a lump sum payment of an amount equal to the fair valueof such insurance; and
- reimbursement of all expenses incurred by the executive under the terms of the agreement.

For purposes of each of the employment agreements, a “change in control” is deemed to occur if (i) Summus is a partyto any consolidation or merger in which it is not the continuing or surviving corporation, (ii) any person or entity becomes thebeneficial owner, directly or indirectly, of 30 % or more of the voting power of our capital stock, or (iii) Summus sells,exchanges or other otherwise transfers all or substantially all of its property and assets.   

 During the period of his employmentand for a period of six months following any termination of such employment, each of the executives is prohibited, whether directlyor indirectly, from:
- owning, managing or participating in the ownership, management or control of, or being employed or engaged by or otherwiseaffiliated as a consultant or independent contractor with, any other business entity engaged in the business of informationprocessing of multimedia over mobile and wireless networks within the United States in competition with      Summus;
- soliciting any business or contracts from any customers of Summus or its affiliates, including past or prospective customers(other than as necessitated by his position with us and in furtherance of our business interests);
- soliciting or attempting to induce any such customer to alter its business relationship with Summus; or
- soliciting or inducing any employee of Summus, to leave the employ of Summus or hiring any employee or any person who was anemployee of Summus or its affiliates within the 12-month period prior to such hiring. 

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Each of the employment agreements also contains customary covenants with respect to the non-disclosure of confidential orproprietary information regarding our business, prospects, finances, operations and trade secrets that have no finiteduration.

**Stock Option Plan**

 The following summary description ofour Amended and Restated 2000 Equity Compensation Plan (the “Plan”) is not intended to be complete and is qualified byreference to the copy of the Plan, filed as Exhibit 10.8 to this annual report on Form 10-K. 

 The Plan, as adopted by theshareholders on January 27, 2000, and subsequently amended by the Board of Directors is intended to provide incentives:
- to the officers and other employees of Summus and its subsidiaries by providing them with opportunities to purchase shares ofcommon stock in Summus 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”);
- to directors, officers, employees and consultants of Summus and its subsidiaries by providing them with opportunities topurchase shares of common stock in Summus pursuant to options granted under the Plan which do not qualify as ISOs(“non-qualified options”) (ISOs and non-qualified options being collectively referred to as “options”);and
- to directors, officers, employees and consultants of Summus, and its subsidiaries by providing them with stock appreciationrights, awards of restricted stock or deferred stock, stock awards, performance shares or other stock-based awards.

 The Plan is administered by theCompensation Committee (the “Committee”) consisting of two or more independent members of the Board of Directors. TheCommittee has the exclusive right to interpret, construe and administer the Plan, to determine the individuals associated withSummus and its subsidiaries from among the class of individuals eligible to whom options, awards and authorizations to makepurchases may be granted in accordance with the terms of the Plan, and to determine the number, form, terms, conditions andduration of any such grant.

*ISOs*.  ISOs may begranted at any time through the tenth anniversary of the effective date of the Plan (which was January 31, 2000).  The ISOexercise price is to be no less than 100% of the “Fair Market Value” (as defined in the Plan) of the common stock onthe grant date.  No ISO may be granted to an individual owning more than 10% of the total combined voting power of all classesof stock issued by Summus unless the purchase price of the underlying shares of common stock is at least 110% of the Fair MarketValue of the shares issuable on exercise of the ISO determined as of the date the ISO is granted. ISOs granted under the Plan mayhave maximum terms of not more than ten years (five years in the case of an individual that owns more than 10% of the totalcombined voting power of all classes of Summus stock) or such shorter period as the Committee specifies in an individualaward.  Generally, ISOs granted under the Plan may remain outstanding and may be exercised at any time up to three monthsafter the person to whom such ISO was granted is no longer employed. ISOs granted under the Plan are subject to the restrictionthat the aggregate Fair Market Value (determined as of the date of grant) of ISOs, which first become exercisable in any calendaryear, cannot exceed $100,000.

*Stock Appreciation Rights*.  Stock appreciation rights may be granted to eligible participants in tandem with an ISOor non-qualified option or may be granted independent of any related option.  A tandem stock appreciation right entitles theholder of the option, within the period specified for exercise of such option, to surrender the unexercised option or a portionthereof and receive in exchange a payment in cash or shares of common stock having an aggregate value equal to the amount by whichthe Fair Market Value of each share of common stock underlying the option (or portion thereof) surrender exceeds the per shareoption exercise price, multiplied by the number of underlying shares of common stock surrendered.  Each tandem stockappreciation right is subject to the same terms and conditions as the related option.

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

 Options and stock appreciation rightsgranted under the Plan are generally not transferable, except by will or the laws of descent and distribution, or under the termsof a qualified domestic relations order as defined by the Code or ERISA; however, non-qualified options (including a related tandemstock appreciation right) may be transferred to the extent determined by the Committee to be consistent with securities and otherapplicable laws and with our policy.
*Restricted Stock.  TheCommittee may make restricted stock awards to participants in the Plan as an incentive for the performance of future services thatwill contribute materially to the successful operation of Summus.  Awards of restricted stock may be made alone or in additionto, or in tandem with other awards made under the Plan. The Committee is to determine the purchase price, if any, to be paid forthe restricted stock, the length of the restriction period, the nature of the restrictions (e.g., in terms of theparticipant’s service or performance), whether the restrictions are to lapse at the end of the restriction period as to anyor all of the shares covered by the award, and whether dividends and other distributions on the restricted stock are to be paidcurrently to the participant or to Summus for the account of the participant.
*Deferred Stock.  TheCommittee may make deferred stock awards, together with cash dividend equivalents, to participants in the Plan, conditioned uponthe attainment of specified performance goals or other factors or criteria as the Committee determines. Deferred stock awards maynot be sold, transferred, pledged, assigned or encumbered during the deferral period, as specified by the Committee. At theexpiration of the deferral period, share certificates are to be delivered to the participant in a number equal to the shares ofcommon stock covered by the award. Upon termination of employment during the deferral period, the participant shall forfeit thedeferred stock; however, the Committee may accelerate the vesting of the award in the event of termination of employment due todeath, disability or retirement, or in the event of hardship or other special circumstances.
*Stock Awards.  Stockawards are to be granted only in payment of compensation that has been earned or as compensation to be earned.  All shares ofcommon 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 ofthe stock award’s grant. Shares of common stock subject to a stock award may be issued or transferred to the participant atthe time of grant or at a subsequent time, or in installments, as the Committee determines. A stock award will be subject to theterms and conditions the Committee determines; however, upon issuance of the shares, the participant shall be entitled to receivedividends, exercise voting rights and exercise all other rights of a shareholder except as otherwise provided in the stockaward.
*Performance Shares. Performance shares may be awarded to participants as an incentive for the performance of future services to Summus.  Awards ofperformance shares may be made either alone or in addition to or in tandem with other awards granted under the Plan. The Committeeis to determine and designate those participants to whom performance shares are to be awarded, the performance period and/orperformance 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 performance shares, and the other terms and conditions of such awards.

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*Other Stock-BasedAwards.  The Committee may grant other awards that are valued in whole or in part by reference to, or are based on, thecommon stock, including convertible preferred stock, convertible debentures, exchangeable securities, phantom stock and stockawards or options valued by reference to book value or performance.
*Administration.  The Planprovides that the Committee may make equitable adjustments in the aggregate number of shares of common stock that may be awardedunder the Plan, the number of shares and class of stock that may be subject to an award, the purchase price to be paid per shareunder 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, ofSummus, the sale or other disposition of all or a portion of its assets and certain other transactions involving Summus; however,the Plan requires that all such adjustments shall be made such that ISOs granted under the Plan shall continue to constitute ISOswithin the meaning of Section 422 of the Code.

 Authorized but unissued shares ofcommon stock of Summus, shares of common stock that are not delivered or purchased under the Plan, and shares reacquired by Summus,for reasons including a forfeiture, termination of employment, expiration or cancellation of an option, can be issued under thePlan. Under the Plan, 2,000,000 shares of common stock were initially reserved for issuance. On February 13, 2001, the Boardadopted resolutions to amend the Plan to increase that number to 6,500,000 shares, and on  May 23, 2002,  the Board adopted resolutions to amend the Plan to increase that number to 8,500,000 shares.  As of March 15, 2003, we had outstandingoptions exercisable for 7,673,379 shares of common stock.
*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 typesof amendments require approval of our shareholders and no such action may be taken which adversely affects any award previouslygranted to a participant under the Plan without the written consent of the participant.

**Alternative Compensation Plan**

 In order to conserve Summus’cash position, the Board of Directors adopted an Alternative Compensation Plan (the “Alternative Plan”) on August 1,2002.  Under the Alternative Plan, each officer of the Company may elect to receive any portion of their compensation in theform of fully vested non-qualified stock options.  The options will have an exercise price equal to the Fair Market Value ofthe our  common stock based on the closing price of our common stock at the end of each bi-monthly payroll period.  Allof the options granted under this plan are issued under the Amended and Restated 2002 Equity CompensationPlan.

Officers may elect percentage increments of 5% starting at a minimum level of 15% of their cash compensation that they mayreceive under the Alternative Plan.  The election may be terminated at the sole discretion of the Board of Directors. Currently, Dr. Jawerth and Messrs. Ban, Lowrey, participate in the Alternatative Plan and have elected to receive 25% of theircompensation under the Alternative Plan.  Mr. Kremer participates in the Alternative Plan and has elected to receive 33% ofhis compensation under the Alternative Plan. 

**Inventions Awards Plan**

 The following summary description ofour Inventions Awards Plan is not intended to be complete and is qualified by reference to the copy of the Inventions Awards Plan,filed as Exhibit 10.40 to our Form 10 filed with the Securities and Exchange on September 28, 2001.

Summus established the Inventions Awards Plan, effective October 30, 2000, to provide incentives to eligible employees (suchemployees being listed in a schedule to the plan) by providing them with opportunities to receive additional compensation as aresult of their development of enhancements or new methods involving the business of Summus that generate revenue for us(“New Technology”).  New Technology is defined under the plan to exclude existing technology of ours or technologyacquired from Summus, Ltd.

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 Under the plan, we are to set aside5% of the gross revenues derived from the licensing or sale of New Technology (or products incorporating such technology) fordistribution among eligible employees.  Dr. Jawerth and a designee of the Board of Directors are, on a quarterly basis, tocalculate the amount of funds to be set aside and the amounts to be received by eligible employees.  Such determinations aresubject to being overruled by 70% of the members of the Board, excluding Dr. Jawerth.  If Summus sells the rights to NewTechnology, eligible employees shall be entitled to an award of 10% of the gross proceeds.  If an eligible employee (otherthan Dr. Jawerth) ceases to be employed by Summus, for any reason, such employee’s right to awards under the plan will alsocease.

 All eligible employees must executeour standard agreement concerning assignment to Summus of inventions developed by such employees while employed by us. Eligible employees may also apply to have technology that is not owned by Summus (defined as “Outside Technology”)commercialized by us.  If we elect to commercialize such technology, the eligible employee(s) shall receive an award equal to5% (10%, if two or more eligible employees submit the Outside Technology) of the gross revenues derived from the licensing or saleof such technology (or products incorporating such technology).

 Under the plan, Summus may, at itsoption, initiate a spin-off company to develop a New Technology or an accepted Outside Technology.  In such event, eligibleemployees may be selected to join the spin-off company.  If the eligible employee(s) accepts a position in the spin-ofcompany, his or her rights to awards under the plan are to be surrendered for 25% of the founders’ equity in the spin-offcompany.

 As of the date of annual report,there are several eligible employees, including Dr. Jawerth, that have been credited with the development of New Technology sincethe establishment of the Inventions Awards Plan.  As awards are earned under this plan, they are recorded as costs of wirelessapplications and contracts.  As of the date of this annual report, no awards have been paid to the eligible employees inconnection with such New Technology.      

**Compensation of Directors**

 The members of the Board of Directorswho are not executive officers or employees of the Company receive:
- a one-time grant of options to purchase 30,000 shares of our common stock upon their initial appointment;
- an annual grant of options to purchase 40,000 shares of our common stock on April 1 of each year, or a pro rata portion if aDirector’s service starts after April 1 of a particular year;
- an annual grant of options to purchase 2,500 shares of common stock for each committee of the Board of Director’s on whichhe serves; and
- reimbursement of travel expenses for members of the Board of Directors who reside outside of the Raleigh, N.C. area. 

 Each of these grants tomembers of our Board of Directors as described above have an exercise price equal to the fair market value of our common stock onthe date of grant and vest quarterly over a one-year period from the date of grant.

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  During fiscal year 2002, the outside members of our Board of Directors were issued the following number of options.

**Name**

**Options Issued**

**Exercise Price**

Neil R. Guenther**(1)**

35,796

$0.47

George H. Simmons

30,000

$1.35

George H. Simmons

45,000

$1.39

Richard F. Seifert**(2)**

30,000

$0.62

Herman Rush

45,000**(3)**

$1.39

____________________(1) Dr. Guenther was appointed to the Board of Directors on February 17, 2003 and received his initial grant of 30,000 optionsand a pro rata annual grant for his service on the Board and his service on the Compensation and Audit Committees.

(2) Mr. Seifert resigned as an Executive Vice President of Summus in July 2002 and received a pro rata annual grant for hisservice on the Board.   

(3) Mr. Rush resigned from the Board on August 19, 2002 and vested in only 3,750 of these options.

**Compensation Committee Interlocks and Insider Participation**

 During the last fiscal year,George H. Simmons and Herman Rush served as members of the Compensation Committee of the Company’s Board of Directors,neither of which is or has been an officer or employee of the Company.  Mr. Rush resigned as a Director of the Company and asa member of the Compensation Committee as of August 19, 2002.  As of March 31, 2003, the Compensation Committee consisted ofGeorge H. Simmons and Neil R. Guenther, none of which is or has been an officer or employee of the Company.  No interlockingrelationship existed during the last fiscal year between the Company’s Board of Directors or Compensation Committee and theboard of directors or compensation committee of any other company.

**ITEM 12.               SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT.**

The following table sets forth, as of March 15, 2003, certain information regarding beneficial ownership of our common stock by:(i) each of our directors, (ii) each Named Executive Officer, as such term is defined in the regulations of the SEC, (ii) alldirectors and executive officers as a group and (iii) each person who is known by Summus to own beneficially more than 5% of theoutstanding shares of our common stock.  As of March 15, 2003, we had 57,403,703 shares of common stock issued andoutstanding.  As of that date, we also had 2,328 shares of non-voting Series A convertible preferred stock issued andoutstanding.

Beneficial ownership is determined in accordance with rules of the Securities and Exchange Commission and includes generallyvoting power and/or investment power with respect to securities. Shares of common stock subject to options currently exercisable orexercisable within 60 days of March 15, 2003, are deemed outstanding for purposes of computing the percentage beneficially owned bythe person holding the options but are not deemed outstanding for purposes of computing the percentage beneficially owned by anyother person. The persons and entities named in the table have sole voting power and sole investment power of the shares reflectedby their names, except as otherwise noted.

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Unless otherwise specified, the address for each beneficial owner is c/o Summus, Inc. (USA), 434 Fayetteville Street, Suite 600,Raleigh, North Carolina 27601.

Name and Address ofBeneficial Owner(1)

Shares Owned Beneficially

Percent of Shares of CommonStock Outstanding

Bjorn D. Jawerth

15,207,421(2)

25.81%

Kerstin Jawerth

3,992,287(3)

6.92%

Neil R. Guenther

2,465,636(4)

4.19%

Richard F. Seifert

1,095,847(5)

1.88%

Herman Rush(12)

76,583(13)

*

George H. Simmons

75,000(6)

*

Gary E. Ban

718,798(7)

1.24%

Robert S. Lowrey

718,225(8)

1.24%

Christopher E.  Kremer

288,149(9)

*

Leonard T. Mygatt, III

694,595(10)

1.20%

All Executive Officers and Directors as a

Group (10 persons) (11)

21,340,254(14)

33.83%

_____________________________________________  *     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 16 of theSecurities and Exchange Act of 1934, as amended (the "Exchange Act").

(2)

 Includes (i) 3,717,296 shares of common stock, and 274,991 shares of common stock underlyingwarrants owned by Kerstin Jawerth with respect to which Dr. Jawerth has sole voting power and (ii) 1,242,366 shares of common stockunderlying options that are exercisable within 60 days of March 15, 2003.

(3)

Dr. Bjorn Jawerth has sole voting power over these shares. Includes 274,991 of common stockunderlying warrants that are exercisable within 60 days of March 15, 2003.   

(4)

Includes (i) 40,000 of common stock held in the names of Dr. Guenther’s children, (ii)1,409,924 shares of common stock underlying warrants that are exercisable within 60 days of March 15, 2003, and (iii) 80,000 sharesof common stock underlying warrants held in the names of Dr. Guenther’s children that are exercisable within 60 days of March15, 2003.

(5)

Includes 535,781 shares of common stock underlying options and 400,000 shares of common stockunderlying warrants that are exercisable within 60 days of March 15, 2003.

(6)

Includes 75,000 shares of common stock underlying options that are exercisable within 60 days ofMarch 15, 2003.

(7)

Includes 384,082 shares of common stock underlying options and 12,546 shares of common stockunderlying warrants that are exercisable within 60 days of March 15, 2003.

(8)

Includes 480,053 shares of common stock underlying options and 150,000 shares of common stockunderlying warrants that are exercisable within 60 days of March 15, 2003.

(9)

Includes 270,809 shares of common stock underlying options that are exercisable within 60 days ofMarch 15, 2003.

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(10)

 Includes 262,991 shares of common stock underlying options and 16,728 shares of common stock underlyingwarrants that are exercisable within 60 days of March 15, 2003.

(11)
 Includes shares beneficially owned by all current directors and executiveofficers.(12) Mr. Rush resigned from the Board of Directors effective August 19, 2002.(13)Includes 76,583 shares of common stock underlying options that are exercisable within 60 days of March 15,2003.(14) Includes 3,336,415 shares of common stock underlying options and 2,244,189 shares underlying warrants that areexercisable within 60 days of March 15, 2003.  
**Securities Authorized for Issuance Under Equity Compensation Plans**

**Equity Compensation Plans Not Approved by the Shareholders of the Summus**

**Number of Securities tobe issued upon exercise of outstanding options**

**Weighted-averageexercise price ofoutstanding options**

**Number of securitiesremaining availablefor future issuance under equity compensation plans****(3)**

 

(a)

(b)

(c)

2000 Amended andRestated Equity Compensation Plan **(1)**

                         7,126,572

$2.35

1,373,428

Stock Options issuedoutside of equity compensation plans **(2)**

 429,603

 $1.44

 N/A

 Total

7,556,175

$2.29

1,373,428

 

 

 

 

 

 

(1) The 2000 Amended and Restated Equity Compensation Plan was originally approved by shareholders and authorized2,000,000 shares for issuance. Theplan was subsequently amended twice by the Board to increase the authorized number of shares to 8,500,000 and is thereforeclassified as a plan not approved by our shareholders.

(2) These options were granted to Dr. Jawerth outside of the 2000 Amended and Restated Equity Compensation Plan since a maximumof 500,000 options can only be granted pursuant to such plan in any one fiscal year.

(3) This column excludes securities reflected in column (a)

There are no equity compensation plans approved by shareholders at the present time.

The 2000 Amended and Restated Equity Compensation Plan wascreated in 2000 for the purpose of granting incentive or non-qualified stock options to employees of, or contractors for, ordirectors of the Company. A total of 2 million shares were initially authorized under the plan.   Subsequently, the Boardamended the plan two times to increase the authorized shares to 6.5 million and then to 8.5 million.  Options granted underthis plan were priced either at the fair market value of our common stock on the date of grant or at prices below the fair marketvalue of our common stock and have a life of ten (10) years from their date of grant, subject to earlier termination as set forthin such plan.  As of December 31, 2002, this plan is still in effect.

-67-
   
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For a further description of each of the stock option plansdescribed above, please see Notes 15 and 16 to the Consolidated Financial Statements herein.

**ITEM 13.        CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.**

Rick Seifert resigned as an Executive Vice President of Summus in July 2002.   On July 9, 2002, Mr. Seifert entered into aconsulting agreement in which he was paid a consulting fee of $10,000 per month for four months, for a total of $40,000.  Inhis consulting agreement, Summus also agreed to pay Mr. Seifert a commission of 7% of all capital raised by him and received bySummus.  In the fiscal year ended December 31, 2002, Mr. Seifert earned commissions of $110,139 for these capital raisingactivities, of which $93,417 has been paid.  The remaining $16,722 is due to Mr. Seifert.  In addition, Mr. Seifertreceived a total of 260,781 options in connection with his capital raising efforts for Summus, the detail for which is set forth inthe chart below. Mr. Seifert’ consulting agreement expired in January 2003, and he is no longer receiving any commissions oroptions for any capital raising activities for Summus.

**Grant Date**

**Number of Options Granted**

**Exercise Price**

5/23/02

16,713

$1.35

5/23/02

16,713

$1.70

5/23/02

16,713

$1.30

5/23/02

16,713

$1.13

5/23/02

16,713

$1.10

5/23/02

16,713

$0.95

5/23/02

16,713

$0.96

6/30/02

 8,250

$0.61

7/19/02

15,000

$0.38

9/19/02

20,090

$1.24

9/19/02

20,090

$0.59

9/19/02

20,090

$0.72

9/19/02

20,090

$0.52

9/19/02

20,090

$0.51

9/19/02

20,090

$0.31
   
All of the options in this table were fully vested and exercisable on their date of grant and granted pursuant to Summus’Amended and Restated 2000 Equity Compensation Plan.   

**Item 14.        Controls and Procedures**

Under the supervision and with the participation of our management, including our principal executive officer and principalfinancial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls andprocedures, as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, within 90 days of the filingdate of this report (the “Evaluation Date”).  Based upon this evaluation, our principal executive officer andprincipal financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective suchthat the material information required to the included in our Securities and Exchange Commission (“SEC”) reports isrecorded, processed, summarized, and reported within the time periods specified in SEC rules and forms relating to the Company andwas made known to them by others within those entities, particularly during the period when this report was being prepared.

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Table    of Contents

In addition, there were no significant changes in our internal controls or in other factors that could significantly affectthese controls subsequent to the Evaluation Date. We have not identified any significant deficiencies or material weaknesses in ourinternal controls, and therefore there were no corrective actions taken.

**PART IV**

**ITEM 15.        EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.**

(a)(1)

 Financial Statements.  See Index to Financial Statements on page F-1.

(a)(2)

 Financial Statement Schedules have been omitted because of the absence of conditionsunder 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 annual report on Form 10-K. The Exhibits designated by (*)  have been previously filed with the Securities and Exchange Commission and are incorporated byreference herein.

 
ExhibitNumber
ExhibitDescription

 3.1*
 Amendedand Restated Articles of Incorporation, filed February 28, 2000 (incorporated by reference to Exhibit 3.1 to our Annual Report forthe fiscal year ended December 31, 2001)
 3.2*
 SecondAmended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to our Form 10 filed on July 5, 2001)
 3.3*
 Articlesof Amendment and Statement of Rights and Preferences of the 8% Series A Convertible Preferred Stock, filed March 3, 2000(incorporated by reference to Exhibit 3.3 to our Annual Report for the fiscal year ended December 31, 2001)
 3.4*
 Articlesof Correction filed June 23, 2000 to Articles of Amendment, filed March 2, 2000 (incorporated by reference to Exhibit 3.4 to ourAnnual Report for the fiscal year ended December 31, 2001)
 3.5*
Amendment to Amended and Restated Articles of Incorporation , filed  February 27, 2002, changing our name toSummus, Inc.(USA) (incorporated by reference to Exhibit 3.6 to our Annual Report for the fiscal year ended December 31, 2001)
 3.6*
Amendment to Amended and Restated Articles of Incorporation, filed February 27, 2002, increasing our authorized common stock, parvalue $.001, from 50,000,000 shares to 100,000,000 shares (incorporated by reference to Exhibit 3.7 to our Annual Report for thefiscal year ended December 31, 2001)
 4.1*
 SpecimenCommon Stock Certificate (incorporated by reference to Exhibit 4.1 to our Annual Report for the fiscal year ended December 31,2001)
 4.2*
 Formof  Subscription Agreement for private placement sales of our common stock (incorporated by reference to Exhibit 4.2 to ourAnnual Report for the fiscal year ended December 31, 2001)
-69-
   
Table    of Contents

 4.3*
 Form ofSelling Shareholders Agreement in connection with private placement sales of our common stock (incorporated by reference to Exhibit4.3 to our Annual Report for the fiscal year ended December 31, 2001)
4.4*
 Formof  Warrant Agreement for warrants issued in connection with private placement sales of our common stock (incorporated byreference to Exhibit 4.4 to our Annual Report for the fiscal year ended December 31, 2001)
10.1*
 Asset PurchaseAgreement, dated October 30, 2000, among Summus, Summus, Ltd., and the stockholders named therein (incorporated by reference toExhibit 10.01 to our Current Report on Form 8-K dated February 16, 2001)
10.2*
 Amendment Number 1to Asset Purchase Agreement, dated as of December 30, 2000, among Summus, 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)
10.3*
 Amendment toAsset Purchase Agreement, dated as of January 30, 2001, among Summus, Summus, Ltd. and the stockholders named therein (incorporatedby reference to Exhibit 10.03 to our Current Report on Form 8-K dated February 16, 2001)
10.4*
 Agreement forTransfer of All Rights and Reservation of License in Software, dated September 4, 2000, betweenPlusStation, LLC, Niksa Radovic and Summus, Ltd. (incorporated by reference to Exhibit 10.9 to our Form 10 filed on July 5, 2001) 
10.5*
 EquityCompensation Plan, effective January 31, 2000 (incorporated by reference to Exhibit 10.05 to our Quarterly Report on Form 10-Qfiled for the quarter ended March 31, 2000)
10.6*
 Amendment toEquity Compensation Plan, effective May 1, 2000 (incorporated by reference to Exhibit 10.26 to our Form 10 filed on July 5,2001)
10.7*
 Amendment toSummus Equity Compensation Plan, effective February 16, 2001 (incorporated by reference to Exhibit 10.09 to our Current Report onForm 8-K dated February 16, 2001)
10.8
Amendment to Summus Equity Compensation Plan, effective May 23, 2002
10.9*
 ExecutiveEmployment Agreement, dated as of February 16, 2001, between Summus and Bjorn Jawerth (incorporated by reference to Exhibit 10.06to our Current Report on Form 8-K dated February 16, 2001)
10.10*
 Amendment to ExecutiveEmployment Agreement of Bjorn D. Jawerth, dated as of February 28, 2001 (incorporated by reference to Exhibit 10.11 to our AnnualReport for the fiscal year ended December 31, 2001)
10.11*
 Executive EmploymentAgreement, dated as of February 16, 2001, between Summus and Gary E. Ban (incorporated by reference to Exhibit 10.12 to our AnnualReport for the fiscal year ended December 31, 2001)
10.12*
 Executive EmploymentAgreement, dated as of October 1, 2001,  between Summus and Christopher E. Kremer (incorporated by reference to Exhibit 10.14to our Annual Report for the fiscal year ended December 31, 2001)
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10.13*
 Executive EmploymentAgreement, dated as of February 16, 2001,  between Summus and Robert S. Lowrey (incorporated by reference to Exhibit 10.15 toour Annual Report for the fiscal year ended December 31, 2001)
10.14*
 Lease Agreement, dated asof October 15, 1999, as modified on March 23, 2000 and June 9, 2000, between Phoenix Limited Partnership of Raleigh and Summus(incorporated by reference to Exhibit 10.31 to our Form 10 filed on July  5, 2001)
10.15*
 Lease Agreement, dated asof August 12, 1999, between Phoenix Limited Partnership of Raleigh and Summus, Ltd. (incorporated by reference to Exhibit 32 to ourForm 10 filed on July 5, 2001) 
10.16*
 Lease ModificationAgreement Number 1, dated as of December 22, 1999, between Phoenix Limited Partnership of Raleigh andSummus, Ltd. . (incorporatedby reference to Exhibit 33 to our Form 10 filed on July 5, 2001) 
10.17*
 Summus Invention AwardsPlan, effective October 30, 2000 (incorporated by reference to Exhibit 10.40 to Amendment No. 1 to our Form 10 filed on September28, 2001)       
10.18*
 Master Porting Agreement,dated July 27, 2001, between Summus and Samsung Electronics America (incorporated by reference to Exhibit 10.41  to Amendment No. 2 to our Form 10 filed on October 31, 2001. 
10.19
 AlternativeCompensation Plan, adopted as of August 1, 2002.
10.20
 AuditCommittee Charter, adopted as of February 17, 2003.
21.1
Subsidiaries of Summus – None
99.1
Section 302 Certificate of Chief Executive Officer
99.2
Section 302 Certificate of Chief Financial Officer
**Reports on Form 8-K**

 During the fourth quarter of the yearended December 31, 2002, we filed with the SEC a Current Report on Form 8-K (Item 5) on November 25, 2002.  This 8-K containeda letter to our shareholders.

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Table    of Contents

**INDEX TO FINANCIALSTATEMENTS**

**Page****Consolidated      Financial Statements of Summus, Inc. (USA)** 
Independent Auditors’ Report of      Ernst & Young LLP
  F-2
Consolidated      Balance Sheets at December 31,      2002 and 2001
  F-3
Consolidated      Statements of Operations for the      Years Ended December 31, 2002, 2001 and 2000
  F-5
Consolidated      Statements of Shareholders’      Deficit for the Years Ended December 31, 2002, 2001 and 2000
  F-6
Consolidated      Statements of Cash Flows for the      Years Ended December 31, 2002, 2001 and 2000
  F-8
Notes to      Consolidated Financial Statements
  F-10
 

**Consolidated Financial      Statements of High Speed Net Solutions, Inc.**

 

Independent Auditors’ Report of      Ernst & Young LLP
  F-43
Statements of Operations for the      Year Ended December 31, 2000
  F-44
Statements of Shareholders’      Deficit for the Year Ended December 31, 2000
  F-45
Statements of Cash Flows for the      Year Ended December 31, 2000
  F-46
Notes to the Financial Statements
  F-47
 

F-1
   
 

Report of Independent Auditors

 

The Board of Directors and ShareholdersSummus, Inc. (USA)

 

We have audited the accompanying consolidated balance sheets of Summus, Inc. (USA) as ofDecember 31, 2002 and 2001, and the related consolidated statements of operations, shareholders’ equity (deficit) and cashflows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility ofSummus, Inc. (USA)’s management. Our responsibility is to express an opinion on these financial statements based on ouraudits.

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

In our opinion, the financial statements referred to above present fairly, in all materialrespects, the consolidated financial position of Summus, Inc. (USA) at December 31, 2002 and 2001 and the consolidated results ofits operations and its cash flow for each of the three years in the period ended December 31, 2002, in conformity with accountingprinciples generally accepted in the United States.

The accompanying financial statements have been prepared assuming that Summus, Inc. (USA)will continue as a going concern. As more fully described in Note 1, Summus, Inc. (USA) has incurred operating losses sinceinception and will require additional capital in 2003 to continue operations. These conditions raise substantial doubt aboutSummus, Inc. (USA)’s ability to continue as a going concern. Management’s plans in regard to these matters are alsodescribed in Note 1. The financial statements do not include any adjustments to reflect the possible future effects on therecoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome ofthis uncertainty.

 

/s/ Ernst & Young LLP

 

Ernst & Young LLPMarch 21, 2003Raleigh, North Carolina

F-2
   
Summus, Inc. (USA)

Consolidated  Balance Sheets
  
**December 31**
 
**2002**

**2001**

**Assets**
  
Current assets:
  
Cash

  $
 25,990
 $
 115,972
Accounts receivable

74,261

65,089

Prepaids and other current assets

70,000

12,428

Total current assets

170,251

193,489
 
Equipment, software and furniture, net

496,733

776,977

Other assets

34,190

 33,058
                       
Total assets

$ 
701,174 
  $ 
 1,003,524
F-3
    
**December 31**

**2002**

**2001**

Liabilities and shareholders’ deficit
  
Current liabilities:
  
Accounts payable and accrued expenses

$

 4,186,610 
$

 4,659,631 
Accrued salaries and related costs

564,260 

506,147 

Current portion of notes payable

269,588 

371,613 

Capital lease obligations, current portion

77,690 

221,197 

Preferred stock dividends payable

46,878 

310,120 

Deferred redeemable feature

– 

576,000 

Deferred revenue

7,285 

– 

Total current liabilities

5,152,311 

6,644,708 
   
Capital lease obligations, less current portion

– 

67,311 

Notes payable, less current portion

12,917 

– 
   
Shareholders’ deficit:
  
Convertible preferred stock, Series A, $0.001 par value;     5,000,000 shares authorized,2,328 and 2,000 shares     issued and outstanding, respectively (liquidation     preference of $1,000 per share)

2,328,312 

2,000,000 

Convertible preferred stock, Series B, $0.001 par value;     6,500 shares authorized, 6,000shares issued and     outstanding at December 31, 2001

– 

6 

Common stock, $.001 par value, authorized 100,000,000     shares; issued and outstanding54,919,276 and 37,151,478,     respectively

 54,919 

37,151 

Additional paid-in capital

36,669,211 

27,399,045 

Stock purchase receivable

– 

(75,000)

Deferred compensation

(227,132)

(534,456)

Accumulated deficit

(43,061,745)

(34,307,622)

Treasury stock, at cost (38,500 shares)

(227,619)

(227,619)

Total shareholders’ deficit

(4,464,054)

(5,708,495)

Total liabilities and shareholders’ deficit

$
 701,174 
$
 1,003,524 
*See accompanying notes.*

F-4
   
Summus, Inc. (USA)

Consolidated Statements of Operations

**Year ended December31** ** **
**2002**
** **
**2001**
** **
**2000**

Revenues:
      
 Contracts and license fees

$
202,819  

$
749,758 

 $

1,068,658 

 Wireless applicationsand contracts
 
204,133 
 
– 
 
– 

Total revenues
 
406,952 
 
749,758 
 
1,068,658 

Cost of revenues:
  
  
 
Contracts and license fees
 
         63,846 
 
299,554 
 
398,326 

Wireless applications and contracts
 
118,263 
 
– 
 
– 

Total cost of revenues
 
182,109 
 
299,554 
 
398,326 

Gross profit
 
224,843 
 
450,204 
 
670,332 
    
 
Selling, general and administrative expenses
 
6,155,416 
 
7,740,867 
 
6,180,862 

Non-cash compensation
 
364,000 
 
956,321 
 
2,127,962 

Research and development
 
918,948 
 
952,605 
 
1,159,833 

Non-cash consulting
 
887,992 
 
– 
 
– 

Non-cash settlements
 
– 
 
1,132,352 
 
– 

Loss before other income (expense)
 
(8,101,513)
 
(10,331,941)
 
(8,798,325)

Other income (expense):
   
Gain on sale of stock of equity investee
 
– 
 
– 
 
3,680,065 

Participation in loss of equity investee
 
– 
 
– 
 
(6,356,932)

Interest income (expense), net
 
(469,571)
 
(56,570)
 
23,911 

Total other income (expense)
 
(469,571)
 
(56,570)
 
(2,652,956)

Loss from continuing operations
 
(8,571,084)
 
(10,388,511)
 
(11,451,281)

Loss from operations of discontinued Rich Media      Direct business
 
– 
 
(135,798)
 
– 

Loss on disposal of Rich Media Direct business
 
– 
 
(215,500)
 
– 

Net loss

$
(8,571,084)

$
(10,739,809)

$
(11,451,281)

Net loss applicable to common shareholders:
 
   
Net loss

 $

(8,571,084)

  $

(10,739,809)

  $

(11,451,281)

Preferred stock dividends
 
(183,039)
 
(153,700)
 
– 

Net loss applicable to common shareholders

$
(8,754,123)

$
(10,893,509)

$
(11,451,281)

Per share amounts (basic and diluted):
     
 
Loss applicable to common shareholders fromcontinuing operations

 $ (0.19)
 $
 (0.30)

 $
(0.35)

Loss applicable to common shareholders fromdiscontinued operations

 $
      – 

$
  (0.01)

 $
 –

Net loss per share (basic and diluted)

$
  (0.19)

$
(0.31)

$
(0.35)

Weighted average common shares outstanding
 
47,149,301 
 
31,806,333 
 
9,546,768 

Recapitalization resulting from theSummus, Ltd.     asset acquisition
 
– 
 
2,924,004 
 
23,392,035 

Weighted average shares of common stock     outstanding giving effect to the recapitalization
 
47,149,301 
 
34,730,337 
 
32,938,803 

*  Selling, general and administrative expenses in 2002, 2001 and 2000 exclude $1.3million, $1.0 million, and $2.1 million, respectively, of non-cash compensation and consulting charges.

*See accompanying notes.*

F-5
   
Summus, Inc. (USA)

Consolidated Statementsof Shareholders’ Equity (Deficit)

 

**Preferred      Stock**

 

 

**Additional**
 

**   Series      A**

**Series      B**

**Common Stock**

**Paid-In**

 

**Shares**

**Amount**

**Shares **

**Amount**

**Shares**

**Amount**

**Capital**
 
  
 

 

 

 

 

 

 

 

**Balance at December 31, 1999**

–

$           –  

4,000

$         4     

9,086,834 

$9,087 

$15,299,433 

Deferred      compensation recognized in           connection with the issuance of           stock options

 –

 –  

 –

 –     

 – 

 – 

 3,106,472 

Exercise      of stock options

–

–  

–

–     

498,104 

498 

(475)

Amortization      of deferred compensation

–

–  

–

–     

– 

– 

– 

Sales of      stock by equity investee

–

–  

–

–     

– 

– 

1,323,792 

Net loss      for 2000

–

–  

–

–     

– 

– 

– 
 
 
**Balance at December 31, 2000**

–

–  

4,000

4     

9,584,938 

9,585 

19,729,222 

Recapitalization      resulting from the           Summus, Ltd. asset acquisition

 2,000

 2,000,000  

 2,000

 2     

 23,392,035 

 23,392 

 (3,734,020)

Elimination      of deferred revenue           resulting from recapitalization

 –

 –  

 –

 –     

 – 

 – 

 1,834,065 

Common      stock options granted for           services

 –

 –  

 –

 –     

 – 

 – 

 936,409 

Common      stock and warrants sold for           cash

 –

 –  

 –

 –     

 2,978,390 

 2,977 

 6,468,935 

Preferred      stock dividends

–

–  

–

–     

– 

– 

– 

Common      stock issued in partial           settlement of loss contingency

 –

 –  

 –

 –     

 550,000 

 550 

 419,436 

Deferred      compensation recognized in           connection with the issuance of           stock options

–

 –  

 –

 –     

 – 

 – 

 355,000 

Reversal      of deferred compensation of           forfeited stock options

–

–  

–

–     

– 

– 

(551,897)

Amortization      of deferred compensation

–

–  

–

–     

– 

– 

– 

Common      stock issued in settlement of           amounts due to related parties

–

–  

–

–     

250,000 

250 

435,565 

Common      stock and warrants issued in           partial settlement of vendor           liabilities

 –

 –  

 –

 –     

 390,072 

 391 

 1,503,815 

Stock      option exercises

–

–  

–

–     

6,043 

6 

2,515 

Cash      collection on stock purchase           receivable

–

–  

–

 –     

– 

 – 

 – 

Net loss      for 2001

–

–  

–

–     

– 

– 

– 
 
 
**Balance at December 31, 2001**

2,000

$2,000,000  

6,000

  $              6     

37,151,478 

$37,151 

$27,399,045 
  
 
   
Summus, Inc. (USA)

Consolidated Statementsof Shareholders’ Equity (Deficit)(continued)

 

**Stock**

 

 

 

**Total**

 

**Purchase**

**Deferred**

**Accumulated**

**Treasury**

**Shareholders’**

 

**Receivable**

**Compensation**

**Deficit**

**Stock**

**Equity      (Deficit)**
 
 
**Balance at December 31, 1999**

$         – 

$                  – 

$(11,962,832)

$           – 

$    3,345,692 

Deferred      compensation recognized in            connection with the issuance of            stock options

 – 

 (3,106,472)

 – 

 – 

 – 

Exercise      of stock options

– 

– 

– 

– 

23 

Amortization      of deferred compensation

– 

2,127,962 

– 

– 

2,127,962 

Sales of      stock by equity investee

– 

– 

– 

– 

1,323,792 

Net loss      for 2000

– 

– 

(11,451,281)

– 

(11,451,281)
 
 
**Balance at December 31, 2000**

– 

(978,510)

(23,414,113)

– 

(4,653,812)

Recapitalization      resulting from the            Summus, Ltd. asset acquisition

 – 

 – 

 – 

 (227,619)

 (1,938,245)

Elimination      of deferred revenue            resulting from recapitalization

 – 

 – 

 – 

 – 

 1,834,065 

Common      stock options granted for            services

 – 

 – 

 – 

 – 

 936,409 

Common      stock and warrants sold for            cash

 (100,000)

 – 

 – 

 – 

 6,371,912 

Preferred      stock dividends

– 

– 

(153,700)

– 

(153,700)

Common      stock issued in partial            settlement of loss contingency

 – 

 – 

 – 

 – 

 419,986 

Deferred      compensation recognized in            connection with the issuance of            stock options

 – 

 (355,000)

 – 

 – 

 – 

Reversal      of deferred compensation of            forfeited stock options

– 

551,897 

– 

– 

– 

Amortization      of deferred compensation

– 

247,157 

– 

– 

247,157 

Common      stock issued in settlement of            amounts due to related parties

– 

– 

– 

– 

435,815 

Common      stock and warrants issued in            partial settlement of vendor            liabilities

 – 

 – 

 – 

 – 

 1,504,206 

Stock      option exercises

– 

– 

– 

– 

2,521 

Cash      collection on stock purchase            receivable

 25,000 

 – 

 – 

 – 

 25,000 

Net loss      for 2001

– 

– 

(10,739,809)

– 

(10,739,809)
 
 
**Balance at December 31, 2001**

$(75,000)

  $   (534,456)

$(34,307,622)

$(227,619)

$(5,708,495)

*See accompanying notes.*

F-6
   
Summus, Inc. (USA)

Consolidated Statementsof Shareholders’ Equity (Deficit)

 

**Preferred      Stock**

 

 

**Additional**
 

**       Series      A**

**   Series      B**

**Common Stock**

**Paid-In**

 

**Shares **

**Amount  **

**Shares**

**Amount**

**Shares**

**Amount**

**Capital**
 
  
 

 

 

 

 

 

 

 

**Balance at December 31, 2001**

2,000 

$ 2,000,000 

6,000 

$         6     

37,151,478 

$37,151 

$27 ,399,045 

Common      stock and warrants sold for  cash

 – 

 – 

 – 

 –     

 9,053,167 

 9,053 

 6,430,254 

Common      stock, options and warrants            issued for services– – – –     394,627 394 952,298 
Conversion      of Series B preferred stock

– 

– 

(6,000)

(6)    

5,670,340 

 5,671 

(5,665)
Preferred      stock dividends– – – –      – – – 
Payment      of Series A preferred stock         dividends with additional shares of         Series A preferred stock

446 

446,312 

– 

–     

– 

– 

– 

Conversion      of Series A preferred stock         into common stock

(118)

(118,000)

– 

–     

8,287

8 

117,992 

Common      stock and warrants issued as payment         of unpaid salary amounts
– 

– 

– 

– 

117,885 

178 

177,717 

Common      stock and warrants issued in           partial settlement of vendor           liabilities

 –

 –

 –

 –     

 255,000 

 255 

 97,461 

Cash      collection on stock subscription           receivable

–

–

–

 –     

– 

 – 

 – 

Beneficial      conversion feature related         to convertible debentures
–

–

–

–     

–

–

– 

Value of      the warrants issued         with the convertible debentures
–

–

–

–     

–

–

– 

Common      stock issued upon conversion         of convertible debentures and related         accrued interest
–

–

–

–     
1,728,5681,729499,556 
Write off of the stock      purchase receivable
–

–

–

–     

–

–

(65,000)

Deferred      compensation recognized in         connection with the issuance of         stock options
–

–

–

–     

–

–

143,950 

Reversal      of deferred compensation of         forfeited stock options
–

–

–

–     

–

–

(126,135)

Amortization      of deferred         compensation
–

–

–

–     

–

–

–

Stock      option exercises
–

–

–

–     
290,30029012,460 
Warrant      exercises
–

–

–

–     
189,62419079,623 
Elimination      of deferred redemption         feature
–

–

–

–     

–

–

576,000

Net loss      for 2002

–

–

–

–     

– 

– 

– 
 
 
**Balance at December 31, 2002**

2,328

$2,328,312

–

  $            –     

54,919,276 

$54,919 

$36,669,211 
  
  
 
   
Summus, Inc. (USA)

Consolidated Statementsof Shareholders’ Equity (Deficit)(continued)

 

**Stock**

 

 

 

**Total**

 

**Purchase**

**Deferred**

**Accumulated**

**Treasury**

**Shareholders’**

 

**Receivable**

**Compensation**

**Deficit**

**Stock**

**Equity      (Deficit)**
 
 
**Balance at December 31, 2001**

$  (75,000) 

$ (534,456)

$(34,307,622)

$ 227,619

$  (5,708,495)

Common      stock and warrants sold for cash

 – 

 –

 – 

 – 

 6,439,307 

Common      stock, options and warrants            issued for services
– 

– 

– 

– 

952,692 

Conversion      of Series B preferred stock

– 

–

– 

– 
– 
Preferred      stock dividends–  – (183,039)–(183,039)
Payment      of Series A preferred stock         dividends with additional shares of         Series A preferred stock

– 

– 

– 

– 

446,312 

Conversion      of Series A preferred stock         into common stock

– 

– 

– 

– 

– 

Common      stock and warrants issued as payment         of unpaid salary amounts– – – – 177,895 
Common      stock and warrants issued in           partial settlement of vendor           liabilities

– 

– 

– 

– 

97,716 

Cash      collection on stock subscription           receivable

 10,000 

 – 
– – 
 10,000 

Beneficial      conversion feature related      to convertible debentures
 – 

 – 

 – 

 – 

 189,655 

Value of      the warrants issued         with the convertible debentures
 – 

 – 

 – 

 – 

190,000 

Common      stock issued upon conversion         of convertible debentures and related         accrued interest
 

– 

 – 

 – 

 – 

 501,285 

Write off of the stock      purchase receivable
65,000 

– 

– 

– 

– 

Deferred      compensation recognized in         connection with the issuance of         stock options
 – 

 (143,950)

 – 

 – 

 – 

Reversal      of deferred compensation of         forfeited stock options
 – 

 126,135 

 – 

 – 

 – 

Amortization      of deferred         Compensation
– 

325,139 

– 

– 

325,139 

Stock      option exercises
– 

–  

– 

– 

12,750 

Warrant      exercises
– 

– 

– 

– 

79,813 

Elimination      of deferred redemption         feature
 – 

 – 

 – 

 – 

 576,000 

Net loss      for 2002

– 

– 

(8,571,084)

– 

(8,571,084)
 
  
**Balance at December 31, 2002**

$               –

  $ (227,132)

$(43,061,745)

$(227,619)

$(4,464,054)

 
*See accompanying notes.*

F-7
   
Summus, Inc. (USA)

Consolidated Statements of Cash Flows
 
**Year ended December 31**
 
**2002**

**2001**

**2000**

**Operating activities**
   
Loss from continuing operations

$

(8,571,084) 
$ 
 (10,388,511)
$ 
 (11,451,281)
Adjustments to reconcile loss from continuing operations to net cash   used in operatingactivities:
     
Depreciation and amortization

371,457 

439,027 

274,708 

Gain on sale of stock of equity investee

– 

– 

(3,680,065)

Participation in loss of equity investee

– 

– 

6,356,932 

Non cash compensation

364,000 

956,321 

2,127,962 

Common stock options and warrants issued for services

887,992 

61,425 

– 

Convertible debt non-cash interest

390,250 

– 

– 

Non-cash settlements

– 

1,132,352 

– 

Changes in operating assets and liabilities, net ofSummus, Ltd.  assetacquisition:
   
Accounts receivable

(9,172)

(66,607)

26,570 

Receivable from related party

– 

– 

19,323 

Other current assets

(38,704)

(66,657)

25,814 

Accounts payable and accrued expenses

(432,853)

1,292,461 

951,999 

Accrued salaries and related costs

236,007 

(119,837)

35,297 

Deferred revenue

7,285 

– 

(658,331)

Net cash used in operating activities from continuing operations

(6,794,822)

(6,760,026)

(5,971,072)

Net cash used in discontinued operations

– 

(30,455)

– 

Net cash used in operating activities

(6,794,822)

(6,790,481)

(5,971,072)
    
**Investing activities**
   
Proceeds from sale of stock of equity investee

– 

– 

4,492,799 

Purchases of computer equipment

(91,212)

(7,480)

(132,233)

Cash acquired from the acquisition of assets fromSummus, Ltd.

– 

43,918 

– 

Net cash (used in) provided by investing activities

(91,212)

36,438 

4,360,566 
    
**Financing activities**
   
Proceeds from exercise of stock options and warrants

92,563 

2,521 

23 

Net proceeds from sale of common stock

6,449,307 

6,396,912 

– 

Proceeds from issuance of convertible debt

500,000 

– 

– 

Principal payments on capital lease obligations

(210,818)

(202,913)

(214,026)

Principal payments on notes payable and short-term borrowings

(35,000)

– 

(49,700)

Cash payment on loss contingency

– 

(75,000)

– 

Proceeds from loans payable to related party

– 

540,000 

1,435,000 

Net cash provided by financing activities

6,796,052 

6,661,520 

1,171,297 

Net decrease in cash

(89,982)

(92,523)

(439,209)

Cash at beginning of year

115,972 

208,495 

647,704 

Cash at end of year

$
 25,990  
$ 
115,972 
$ 
208,495  
 
F-8
   
Summus, Inc. (USA)

Consolidated Statements of Cash Flows (continued)
 
**Year ended December 31**
 
**2002**

**2001**

**2000**

**Supplemental disclosures of cash flow information**
   
Cash paid for interest

$

16,505
$ 
 31,101
$ 
 – **Non-cash investing and financing activities** Assets acquired under capital leases$–$–$ 322,890 
 
*See accompanying notes.*
 
F-9
   
Summus, Inc. (USA)

Notesto Consolidated Financial Statements

December 31, 2002

**1.  Business, Organization and Basis of Presentation**

*Business*

Summus, Inc. (USA) ("Summus, Inc." or the "Company"), formerly known as High SpeedNet Solutions, is engaged in development of efficient information processing solutions for the mobile and wireless markets. Inaddition, Summus, Inc. also engaged in research and development contracts for governmental agencies in the areas of complex imagingand object recognition as well as the licensing to third parties its Photo ID compression and decompression technology. The Companyceased providing research and development contract services for governmental agencies during the first quarter of 2002.

The core of the Company’s business plan is to focus on the emerging wireless and mobilemarket. Summus, Inc. has developed proprietary software, technology and applications to enable information processing and resourcemanagement to include, but not be limited to, the creation, transmission, playing and management of content over wireless networks.The Company’s technology platform, which provides the foundation for its current and future products and services, is designed toaddress the bandwidth constraints of existing wireless network infrastructure. This will enable mobile, high-speed access to a widerange of telecommunications services supported by fixed telecommunications networks and other services to mobile users.

During the second quarter of 2002, the Company completed the development of its firstwireless application and launched it over the Verizon Wireless carrier network. Since this initial launch, through the firstquarter of 2003 the Company has completed several other wireless applications that have been launched on several wireless carriernetworks in the United States. These applications can be purchased by the end-user as a one-time purchase, or subscribed to on amonthly basis. The majority of the applications completed by the Company during 2002, as well as planned future applications, havebeen developed under agreements with content partners.  Revenue earned from these applications is shared with the contentpartners based on contractual revenue sharing rates. The Company outsources, with a third party hosting company, the infrastructureneeded to host and deliver the transactions for our application customers.

F-10
   
Summus, Inc. (USA)

Notesto Consolidated Financial Statements (continued)

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

*Organization*

On February 16, 2001, High Speed Net Solutions, Inc. (“High Speed”) andSummus, Ltd. entered into a contract whereby, in legal form, High Speed acquired all the assets of Summus, Ltd. Although the legalform of the transaction was an acquisition of assets, in substance the transaction represented a Summus, Ltd. capital transactionaccompanied by a recapitalization. Since the Summus, Ltd. shareholders were the majority owners of the entity after thistransaction was completed, the transaction was accounted for as an issuance of stock by Summus, Ltd. in exchange for the netmonetary assets of High Speed accompanied by a recapitalization of Summus, Ltd. The accounting  for the transaction isessentially equivalent to that resulting from a reverse acquisition, except that no goodwill or other intangible assets arerecorded.

Prior to this recapitalization transaction, High Speed was a publicly-traded entity andSummus, Ltd. was a privately-held company. Since the legal form of the transaction was an acquisition of Summus, Ltd. by HighSpeed, the legal entity, which represented the combined, recapitalized Summus, Ltd., continued to use the High Speed trade name andits stock continued to trade in the public markets under the High Speed name.  As a result of the transaction, the historicalfinancial statements of Summus, Ltd., for accounting purposes, are deemed to be those of the Company.

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

*Basis of Presentation*

The accompanying financial statements have been prepared on a going concern basis, whichcontemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in thefinancial statements for the year ended December 31, 2002, the Company incurred a net loss of $8.6 million, experienced negativecash flows from operations and has a significant deficiency in working capital at December 31, 2002. The Company’scontinuation as a going concern is dependent on its ability to obtain additional financing, to generate sufficient cash flow tomeet its obligations on a timely basis, and ultimately to attain profitability. The Company is actively promoting and expanding itsproduct line and pursuing additional equity financing from existing shareholders and other institutional investors. Managementexpects to be able to attract additional capital to continue to fund operations and also expects that increased revenues willreduce its operating losses in future periods. However, there can be no assurance that management’s plan will be executed asanticipated.

F-11
   
Summus, Inc. (USA)

Notesto Consolidated Financial Statements (continued)

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

The financial statements presented herein do not include any adjustments relating to therecoverability of assets and classification of liabilities that might be necessary should the Company be unable to continue as agoing concern.

**2.  Recapitalization**

As previously noted, on February 16, 2001,High Speed and Summus, Ltd. entered into a merger transaction. The transaction was accounted for as aSummus, Ltd. capital transaction, accompanied by a recapitalization. 

As a result of the transaction, the historical financial statements of Summus, Ltd., foraccounting purposes, are deemed to be those of the Company. The equity accounts of Summus, Ltd. have been adjusted for arecapitalization to reflect the equity structure of High Speed, the legal acquirer. Specifically:
- the historical shareholders’ equity of Summus, Ltd. prior to thetransaction has been restated for the equivalent number of shares of High Speed common and Series B preferred stock, and otherequity interests, received in the transaction after giving effect to any difference in par value of High Speed’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 afterthe transaction;
- loss per share for periods prior to the transaction have been restatedto reflect the number of equivalent shares received by Summus, Ltd. in the transaction; and
- the transaction resulted in the net issuance of 23.4 million shares ofcommon stock, 2,000 shares each of Series A and Series B preferred stock and warrants to purchase 500 shares of Series B preferredstock.

In connection with the transaction, the Company entered into a three-year employmentagreement with Dr. Bjorn Jawerth. Under this employment agreement, in exchange for Dr. Jawerth’s covenant not to compete with theCompany for a period of 18 months from and after the termination of his employment with the Company, the Company issued options toDr. 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 on February 16, 2001, the closing date ofthe transaction. The issuance of these options was in lieu of a $500,000 cash payment provided for in Dr. Jawerth’s employmentagreement. The employment agreement provides that Dr. Jawerth is to receive a base salary of $350,000 (which is subject to anannual increase of at least 10%) plus other benefits including severance benefits.  Dr. Jawerth has

F-12
   
Summus, Inc. (USA)

Notesto Consolidated Financial Statements (continued)

**2.  Recapitalization (continued)**

agreed to keep his cash compensation at the initial base salary amount of$350,000, less 25% or $262,500 in connection with the alternative compensationarrangement described in note 16. The10% annual increase in his salary for 2002 has been recorded as accrued salaries in the Company’s balance sheet.

Under the terms of the recapitalization transaction, Summus, Inc. agreed to use reasonablecommercial efforts to assist Dr. Jawerth in the private sale of up to 1,666,667 shares ofSummus, Inc. common stock held by Dr. Jawerth at a per share price of not less than $1.50 per share(representing $2.5 million in value). The recapitalization 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 exerciseprice of $1.50 per share, exercisable for three times the number of shares of common stock sold in the private sale. The optionswill be exercisable during the second through the fifth year after the options are issued. Non-cash compensation willbe recorded upon the issuance of these options. Under current accountingliterature, 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 shareand the traded value of the Summus, Inc. common stock on the date the options are issued. As of December 31, 2002, no sharessubject to this agreement have been sold.

At the request of the Company's Boardof Directors, outside counsel was engaged to advise the Company with respect tothe interpretation of certain of these terms related to Dr. Jawerth's employmentagreement.  The Company has not accrued any amounts related to this matterin its consolidated financial statements as of December 31, 2002, as thepossible exposure to the Company, if any, cannot be reasonably estimated as thereview by outside counsel is ongoing.

Under his employment agreement, Summusgranted Dr. Jawerth, personally, a  non-exclusive, non-transferable,world-wide license, without right to sublicense, to make and use New Technology(as defined in the Inventions Award Plan) that is developed during the twelvemonths following the closing (the “Closing”) of the asset purchase agreementbetween Summus, Ltd. and High Speed Net Solutions, Inc.  Any rights of Dr.Jawerth under this license are subject to his fiduciary obligations as adirector and/or officer of Summus.  This license shall terminate on thelater of the date twelve months from the Closing or such later date as may beset by the Board, excluding Dr. Jawerth.  If  Summus ceases to be agoing concern prior to the license termination date, the license shall beperpetual and shall include the rights to sell and offer to sell products andservices using the licensed New Technology, and the right to sublicense such NewTechnology.

**3.  Summary of Significant Accounting Policies**

*Principles of Consolidation*

The 2001 consolidated financial statements include the accounts of the Company and itsformer wholly owned subsidiary, Douglas May & Company, Inc. Significant intercompany accounts and transactions have beeneliminated in consolidation.  The results of operations of Douglas May & Company, Inc. have been presented as discontinuedoperations for the year ended December 31, 2001.

*Estimates*

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

F-13
   
Summus, Inc. (USA)

Notesto Consolidated Financial Statements (continued)

**3.  Summary of Significant Accounting Policies (continued)**

*Revenue Recognition and Related Costs*

*Contracts and license fees*

During  the first quarter of 2002 and for the years ended December 31, 2001 and 2000,  we derived our revenues primarily from research and development contracts for  governmental agencies and the commercial licensing of our  technology.  We recognized revenue on these contracts at the time  services were rendered based upon the terms of individual contracts.   Regarding the commercial licensing of our technology, we followed 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*.” Revenue from software license fees is 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.

*Wireless  applications and contracts*

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

During  2002, the Company entered into a strategic partnership agreement related to  the mobile and wireless markets.  Revenue earned under this agreement was  recognized ratably over the year ended December 31, 2002, as the services were  provided.

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

Historically, costs of revenues primarily represent costs of providing contractservices.  The costs of license fee revenue have not been separately maintained and have historically beeninsignificant.  Commencing with the second quarter of 2002, costs of revenues primarily include costs of deploying wirelessapplications.

*Segments*

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

*Equipment and Furniture*

Equipment and furniture is stated at cost. Depreciation is computed over the estimateduseful lives of the assets (generally three to seven years) using the straight-line method. Amortization of capital lease assets isincluded in depreciation expense.

F-14
   
Summus, Inc. (USA)

Notesto Consolidated Financial Statements (continued)

 

**3.  Summary of Significant Accounting Policies (continued)**

*Investment in Equity Investee*

During 1999, Summus, Ltd. acquired a majority of the outstanding stock of High Speed. Soonthereafter, Summus, Ltd. began to sell a portion of the High Speed shares it had acquired to independent third parties for cashsuch that by December 31, 1999, the ownership percentage in High Speed was reduced to approximately 44%. Since Summus, Ltd.’scontrolling interest in High Speed was temporary, Summus, Ltd. accounted for its investment using the equity method ofaccounting rather than consolidating High Speed in the Summus, Ltd. accounts. Summus, Ltd. soldadditional shares of its High Speed stock in 2000 such that its ownership percentage at December 31, 2000 was approximately 33%.Upon the closing of the recapitalization transaction on February 16, 2001, Summus, Ltd.’s investment in High Speed wascancelled.

*Financial Instruments and Significant Concentrations*

The Company’s financial instruments that are exposed toa concentration of credit riskconsist primarily of its trade accounts receivable. Collateral is generally not required. Management provides an estimatedallowance for doubtful accounts based on its assessment of the likelihood of future collections. No allowance has been recorded asof December 31, 2002 or 2001, as all amounts are deemed to be fully collectible.

During 2002, the Company had launched its wireless applications with one wirelesscarrier.  The total amount of the Company’s accounts receivable balance as of December 31, 2002 is due from thiswireless carrier.  Should this wireless carrier discontinue the deployment of the Company’s applications, theCompany’s business would be adversely affected.

The carrying amount of cash, accounts receivable, accounts payable and debt approximatefair value for these financial instruments because of the short maturities of the instruments.

During 2002, 2001 and 2000, revenue from the U.S. Government and related entitiesrepresented 29%, 67%, and 60% of total revenue, respectively.   Revenue from sources other than the U.S. Government andrelated entities in 2002 was generated by one customer that accounted for 25% and a second customer that accounted for 11% of theCompany’s total revenue.

*Software Development Costs*

Capitalization of software development costs begins with the establishment oftechnological feasibility of new or enhanced software products. Technological feasibility of a computer software product isestablished when the Company has completed all planning, designing, coding and testing that is necessary to establish that thesoftware product can be produced to meet design specifications including functions, features and technical performancerequirements. All costs incurred prior to

F-15
   
Summus, Inc. (USA)

Notesto Consolidated Financial Statements (continued)

 

**3.  Summary of Significant Accounting Policies(continued)**

establishing technological feasibility of a software product are charged to research anddevelopment expense as incurred.

The Company amortizes capitalized software development costs on a product-by-product basisat the greater of the amount computed using (a) the ratio of current gross revenues for a product to the total of current andanticipated 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. The Company capitalized$337,451 during 2001 of costs incurred related to product development that met these criteria for capitalization.

During the fourth quarter of 2001, the Company wrote off the $337,451 of software coststhat were capitalized during the second and third quarters of 2001. During the fourth quarter of 2001, management changed itsbusiness model and its intended use of its software products and related technology.  Based on an evaluation of the change inthe business model and the associated projected cash flows, management determined that the software costs capitalized during 2001were impaired and wrote the amount off as research and development costs. No capitalized software development costs were incurredin 2002.

*Income Taxes*

Income taxes are accounted for using the liability method in accordance with Statement ofFinancial Accounting Standards ("SFAS") No. 109, *"Accounting for Income Taxes."* Under SFAS 109, deferred tax assets orliabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilitiesusing the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferredincome tax expenses or benefits are based on the changes in the asset or liability from period to period. If available evidencesuggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuationallowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changesin such valuation allowance would be included in the provision for deferred income taxes in the period of change.

S*tock-Based Compensation*

The Company has stock-based compensation plans for employees, consultants and directors,which are described more fully in Note 15.  The Company accounts for those plans under the intrinsic value method prescribedby APB Opinion No. 25,*Accounting for Stock Issued toEmployees (“APB 25”)*and related interpretations.  For optionsgranted under those plans with an exercise price equal to the market value of the stock on the date of grant, no compensation costis recognized in net operations as reported in the consolidated statement of operations.  Compensation cost is recognized innet earnings/loss for awards granted under those plans with an exercise price less than the market value of the underlying commonstock on the date of grant.  Such costs are recognized ratably over the

F-16
   
Summus, Inc. (USA)

Notesto Consolidated Financial Statements (continued)

 

**3.  Summary of Significant AccountingPolicies (continued)**

vesting period.  The Company recorded non-cash compensation related to the issuanceof fully-vested stock options with exercise prices below the fair market value of the underlying stock plus the amortization ofdeferred compensation arising from stock option issuances subject to vesting totaling $364,000, $956,321 and $2,127,962 in 2002,2001 and 2000, respectively.

The following table illustrates the effect on net loss and net loss per share if theCompany had applied the fair value recognition provision of Statement of Financial Accounting Standards No. 123, *Accounting forStock-Based Compensation (“SFAS 123”). * In accordance with SFAS 123, the fair value of each option grant wasdetermined by using the Black-Scholes option pricing model with the following weighted average assumptions for the twelve monthperiod ended December 31, 2002 and 2001: dividend yield of 0%; volatility of 1.379 and 1.789, respectively; risk-free interest rateof 3.0% and 5.34%, respectively, and expected option lives of 5 years. The weighted average grant-date fair value of optionsgranted during 2002 and 2001 was $0.62 and $2.90 per option, respectively.
 
**Year ended December 31**
 
**     2002**

**2001**

**2000**
        
Net loss applicable to common shareholders

$ (8,571,084)

$ (10,739,809)

$(11,451,281)

Non-cash compensation charges included in  net loss

364,000 

956,321 

2,127,962 

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

(2,367,851)

(5,152,714)

(5,257,477)
     
Adjusted net loss applicable tocommon  shareholders

$(10,574,935)

$(14,936,202)

$(14,480,796)
     
Basic and diluted loss per share:
   
Reported net loss applicable tocommon  shareholders

$           (0.19)

$           (0.31)

$        (0.35)

Non-cash compensation charges included in net  loss

0.01 

0.03 

0.06 

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

(0.05)

(0.15)

(0.16)
    
Adjusted net loss applicable to common   shareholders

$           (0.23)

$           (0.43)

$       (0.45)
 
  
F-17
   
Summus, Inc. (USA)

Notesto Consolidated Financial Statements (continued)

 

**3.  Summary of Significant Accounting Policies (continued)**

The Company accounts for stock-based compensation to non-employees of the Company,primarily consultants and advisors, at the fair value of the equity instrument in accordance with the provisions of SFAS No. 123.Non-cash consulting expense related to such stock based compensation for the year ended December 31, 2002 was $887,992.

*Loss Per Share*

Loss per share has been calculated in accordance with Statement of Financial AccountingStandards ("SFAS") No. 128, *"Earnings Per Share."* Basic loss per share was computed by dividing the net loss for each periodpresented by the weighted average number of shares of common stock outstanding for such period, as adjusted for therecapitalization. Although the Company has potential common stock equivalents related to its outstanding stock options, warrantsand preferred stock, these potential common stock equivalents were not included in diluted loss per share for each period presentedbecause the effect would have been antidilutive.

Common stock equivalents not included in diluted loss per share in 2002 consist of7,556,175 outstanding stock options, 30,658,477 outstanding warrants and 166,775 Series A preferred shares and related accrueddividends, as converted.

*New Accounting Pronouncements*

On January 1, 2002, the Company adopted Statement of Financial Accounting Standards No.144, *“Accounting for the Impairment or Disposal of Long-Lived Assets,”*(SFAS 144”). This Statementaddresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes Statement No. 121,*“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,”* and theaccounting and reporting provisions of APB Opinion No. 30, *“Reporting the Results of Operations for a Disposal of aSegment of a Business.”* The adoption of SFAS 144 had no impact on the Company’s net losses or financialposition.

In August 2001, the FASB issued Statement of Financial Accounting Standards 143,*“Accounting for Asset Retirement Obligations”* (“SFAS 143”).  SFAS 143 requires an entity torecord a liability for an obligation associated with the retirement of an asset at the time that the liability is incurred bycapitalizing the cost as part of the carrying value of the related asset and depreciating it over the remaining useful life of thatasset.  The standard is effective for financial statements for fiscal years beginning after June 15, 2002 and will be adoptedby the Company in fiscal 2003.  The Company does not expect the adoption of SFAS 143 to have a material impact on theCompany’s results of operations, financial position or cash flows.

In April 2002, the FASB issued Statement of Financial Accounting Standards 145,*“Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB Statement No. 13, and Technical Corrections”*(“SFAS 145”).  SFAS 145 requires gains and losses on extinguishments of debt to be classified as income or lossfrom continuing operations rather than as extraordinary items as

F-18
   
Summus, Inc. (USA)

Notesto Consolidated Financial Statements (continued)

 

**3.  Summary of Significant Accounting Policies (continued)**

previously required under Statement 4.  Extraordinary treatment will be required forcertain extinguishments as provided in APB 30.  SFAS 145 also amends Statement 13 to require certain modifications to capitalleases be treated as a sale-leaseback and modifies the accounting for sub-leases when the original lessee remains a secondaryobligor (or guarantor).   SFAS 145 is effective for all fiscal years beginning after May 15, 2002 andwill be adopted by the Company on January 1, 2003.  The Company does not expect theadoption of SFAS 145 to have a material impact on the Company’s results ofoperations, financial position or cash flows.

In July 2002, the FASB issued Statement of Financial Accounting Standards 146,*“Accounting for Costs Associated with Exit or Disposal Activities”* (“SFAS 146”).  SFAS 146,which superseded EITF Issue 94-3, *“Liability Recognition for Certain Employee Termination Benefits and Other Cost to Exitan Activity (including Certain Costs Incurred in a Restructuring)”*, requires that a liability for a cost associated withan exit or disposal activity be recognized when the liability is incurred.  Under Issue 94-3, a liability for an exit cost wasrecognized at the date of an entity’s commitment to an exit plan.  The provisions of this Statement are effective forexit or disposal activities that are initiated after December 31, 2002.  The Company does not expect the adoption of SFAS 146to have a material impact on the Company’s results of operations, financial position or cash flows.

In December 2002, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards No. 148, *Accounting for Stock-Based Compensation*   - *Transition andDisclosure* (“SFAS 148”).  SFAS 148 provides transition guidance for companies that adopt the fair value methodfor stock-based employee compensation and has certain disclosure provisions that are effective as of December 31, 2002.  Dueto the Company continuing to apply the intrinsic value provisions of APB 25, the adoption ofSFAS 148 did not have any impact on itsnet loss or financial position.  The disclosure provisions of this statement have been incorporated herein.

In November 2002, the FASB issued FIN 45, which expands previously issued accountingguidance and disclosure requirements for certain guarantees. FIN 45 requires companies to recognize an initial liability for thefair value of an obligation assumed by issuing a guarantee.  The provision for initial recognition and measurement of theliability will be applied on a prospective basis to guarantees issued or modified after December 31, 2002.  TheCompany doesnot expect the adoption of FIN 45 to have a material impact on the Company’s results of operations, financial position orcash flows.

In January 2003, the FASB issued FIN 46, *Consolidation of Variable InterestEntities. * FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entityif the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficientequity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The Company will be required to adopt the provisions of FIN 46 at the beginning of its 2004 fiscal year for entities existing atJanuary 31, 2003, however FIN 46 will apply to all new variable interest entities created or acquired after January 31,

F-19
   
Summus, Inc. (USA)

Notesto Consolidated Financial Statements (continued)

 

**3.  Summary of Significant Accounting Policies (continued)**

2003.  The Company does not expect the adoption of FIN 46 to have a material impacton the Company’s results of operations, financial position or cash flows.

*Reclassifications*

Certain reclassifications have been made to the 2000 and 2001 consolidated financialstatements to conform to the 2002 presentation. These reclassifications had no effect on net loss or shareholders’ deficit aspreviously reported.

**4.  Equipment and Furniture**

Equipment and furniture consists of the following at December 31:
 
**2002**

** **

**2001**
    
Computer equipment financed by capital leases

 $
 657,419  
   $
 802,020 
Computer software and equipment

680,086 
 
633,881 

Furniture and fixtures

269,497 
 
79,881 
 
1,607,002 
 
      1,515,782 

Less accumulated depreciation

(1,110,269)
 
  (738,805)
 
 $ 
 496,733  
   $
 776,977   
Depreciation expense totaled $371,457, $439,027 and $274,708 for the years ended December31, 2002, 2001 and 2000, respectively.

**5.  Leases**

The Company leases equipment and office space under long-term capital and operating leaseagreements. Rental expense amounted to $347,000, $498,000, and $424,000 for the years ended December 31, 2002, 2001 and 2000,respectively.

F-20
   
Summus, Inc. (USA)

Notesto Consolidated Financial Statements (continued)

 

**5.  Leases (continued)**

Minimum future lease payments undernoncancellable leases at December 31, 2002 are as follows:

**Capital Leases**

**OperatingLeases**
 
2003

 $80,435 
$
 344,634 
2004

– 

310,983

2005

– 

260,700

Total minimum lease payments

80,435 

  $
 916,317
Less amounts representing interest

(2,745)

   Present value of minimum lease payments

** **$
 77,690 ** **
**6.  Income Taxes**

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

Deferred income taxes reflect the net tax effects of temporary differences between thecarrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.Significant components of the Company’s deferred tax assets are as follows:
 
**December 31**
 
**2002**

**2001**
   
Accrued expenses and other revenue

$
 100,000 
$
2,200,000 
Net operating losses

10,300,000 

  11,900,000 

Start-up costs

3,100,000 

1,800,000 

Investments

– 

1,600,000 

Total deferred tax assets

13,500,000 

17,500,000 

Valuation allowance

(13,500,000)

(17,500,000)

Net deferred taxes

$
 – 
$ 
– ** **
Management has determined that a 100% valuation allowance for existing deferred tax assetsis appropriate given the uncertainty regarding the ultimate realization of these assets.

At December 31, 2002, the Company had federal and state net operating loss carryforwardsof approximately $26.0 million for income tax purposes. The tax benefit of these carryforwards is reflected in the above table ofdeferred tax assets. If not used, these carryforwards begin to expire in 2018 for federal tax purposes and in 2013 for state taxpurposes. U. S. tax rules impose limitations on the use of net operating losses following certain changes in ownership. If such achange occurs, the 

F-21
   
Summus, Inc. (USA)

Notesto Consolidated Financial Statements (continued)

 

**6.  Income Taxes (continued)**

limitation would reduce the amount of these benefits that would be available to offsetfuture taxable income each year, starting with the year of ownership change.

**7.  Related Party Transactions**

In February 1999, Summus, Ltd. entered into a Marketing License Agreement with HighSpeed.  In March 2000, Summus, Ltd. entered into several agreements with High Speed (see Note 11).

Prior to the recapitalization on February 16, 2001, Summus, Ltd. provided cash advances toHigh Speed, its equity investee. The outstanding balance on February 16, 2001 related to these advances was $154,000. This balancewas canceled upon the closing of the Summus, Ltd. recapitalization on February 16, 2001 (see Note 2).  During 2001 and 2000,High Speed made loans to Summus, Ltd. totaling $540,000 and $1,435,000.

These loans accrued interest at 8% and were payable within 60 days of issuance. Theseloans were canceled upon the closing of the Summus, Ltd. recapitalization on February 16, 2001 (see Note 2).

**8.  Convertible Debentures**

On July 19, 2002, the Company issued 6% convertible secured debentures, along withwarrants to purchase 1,724,138 shares of common stock for aggregate gross proceeds for $500,000. The warrants are exercisable uponissuance, have a term of three years and have exercise prices ranging from $0.47 to $0.59 per share.  The debentures had aninitial life of five years and were convertible into common stock at a conversion rate of $0.29 per share.  As of December 31,2002, all of the convertible debentures plus accrued interest had been converted into1,728,568 shares of common stock.

The accounting treatment for the debentures involved allocating the value of the principalamount of $500,000 between the debentures, the associated warrants and a beneficial conversion feature associated with thedebentures.  A beneficial conversion feature existed because the conversion rate of the debentures was below the traded valueof the Company’s common stock on the date the debentures were issued.  The beneficial conversion feature was valued at$189,655 and was recorded as a debt discount and additional paid-in-capital on the date the debentures were issued.  Since thedebentures were convertible into common stock immediately, the value of the beneficial conversion feature was charged to interestexpense on the date of issuance. 

F-22
   
Summus, Inc. (USA)

Notesto Consolidated Financial Statements (continued)

**8.  Convertible Debentures (continued)**

Interest expense relating to the convertible debenture transaction totaled $420,250consisting of the following:
- $190,000, relating to the value, as determined by the Black-Scholes pricing model, of the1,724,138 warrants issued to the debentures holders;
- $189,655, relating to the value of the beneficial conversion feature associated with theconvertible debentures;
- $39,310, relating to placement agent fees, consisting of a cash commission of $30,000 anda warrant to purchase 51,724 shares of common stock that was valued at $9,310 using the Black-Scholes pricing model and;
- $1,285, relating to interest expense incurred while the debentures remained outstandingbased on the stated rate of 6% per annum.  At the Company’s election, these interest costs were paid through theissuance of shares of common stock based on the conversion rate of $0.29, resulting in the issuance of        4,430 shares of commonstock.

**9.  Notes Payable**

During 1999, the Company entered into an agreement with a shareholder to repurchase 1,533shares of its common stock from that shareholder for an aggregate value of $268,373, of which $268,075 represented a terminationfee for a development contract and $298 represented the fair value of the shares repurchased. In connection with this agreement,the Company entered into a promissory note with the shareholder whereby the Company agreed to pay approximately $10,000 per monthover a 27-month period to fund this transaction. The Company did not make all required monthly installments and thus defaulted onthe promissory note. Consequently, the note is accruing interest at 18% per annum and the total amount has been classified as acurrent liability. The outstanding balance, including accrued interest, as of December 31, 2002 and 2001 is $205,005 and $171,613,respectively.

On September 4, 2000, the Company entered into an agreement to obtain the rights tocertain software technology. In exchange for these rights, the Company agreed to pay $200,000 in eight equal installments of$25,000 beginning in 2001 and continuing over the next two years. On July 19, 2002, the payment terms of this agreement wereamended for an adjustment in the payment terms, whereby the Company issued 235,000 shares of unregistered common stock withregistration rights to repay $87,500 of the outstanding balance.  The remaining balance will be repaid in 6 equal installmentscommencing July 19, 2003.  The outstanding principal balance of this note as December 31, 2002 and 2001 is $77,500 and$200,000, respectively.

F-23
   
Summus, Inc. (USA)

Notesto Consolidated Financial Statements (continued)

**10.  Investment in Equity Investee**

During 1999, Summus, Ltd. acquired 1,500,000 shares of common stock of High Speed aspartial payment for royalties due in connection with a Marketing License Agreement between the companies. The shares were notregistered with the Securities and Exchange Commission under the Securities Act of 1933. Subsequently, Summus, Ltd. acquired anadditional 9,542,360 shares of High Speed common stock (such shares also being restricted securities) from a significantshareholder of High Speed 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 High Speed at that time. As of December 31, 2000, Summus, Ltd.’s ownershippercentage decreased to approximately 33%, as a portion of the shares initially acquired were sold. Summus, Ltd. accounted for thisinvestment using the equity method of accounting. The initial carrying amount was recorded at the estimated fair value of the stockreceived taking into account the fact that the stock was not registered and thus was not freely tradable. Summus, Ltd. adjusted thecarrying amount of its investment in High Speed for its share of High Speed’s losses subsequent to the date of investment.Additionally, during 2000, Summus, Ltd.’s investment in High Speed was increased based on sales of additional shares of HighSpeed stock to third parties by High Speed and was decreased based on Summus, Ltd. recording its share of High Speed’slosses. Based on these transactions, the carrying value of Summus, Ltd.’s investment was reduced to zero at December 31, 2000. AtDecember 31, 2000, Summus, Ltd. owned 8,217,781 shares of High Speed which represented an approximate 33% ownership percentage. OnFebruary 16, 2001, Summus, Ltd. sold substantially all of its assets to High Speed in a transaction accounted for as a capitaltransaction, accompanied by a recapitalization. (See Note 2).

The condensed results of operations and financial position of High Speed at December 31,2000 is summarized below:

Total assets

$

4,497,607 
Total liabilities

$

 4,849,259 
Total stockholders’deficit

$

 (351,652)
Net loss

$

 (12,441,655)
 

 

 

 

**11.  Deferred Software Royalty Revenue**

In February 1999, Summus, Ltd. entered into a Marketing License Agreement ("MLA") withHigh Speed. In consideration for its grant to High Speed of the right to resell certain stand-alone software products specified inthe MLA over the three-year term of the agreement, Summus, Ltd. received prepaid software royalty payments in the aggregate amountof $3,000,000, consisting of cash payments of $2,250,000 and 1,500,000 shares of High Speed common stock valued at $750,000. Thevalue assigned to the 1,500,000 common shares was based on a discounted value of High Speed’s common stock taking intoconsideration the restricted nature of these shares. This amount was classified as deferred revenue in Summus, Ltd.’s balancesheet.

F-24
   
Summus, Inc. (USA)

Notesto Consolidated Financial Statements (continued)

 

**11.  Deferred Software Royalty Revenue (continued)**

In mid-February 2000, Summus, Ltd. and High Speed entered into several agreements (i.e., amaster agreement, software license agreement, software maintenance agreement, revenue sharing agreement and software escrowagreement) that superseded the MLA in its entirety. Under these agreements, Summus, Ltd. granted to High Speed a non-exclusivelicense to use a suite of software products referred to as "MaxxSystem." The terms of the software license agreement provided forHigh Speed’s payment of a one-time license fee of $1 million (against which High Speed received a credit of $1 million, under theterms of the master agreement, in recognition of payments High Speed had made under the MLA), and a revenue-based fee of thegreater of (i) 10% of the gross revenues generated by High Speed with MaxxSystem, or (ii) $.03 multiplied by the number of richmedia messages delivered to recipients (against which High Speed also received a credit of $1 million, under the terms of themaster agreement, in recognition of payments made under the MLA). High Speed received an additional credit of approximately$200,000 for other fees due Summus, Ltd. under the software license agreement and/or the software maintenance agreement.

The payments received by Summus, Ltd. under the MLA, in the aggregate amount of $3million, were credited against the capitalized software development costs of the software covered by the MLA and the softwarelicense agreement. Summus, Ltd. applied $658,332 of its deferred revenue balance against such costs during 2000.

On February 16, 2001, High Speed acquired all the assets and operations of Summus, Ltd. ina transaction accounted for as a recapitalization of Summus, Ltd. (see Note 2). As of the closing date of the transaction, Summus,Ltd. had not delivered to High Speed all of the MaxxSystem suite of software products specified in the software license agreementand, therefore, was not able to recognize any revenue associated with such agreement. Upon the closing of the transaction, theagreements between Summus, Ltd. and High Speed entered into in mid-February 2000 were made null and void. As a result, the deferredrevenue associated with the mid-February 2000 agreements was reclassified to additional paid-in capital as of the closing of therecapitalization.

**12.  Profit Sharing Plan**

The Company has established a 401(k) retirement plan for the benefit of employees who haveattained the age of 21 years. The Company’s matching contribution to the plan is discretionary and is not limited to profits.For the years ended December 31, 2002, 2001 and 2000, the Company contributed $26,166, $37,176 and $42,303 to theplan,respectively.

**13.  Common Stock and Warrants**

Subsequent to the Company’s recapitalization (see Note 2), Summus, Inc. sold toinvestors during 2001, 2,978,390 shares of its unregistered common stock and warrants to purchase an additional 6,175,658 shares ofunregistered common stock for gross cash proceeds of $6,371,912. During 2000

F-25
   
Summus, Inc. (USA)

Notesto Consolidated Financial Statements (continued)

 

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

and through the closing of the Summus, Ltd. recapitalization transaction on February 16,2001, the Company issued 1,997,564 and 428,234 warrants, respectively, to purchase shares of its unregistered common stock inconnection with sales of its unregistered common stock for cash. The warrants have exercise prices ranging from $2.40 to $5.25 pershare, a term of five years and cannot be exercised within five months of the date of issuance.

Also in connection with Summus, Ltd.recapitalization transaction, the former Summus, Ltd. shareholders were issued warrants to purchase 500 shares of Series Bpreferred stock at an exercise price of $5,500.00 share. On February 27, 2002, these warrants were converted into 500,000 warrantsexercisable over five years to purchase shares of unregistered common stock, with an exercise price of $5.50 per share.  Thewarrants to purchase Series B preferred stock were issued as partial consideration in the Summus, Ltd. recapitalization transactionin order to preserve the Company’s common stock for other uses.

During the year ended December 31, 2002, the Company sold to investors 9,053,167 shares ofits unregistered common stock (including 21,666 shares of unregistered common stock in the form of commissions) and warrants topurchase an additional 17,779,104 shares of unregistered common stock for net cash proceeds of $6,439,307. The warrants have exercise pricesranging from $0.48 to $4.00 per share, a term of five years and cannot be exercised within the first six months of the date ofissuance.   The estimated fair value of the unregistered shares issued as commissions for capital raising was deductedfrom the gross proceeds raised.  During the year ended December 31, 2002, the Company paid one of its outside directors cashcommissions of $110,139 relating to the sale of the Company’s unregistered common stock and warrants.

During the year ended December 31, 2002, the Company issued177,885 shares of itsunregistered common stock and warrants to purchase 150,000 shares of unregistered common stock to certain members of management inlieu of cash payment for unpaid salary amounts earned in 2001.  These shares and warrants were valued at $177,895, based onthe recorded value of the unpaid salary amounts as of December 31, 2001.

During 2002, the Company issued 234,254 shares of itsunregisteredcommon stock and 40,000 warrants to purchase unregistered common stock with an exercise price of $2.35 to consultants for servicesprovided to the Company and 20,313 shares of its unregistered common stock in connection with the termination of a former employeeas a severance payment.  The unregistered common shares were valued at$85,958, based on the negotiated terms of eachcontract and the warrants were valued at $44,800 using the Black-Scholes option-pricing model.  The costs of these serviceswere included in non-cash consulting expense for the year ended December 31, 2002.

During January 2002, the Company entered into two separate agreements whereby it issued115,000 shares of its unregistered common stock and 230,000 warrants to purchase the Company’s unregistered common stock withan exercise price of $2.50 per share to a shareholder as consideration for the conveyance by him of 115,000 shares ofthe  Company’s  commonstock to: (1) an

F-26
   
Summus, Inc. (USA)

Notesto Consolidated Financial Statements (continued)

 

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

investment banking company for investment banking services and (2) an independentconsultant for financial advisory services.  The 115,000 shares were recorded at their estimated fair value of $157,376 byapplying a discount to the traded value of the Company’s freely trading common stock on the date of each agreement.  The230,000 warrants were valued at approximately $297,600 using the Black-Scholes option-pricing model.  The costs of theseservices were included in non-cash consulting expense for the year ended December 31, 2002.

During February 2002, the Company issued 25,000 shares of its unregistered common stockand 12,500 warrants to purchase the Company’s unregistered common stock with an exercise price of $2.50 per share to anindependent firm providing investor relation services.  The 25,000 shares were recorded at their estimated fair value of$37,280 by applying a discount to the traded value of the Company’s freely trading Common Stock on the date of theagreement.  The 12,500 warrants were recorded at their estimated fair value of $17,625 using the Black-Scholes option-pricingmodel.  On June 19, 2002, the Company terminated this agreement and issued 10,000 warrants to purchase the Company’sunregistered common stock with an exercise price of $2.50 per share as a termination fee.  These warrants were valued at$4,200 using the Black-Scholes option-pricing model. Additionally, prior to the termination of this agreement, the Company wascommitted to issue to the investor relations firm, warrants to purchase shares of the Company’s unregistered common stock, ifand when the traded value of the Company’s stock price achieved certain levels over a certain time period.  Thesecontingent warrants were valued at $30,000 and since this agreement was terminated before the any of the warrants could be earned,the $30,000 was charged to non-cash expense.

During 2002, the Company issued 235,000 shares of its unregistered common stock as apartial payment of $87,500 on a note payable, see Note 9.  Also during 2002, the Company issued 20,000 shares of itsunregistered common stock as a partial payment of $10,216 on an outstanding balance due to a former service provider to theCompany. In each instance, the value of these shares was determined based on negotiations between the parties.

During 2002, the Company issued 189,624 shares of its unregistered common stock upon theexercise of outstanding warrants.  The Company received $79,813 in proceeds from the exercise of these warrants.

During 2002, the Company deemed the $65,000 stockpurchase receivable not collectibleand wrote off the receivable against additional paid in capital.

The Company has reserved shares of its authorized 100,000,000 shares of common stock forfuture issuance as follows:

F-27
   
Summus, Inc. (USA)

Notesto Consolidated Financial Statements (continued)

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

Series A convertible preferred stock and related dividends

166,775

Outstanding common stock warrants

30,658,477

Outstanding stock options

7,556,175

Possible future issuance under stock option plans

943,825

Total

39,325,252

A summary of the Company’s outstanding warrants as of December 31, 2002 is asfollows:

Exercisable Warrants

Range ofExercise Prices

NumberExercisable

Weighted Average Exercise Price

 
$      ..029 – 0.80

         8,993,241

$
 0.60
        1.40 –2.50

8,229,810

 
1.86
         2.80 –4.00

10,885,988

  
3.29
         4.50 –5.50

2,549,438

  
4.93
30,658,477

$
 2.25
**14.  Preferred Stock**

***Series A Preferred Stock***

The Company has 2,328 and 2,000 shares of Series A preferred stock outstanding as ofDecember 31, 2002 and 2001 respectively.  These shares are valued based upon the liquidation preference (the“Liquidation Preferences”) of Series A preferred stock of $1,000 per share.

The holders of the Series A preferred stock are entitled to receive cumulative cashdividends at a rate of 8% per annum of the initial liquidation preference of $1,000 per share Liquidation Preference plus accruedbut unpaid dividends. The Company, at its election, can provide for the payment of dividends on the Series A preferred stockthrough the issuance of additional shares of Series A preferred stock having an aggregate initial liquidation preference equal tothe amount of cash dividends otherwise payable. Dividends are cumulative from the date of issuance and are payable, when, as and ifdeclared by the Board of Directors, on March 31 and September 30 of each year. The Company recorded preferred stock dividendsof $183,039 and $153,700 in 2002 and 2001, respectively.

In April 2002 and October 2002, the Company’s Board of Directors authorized thepayment of the accrued Series A preferred stock dividends at March 31, 2002 and September 30, 2002, totaling $355,315 and $90,997,respectively.  At the Company’s election, the payment of these dividends was made through the issuance of 446 new sharesof Series A preferred stock.  During 2002, a holder of Series A preferred stock converted 118 shares of Series A preferredstock into 8,287 shares of the Company’s unregistered common stock.  As of December 31, 2002,the Company had $46,878 in accrued dividends.

F-28
   
Summus, Inc. (USA)

Notesto Consolidated Financial Statements (continued)

 

**14.  Preferred Stock (continued)**

The holders of the outstanding shares of Series A preferred stock are not entitled to voteon matters submitted to the Company’s shareholders for voting. However, approval of holders of a majority of the outstanding sharesof Series A preferred stock is required prior to the issuance of a new series of preferred stock that ranks senior to the Series Apreferred stock.

Each share of the Series A preferred stock is convertible at the option of the holder, atany time after the date of issuance, into shares of common stock equal to the Liquidation Preference divided by the initialconversion price of $14.24. The conversion price is subject to adjustment in accordance with the Company’s articles ofincorporation.  At the Company’s election, it has the right to redeem any outstanding shares of the Series A preferredstock at the Liquidation Preference of $1,000 per share.

***Series B Preferred Stock***

During February 2001, the Company amended its bylaws to provide for the authorization of6,500 shares of Series B preferred stock. The Company issued 6,000 shares of Series B preferred stock (2,000 of which were placedin escrow) in connection with the Summus, Ltd. recapitalization.  Of these shares, 4,000 were issued to the former Summus,Ltd. shareholders in the first quarter of 2002.

On February 16, 2002, the escrow agreement that was established in connection with therecapitalization transaction between the Company and Summus, Ltd. was terminated.  Initially, 2,000 Series B preferred shareswere placed in escrow as security for any indemnification obligations of Summus, Ltd. and its shareholders under therecapitalization transaction.  Prior to the termination of the escrow agreement, claims were made against the escrowed sharesfor liabilities of Summus, Ltd.  that were identified and paid during the escrow period, but were not known at the closing ofthe recapitalization transaction on February 16, 2001.  Of the total 2,000 Series B preferred shares placed in escrow, 329.660shares were claimed for indemnification of Summus, Ltd.’s obligations, resulting in 1,670.339 Series B preferred sharesavailable for distribution to the former Summus, Ltd. shareholders.  As noted below, these shares were automatically convertedinto 1,670,339 unregistered common shares based on a conversion ratio of 1,000 to 1 and were subsequently distributed to the formerSummus, Ltd. shareholders.

On February 27, 2002, a majority of the Company’s shareholders approved the increasein the number of authorized common shares from 50.0 million to 100.0 million.  The increase in the number of authorized sharestriggered the automatic conversion of all of the outstanding shares of the Series B preferred stock.  On February 27, 2002,there were 6,000 shares of Series B preferred stock outstanding that converted into 6,000,000 shares of common stock.  The329.660 Series B preferred shares that were claimed for indemnification purposes were converted into 329,660 shares of common stockand were retired by the Company, resulting in a net issuance of 5,670,340 of common stock on the conversion date.

F-29
   
Summus, Inc. (USA)

Notesto Consolidated Financial Statements (continued)

 

**15.  Stock Options**

During 2000, the Company established a stock option plan to provide for the issuance ofstock options to employees and directors. Options granted in connection with initial employment with the Company generally have aterm of ten years and vest quarterly over a three-year term.

During 2000, all of the stock options were granted with an exercise price of $0.19 pershare. This exercise price was below the estimated fair value of the Company’s underlying common stock. Deferred compensationhas been recorded for the difference in value between exercise price and the estimated fair value of the underlying common stockand is being recognized over the vesting period of the stock options. Non-cash compensation expense relating to these grants was $202,642, $202,157 and $2,127,962 in 2002, 2001 and 2000, respectively.  Additionally, during 2001, stock options exercisablefor 615,879 shares of common stock were granted with exercise prices below the fair market value of the underlying common stock,resulting in total compensation expense of $864,164, of which $110,000 was deferred at December 31, 2001 and is being amortized tonon-cash compensation through 2004. Of the $864,164 compensation expense attributable to 2001 option grants, $541,688 related tooptions issued to Dr. Jawerth in connection with the recapitalization discussed in Note 2.

During 2002, the Company granted 397,531 fully vested stock options to anemployee/director of the Company with exercise prices ranging between $ 0.31 and $1.24, in connection with capital raisingactivities.  Of these options, 310,586 had exercise prices below the fair market value of the underlying common stockresulting non-cash compensation expense of $161,358.

During 2002, the Company granted 33,000 stock options to each of the three new members ofits Board of Advisors.  These options vest quarterly over a twelve month term and have an exercise price equal to the tradedper share value of the underlying common stock on the date of grant. The value of these options,  as determined by the Black-Scholes optionpricing model under the fair value method of accounting, was recorded as  non-cash consulting expense of $97,515 during 2002.  Also during 2002, the Company entered into an agreement with one of its Boardof Advisors for consulting services. Under the terms of this agreement, 200,000 options with an exercise price of $0.35 weregranted to this advisor.  The vesting schedule of these options provided for 75,000 of these options to be fully vested on thedate of grant, 50,000 to vest over the next three month period, and 15,000 to vest each quarterly period thereafter.  Thevalue of the vested options, as determined by the Black-Scholes option pricing model under the fair value method ofaccounting, was recorded as non-cash consulting expense of $25,000 during2002.  This agreement was terminated during the fourth quarter of 2002, upon which 75,000 options were  forfeited.

The Company has entered into various consulting agreements that provide for the issuanceof options to purchase unregistered shares of the Company’s common stock primarily on a monthly basis as

F-30
   
Summus, Inc. (USA)

Notesto Consolidated Financial Statements (continued)

 

**15.  Stock Options (continued)**

services are performed.  These options vest on a monthly basis as they are earned andhave exercise prices that equal the traded value of the Company’s freely traded common stock using a three-day average at theend of each month.  For the year ended December 31, 2002, the Company issued 146,032 options under these consultingagreements.  These options were valued at $81,788 using the Black-Scholes option-pricing model under the fair value method ofaccounting with the following weighted average assumptions: dividend yield of 0%; volatility ranging between 1.379 and 1.789; riskfree interest rates ranging between 3.20% and 4.50% and expected option lives of 5 years for the year ended December 31,2002.  The term of these agreements is generally twelve months, however the Company can immediately terminatethem.   Additionally, the Company is also committed to pay cash fees to a consultant for administrative services thathave been provided, upon the obtainment of at least $2.0 million in new financing.  As of December 31, 2002, the Company hadaccrued approximately $255,000 relating to this commitment.

The Company’s Board of Directors authorized an amendment to Summus, Inc.’s EquityCompensation Plan (the “Plan”) in February 2001 to increase the aggregate number of shares of its common stockavailable for issuance of stock awards under the Plan to 6,500,000. The Plan provides for the issuance of stock options toemployees, directors, advisors and consultants of the Company. Options granted generally have a ten-year term and vest over threeyears from the date of grant. Certain of the stock options granted under the Plan have been granted pursuant to various stockoption agreements. Each stock option agreement contains specific terms. On May 23, 2002, the Company’s Board of Directorsadopted resolutions to amend the Company’s Plan to increase the shares available under the Plan from 6,500,000 to8,500,000.

A summary of the Company’s stock option activity is as follows:

**Shares**

**WeightedAverage ExercisePrice**
  
Outstanding – December 31, 1999

– 

     $ 
– 
Granted

1,664,737 

0.19 

Exercised

(498,104)

0.19 

Outstanding – December 31, 2000

1,166,633 

0.19 

Issuance of options in accordance with terms of therecapitalizationtransaction

1,942,705 

3.96 

Granted

2,252,901 

2.24 

Forfeited

(224,054)

(4.83)

Exercised

(6,043)

(0.42)

Outstanding – December 31, 2001

5,132,142 

     $
 2.98 
Granted

3,401,654 

            1.05 

Exercised

(290,300)

           (0.03)

Forfeited

(687,321)

           (2.17)

Outstanding – December 31, 2002

7,556,175 

     $
 2.29 
F-31
   
Summus, Inc. (USA)

Notesto Consolidated Financial Statements (continued)

 

**15.  Stock Options (continued)**

The following table summarizes information about stock options outstanding at December 31,2002:

**Options Outstanding**

**Range ofExercise Prices**

**Number Outstanding**

**Weighted AverageContractual Life**

**Weighted AverageExercise Price**

$       0.01- 1.00

2,031,667

9.09

$             0.47

         1.50- 3.00

3,471,458

9.07

              1.78

         3.50- 6.82

1,758,050

8.21

             3.95

         7.50-18.90

   295,000

6.96

           11.06
 
7,556,175

8.80

$            2.29

 

**OptionsExercisable**

**Range ofExercise Prices**

**Number Exercisable**

**Weighted AverageExercise Price**

** **

$       0.01- 1.00

1,663,367

$            0.49

         1.50- 3.00

2,360,467

              1.71

         3.50- 6.82

1,3247,751

             4.07

         7.50-18.90

   256,667

           11.37
 
5,628,252

$            2.36

During 2002, the Company issued 290,300 shares of its common stock upon the exercise ofoutstanding stock options.  The Company received $12,750 in proceeds from the exercise of these stock options.

**16.  Commitments and Contingencies**

Commencing August 15, 2002, the Company adopted an alternative compensation arrangementfor its executives. Under the terms of the new arrangement, electing executives may receive a portion of their annual cashcompensation in the form of fully vested stock options.  The stock options will have an exercise price equal to the fairmarket value of the Company’s’ common stock based on the three-day average of the closing prices of the common stock at the end of eachrespective payroll period.  The amount of compensation to be received in stock options (the “target compensation”)is to be determined by the participating executive based on increments of 5% commencing with a minimum level of 15% of theparticipant’s annual compensation.  The number of shares underlying each option will be determined by dividing thedollar value of the target compensation by the three day average closing price at the end of each respective payroll period. Once this election is made, it will remain effective for a minimum of three months and can be terminated early at the fulldiscretion of the Company. Beginning on August 15, 2002, five executives elected to participate in this alternative payment plan atreduced salary levels ranging between 25% and 35% of their respective annual compensation. As of December 31, 2002, the Company hasissued 241,431 fully vested stock options with exercise prices ranging between $0.25 and $0.48 per share under thisplan.

F-32
   
Summus, Inc. (USA)

Notesto Consolidated Financial Statements (continued)

 

**16.  Commitments and Contingencies (continued)**

On July 19, 2002, the Company entered into an irrevocable common stock equity line thatwas intended to provide funding to the Company in amounts up to $10.0 million. The Company filed a registration statement on FormS-1 with the Securities and Exchange Commission on July 31, 2002 relating to this common stock equity line agreement.  Basedon comments received from the Securities and Exchange and related communicationswith the SEC, the Company understood thatthe terms of the equity line financing arrangement were such that it would not be able to resolve the staff’s comments in atimely manner and seek effectiveness of the registration statement in a timely manner.  Due to these developments, the lengthof time involved in completing the transaction, and other factors, the Company determined that it was in its best interest towithdraw the registration statement and not proceed with the equity line.  Accordingly, on September 17, 2002, the Companysubmitted to the SEC a request to withdraw the registration statement and cancelled allagreements associatedwith the common stock equity line.  In connection with the cancellation of the agreements associated with the common stockequity line, Talisman, the intended purchaser under the equity line, indicated to the Company its intention toretain ownership of the warrants to purchase 500,000 shares of the Company’s unregistered common stock at an exercise priceof $0.47 per share that were issued to Talisman upon the execution of the equity line agreements. It is management’sposition, with the advice of legal counsel, that the cancellation of these warrants became effective with the cancellation of theequity line agreements and that no loss contingency exists.  Therefore, the Company has not recorded the issuance of these500,000 warrants in its financial statements.  The Company has sent correspondence to Talisman stating its position that thewarrants have been cancelled.  To date, the Company has not received correspondence back from Talisman indicating theirconcurrence.

The Company established the Inventions Awards Plan (“the Plan”), effectiveOctober 30, 2000, to provide incentives to certain eligible employees by providing them with opportunities to receive additionalcompensation as a result of their development of enhancements or new methods that generate revenue for the Company.

Under the terms of the plan, the Company is obligated to reserve 5% of the gross revenuesderived from the licensing or sale of  “New Technology”, as defined in the agreement, for distribution amongeligible employees.  If the Company sell the rights to New Technology, eligible employees shall be entitled to an award of 10%of the gross proceeds. 

In addition, the Company may, at its option, initiate a spin-off company to develop NewTechnology.  If the eligible employee accepts a position in the spin-off company, his or her rights to awards under the planare to be surrendered for 25% of the founders’ equity in the spin-off company.

As of December 31, 2002, there areseveral eligible employeeswho have been credited with the development of New Technology since the establishment of the Inventions Awards Plan.   As awards are earned under the Plan they are recorded as costs of revenues of  wireless applications and contracts.

F-33
   
Summus, Inc. (USA)

Notesto Consolidated Financial Statements (continued)

 

**17.  Settlements of Contractual Disputes and Litigation**

***The Richdale Contractual Dispute***

In June 2001, the Company entered into an agreement of settlement and compromise wherebyit issued 250,000 shares of its unregistered common stock in full satisfaction of a $435,815 payable to entities affiliated with arelated party. Under the terms of the agreement, the Company agreed to register the resale of the shares issued upon the Company’sfiling of a registration statement under the Securities Act of 1933.

***The Dunavant Litigation***

On June 29, 2001, the Company entered into a settlement agreement and voting agreementwith William R. Dunavant and his counsel. Under the terms of such agreements:
- the Company issued an aggregate of 475,000 shares of common stock toMr. Dunavant and his counsel which were valued at $352,688. Such amount was determined by applying a discount to the traded valueof the Company’s stock on the date of the revised settlement;
- Mr. Dunavant agreed to certain resale restrictions with respect to allbut 350,000 shares of common stock held by him (an aggregate of 2,275,000 shares), specifically, to limit his public resale of suchshares to 30,000 shares per calendar month until February 15, 2002;
- the Company agreed to prepare and proceed diligently to complete andfile a registration statement with the SEC registering the resale of all of the shares held by Mr. Dunavant, his spouse and hiscounsel, with Mr. Dunavant and his counsel having a right to seek an immediate hearing for emergency injunctive relief if suchregistration statement was not filed before July 31, 2001, unless counsel to the Company advised the Company (as counsel did) thatit was 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 periodfrom the date of the agreements, to vote the shares held by them in favor of and for the election of Board nominees by the Companyand to vote such shares in a manner consistent with the recommendation of the Board with respect to certain extraordinarytransactions (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 theother, executed mutual general releases with respect to any and all claims against each other, except with respect to theobligations and liabilities under such agreements.

At the meeting of the Company’s Board of Directors held on July 20, 2001, counsel to theCompany

F-34
   
Summus, Inc. (USA)

Notesto Consolidated Financial Statements (continued)

 

  **17.  Settlements of Contractual Disputes and Litigation (continued)**

advised the Board that, in counsel’s opinion, it was in the best interests of the Companyand its shareholders to delay the filing of a registration statement with the SEC to register the resale of all the shares ofcommon stock held by Mr. Dunavant, his spouse and his attorney. Counsel’s views on this subject took cognizance of, among otherthings, the critical importance to the Company of:
- becoming timely in its reporting obligations under the SecuritiesExchange Act of 1934, as amended (at the time the Company’s quarterly report on Form 10-Q for the first quarter of 2001, to havebeen filed on or before May 15, 2001, had not yet been filed); and
- clearing its Form 10 at the earliest opportunity possible, since theclearance of the Form 10 was a prerequisite to having the Company’s common stock made eligible for quotation on the OTC BulletinBoard 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 theregistration statement in view of these considerations.

On November 2, 2001, the Company cleared all comments with respect to its Form 10.Subsequent to clearing the comments with the SEC, the Company filed a registration statement on Form S-1 which was declaredeffective by the SEC on July 22, 2002.

***The AIC Litigation***

On March 30, 2001, Analysts International Corporation ("AIC") filed a civil summons andcomplaint in General Court of Justice, District Court Division, County of Wake, North Carolina, against High Speed Net Solutions,Inc. The complaint alleged that the Company breached certain contracts with AIC, dated December 9, 1999, February 11, 2000, April25, 2000, May 9, 2000, and May 23, 2000, under which AIC provided the Company with computer programming services. AIC requestedthat the court enter judgment in its favor for $358,426, plus pre-judgment interest from September 26, 2000, on certain invoices atthe rate of 18% per annum, post-judgment interest at the rate of 8% per annum, reasonable costs of AIC and other relief the courtdeems equitable.

The Company and AIC entered into a settlement agreement and release, dated August 7, 2001,under which the Company 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 nine months, commencing one month after execution of the settlement agreement, and (iii) $10,000per month thereafter until the balance of the Indebtedness is paid in full. At December 31, 2001, the Company was current in itsobligations under this agreement. The remaining amount due, plus

F-35
   
Summus, Inc. (USA)

Notesto Consolidated Financial Statements (continued)

 

**17.  Settlements of Contractual Disputes and Litigation (continued)**

accrued interest, is included in accounts payable and accrued expenses in the accompanyingbalance sheet. The Company also executed a consent order in favor of AIC providing for AIC’s entry of a judgment by consent in theamount of the Indebtedness, less any payments made under the settlement agreement, in the event the Company defaults on itsobligations under the settlement agreement.  The Company has not made payments under this settlement agreement since September 30, 2002 andtherefore it is currently in default under the terms of this agreement.  Upon default, AIC must notify the Company in orderto activate a 3-day cure period.  If the Company is unable to cure the default within the cure period, an automatic defaultjudgment will be made against the Company.

***The ENELF Litigation***

On March 15, 2001, ENELF, LLC filed a civil lawsuit in the United States District Courtfor the Eastern District of Texas alleging patent infringement by Microsoft Corporation, Texas Instruments, Incorporated Aware,Inc. and the Company. ENELF alleged that certain modules of MaxxSystem and PhotoID SDK infringed upon ENELF’s U.S. Patent Number4,599,567 entitled "Signal Representation Generator". ENELF sought to enjoin the Company from making, selling, offering for sale,using, or importing its wavelet-based video and image processing technology. In addition, ENELF sought an unspecified amount ofmonetary damages. The Company has asserted counterclaims for a declaratory judgment of noninfringement, invalidity andunenforceability of the ENELF patent.

On December 12, 2001, the Company and ENELF entered into a settlement and releaseagreement to settle all matters raised in the lawsuit filed on March 15, 2001 to avoid further expenditure of time and resourcesrelating to further litigation and uncertain outcome thereof. Under the terms of the settlement and release agreement, the Companyissued to ENELF 75,000 shares of the Company’s unregistered common stock which were valued at $80,437.

***Settlement of Claims of Van Ernst JakobsN.V.***

On August 21, 2001, the Company commenced negotiations with Van Ernst Jakobs N.V. ("VEJ")regarding the settlement of disputed amounts claimed by VEJ.

VEJ asserted a claim for services rendered in connection with fund raising activities itcoordinated and for services as a "finder" in the Company’s recapitalization transaction. VEJ asserted that certain amountswere due and payable by the Company to VEJ, in the form of cash and equity securities of the Company. The Company’s management wasof the view that payment of any amounts to VEJ (beyond consideration previously paid in connection with its capital-raising effortson behalf of the Company, consisting of a cash payment of $100,000 and the issuance of 32,501 shares of the Company’s common stock)was conditioned on VEJ raising additional capital for the Company.

F-36
   
Summus, Inc. (USA)

Notesto Consolidated Financial Statements (continued)

 

**17.  Settlements of Contractual Disputes and Litigation (continued)**

Upon consultation with the Company’s outside counsel, the Company was advised of thestrengths and weaknesses of VEJ’s claims and the uncertain outcome of potential litigation. After considering the facts andcircumstances, the Company’s management agreed to settle the claim (for a significantly lower amount than originally claimed andwith no disbursement of cash) in order to:

(1)

 maintain a goodrelationship with VEJ, as a shareholder of the Company and as a representative of other significant Companyshareholders;

(2)

 further induce VEJ to assist with or participate in future capital raisingactivities (recognizing that VEJ has been involved in significant capital raising transactions on behalf of the Company that havebeen critical to the financing of its operations and the Company continues to depend upon sales of its equity securities to financeits operations); and

(3)

 avoid costly litigation in connection with the settlement of the assertedclaim.

In October 2001, the Company and VEJ reached an agreement in principle, which was thendocumented in a definitive settlement agreement and release, which provided for the Company’s issuance to VEJ:

(1)

 80,000 shares of its unregistered common stock (in lieu of a cash payment of$143,415);
(2) a warrant to purchase 250,000 shares of the Company’s unregisteredcommon stock with an exercise price of $4.00 per share, valued using the Black-Scholes option pricing model, at approximately$400,000;(3)  a warrant to purchase 150,000 of the Company’s unregistered commonstock with an exercise price of 2.50 per share, valued, using the Black-Scholes option pricing model, at $256,500; and(4) a warrant to purchase 150,000 of the Company’s unregistered commonstock with an exercise price of $4.50 per share, valued, using the Black-Scholes option pricing model, at $252,000.
The Company has expensed the aggregate estimatedfair value of these securities, resulting in anon-cash charge in the statement of operations of the year ended December 31, 2001 of $1,051,915.

**The Alan Kleinmaier Litigation**

On November 15, 2001, Alan Kleinmaier, a former employee and officer of Summus, Inc. andSummus, Ltd. filed a civil lawsuit in the General Court of Justice, Superior Court Division in Wake County, North Carolina, againstthe Company and the former officers and directors of Summus, Ltd. In this suit, Mr. Kleinmaier claims that he was entitled to threemonths severance pay of $32,350

F-37
   
Summus, Inc. (USA)

Notesto Consolidated Financial Statements (continued)

 

**17.  Settlements of Contractual Disputes and Litigation (continued)**

when he was terminated from Summus, Ltd. The Company has filed an answer to Mr.Kleinmaier’s claims and has made several counterclaims against him. In May 2002, the Company and Mr. Kleinmaier mediatedclaims between them.  Mr. Kleinmaier received 15,000 options to purchase shares of Summus, Inc.’s unregistered common stock at $0.50 per share and executed arelease against all parties.  These options were valued at $8,850 using the Black-Scholes option-pricing model.

**The AT&T CORP. Litigation**

On June 7, 2002, AT&T CORP. filed a civil lawsuit in the United States District Courtfor the Eastern District of North Carolina against Summus, Inc. (USA).  In this suit, AT&T claimsthat it is entitledpayment in the amount of $231,910 for telephone calls and services rendered to the Company.  The Company has filed an answerto this claim and has made several counter claims.  In March 2003, the Company and AT&T CORP. settled the claim betweenthem, whereby both parties agreed to reduce the total amount owed by the Company to AT&T CORP. to $120,000 and this reducedamount be repaid over an 18 month period without interest commencing in March 2003.  Thereduction of this liability will bereflected in the Company’s Form 10-Q for the quarterly period ended March31, 2003.

**The Porter Novelli Litigation**

On December 12, 2002, Porter Novelli filed a civil summons in Wake County General DistrictCourt of Justice in the State of North Carolina, claiming that it is entitled payment in the amount of $18,886 for past servicesrendered to the Company.  The Company was granted an indefinite extension of time to file an answer to this complaint whilenegotiations for settlement are discussed. The Company is currently attempting to negotiate a resolution to this matter.

**18.  Discontinued Operations**

***Divestiture of "Rich Media Direct" (RMD) Business, including Douglas May & Co.,Inc.***

Upon the closing of the Company’s recapitalization transaction, management decidedto focus the Company’s efforts on Summus, Ltd.’s business operations at the time of the transaction. Management chose tofocus primarily on Summus, Ltd.’s business plan because of its perception that this business plan had the potential to creategreater shareholder value compared to the scope of Summus, Inc.’s business operations. In addition, the Company did not expect tohave the fund-raising capacity to continue to fund the business plans of both Summus, Ltd. and Summus, Inc., as previouslyenvisioned. The Summus, Inc. business consisted primarily of the “rich media direct” business operated by Douglas May& Co., a wholly-owned subsidiary of Summus, Inc. Therefore, management undertook a review to determine the appropriate courseof action for this portion of its business given the existing and anticipated funding constraints.

F-38
   
Summus, Inc. (USA)

Notesto Consolidated Financial Statements (continued)

 

**18.  Discontinued Operations (continued)**

On September 19, 2001, the Company and Douglas May entered into a stock purchase agreementunder which the Company sold and transferred to Mr. May all of the Company’s equity interest in Douglas May & Co. and relatedrich media direct assets. The date of the transaction represents the measurement date, as defined by Accounting Principles BoardOpinion No. 30 ("APB 30"), for the disposition of the Company’s rich media direct business. The results of operations ofDouglas May & Co. have been presented as discontinued operations in the Company’s statement of operations for the year endedDecember 31, 2001 in accordance with the guidance of APB 30. For the period February 16, 2001 through September 19, 2001, theoperations of Douglas May & Co. reflected approximately $319,000 in revenues and a net loss of $135,798. The Company hasrecorded a loss of $215,500 on this disposition of the discontinued operations for the year ended December 31, 2001.

Under the terms of its acquisition agreement with Mr. May, the Company acquired all of theissued and outstanding shares of capital stock of Douglas May & Co. from Mr. May in September 2000. As partial considerationfor the Company’s sale of Douglas May & Co. back to Mr. May, the Company has been released from its obligations with respect totwo allotments of shares of the Company’s common stock issued to Mr. May under the terms of the September 2000 share acquisitionagreement, specifically:
- the obligation to repurchase one allotment of 87,498 shares of theCompany’s common stock for $576,000; and
- the commitment to issue to Mr. May additional shares of the Company’scommon stock, which when combined with an original 50,000 share allotment, would provide a value of $500,000 as of the firstanniversary of the date the Company acquired Douglas May & Co. This amount was initially recorded at the guaranteed value of$500,000. Therefore, if these shares had ultimately been issued, the only accounting implication would have been reclassificationof the par value of the shares within the shareholders’ deficit.

The release of the Company of the above obligations was expressly made conditional uponthe Company not filing (or having filed against it) a petition in bankruptcy for a period of one year from the closing of the saleof Douglas May & Co. to Mr. May.  Since this release is conditional for one year, the Company reflected a liability of$576,000 on its balance sheet during the one-year time period. Since the Company did not file ( or have filed against it) apetition in bankruptcy during the one-year time period commencing September 30, 2001, the $576,000 liability was reclassified topermanent equity on September 19, 2002.

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

F-39
   
Summus, Inc. (USA)

Notesto Consolidated Financial Statements (continued)

 

**18.  Discontinued Operations (continued)**

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’sMaxxSystem suite of software products developed in connection with the Company’spreviously planned "rich media direct" service offering.

The Company also entered into a technology license agreement (and a related source codeescrow agreement) with a newly formed corporation and wholly-owned subsidiary of Douglas May & Co. Under the technology licenseagreement, the Company has granted to this company a perpetual, non-exclusive, non-transferable license with respect to some of theCompany’s core software technology for image, video compression and video streaming. The technology license agreement provides forthe 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 agreementcan be terminated by the licensee at any time following the first to occur: (1) payment of $400,000 in royalty payments to theCompany or (2) ninety days prior to the second anniversary of the agreement, provided that $400,000 in royalty payments have beenearned by the Company. The first specified minimum royalty payment of $100,000 was payable to the Company on December 31,2001. The Company extended the payment of the $100,000 into various installments commencing on March 31, 2002. As of June 30, 2002,the Company did not receive the scheduled installments under the extended payment plan, and accordingly all agreements between theCompany and Douglas May & Co., Inc. and it wholly owned subsidiary became null and void, except the obligations noted abovewhich expired on September 19, 2002. All royalty payments received by the Company during 2002, totaling $30,000, were recorded ascontracts and licensee fee revenue when the cash payments were collected due to the uncertainty of collection.

 

 

F-40
   
Summus, Inc. (USA)

Notesto Consolidated Financial Statements (continued)

 

**19.  Selected Quarterly Financial Data(Unaudited)**

Selected quarterly financial data for the years ended December 31, 2002 and 2001 is asfollows: 
 
**Three Months Ended**
 
**March 31**

**June 30**

**September 30**

**December 31**
 
*(in thousands, except per share data)*

**2002**
    
Revenues

$
 228 
$
 51 
$
 36 
$
 92 
Gross profit

164 

30 

(16)

47 

Net loss

(2,561)

(2,125)

(2,269)

(1,616)

Net loss per common share, basic and     diluted

(0.07)

(0.05)

(0.05)

(0.02)

**2001**

Revenues

$
 296 
$
 211 
$
 117 
$
 126 
Gross profit

163 

109 

63 

115 

Noncash settlements (1)

– 

– 

1,052 

124 

Loss from continuing operations (2)

(2,340)

(1,916)

(3,513)

(2,696)

Loss from discontinued operations (2)

(35)

(15)

(86)

– 

Loss on disposal of discontinued     operations

(216)

– 

–

– 
     
Net loss

(2,590)

(1,930)

(3,600)

(2,696)

Net loss per common share, basic and     diluted

(0.08)

(0.06)

(0.10)

(0.08)

 

(1)

During the third quarter in 2001, the Company settled claims of Van Ernst JakobsN.V.

(2)

During 2001, the Company discontinued its Rich Media Direct business which included thedivestiture of its wholly-owned subsidiary, Douglas May & Company. The Company recorded a loss on disposal of $216.

**20.  Subsequent Events**

From January 1, 2003 through March 15, 2003, the Company sold to private investors2,483,351 shares of its unregistered common stock, and warrants to purchase an additional 316,000 shares of common stock,and re-priced 3,324,502 previously issued warrants with initially issued exercise prices ranging between $1.47 and $5.25, pershare, to re-priced exercise prices ranging between $0.74 and $1.69, per share, for gross cash proceeds of approximately $1.2million.  These proceeds were used for general working capital purposes.

F-41
   
Summus, Inc. (USA)

Notesto Consolidated Financial Statements (continued)

 

**20.  Subsequent Events (continued)**

On February 21, 2003, the Company signed and executed a mutual release of all claims witha former law firm that had provided legal services to the Company.  Under the terms of this agreement, both parties agreed toa mutual release of any and all claims between the parties, as well as a cancellation of the unpaid fees owed by the Company to thelaw firm, totaling $886,557.   The Company did not issue any cash or equity securities in connection with this release. The reduction of this liability will be reflected in the Company’s  financial statements included inits Form 10-Q for the quarterly periodended March 31, 2003.

On February 27, 2003, Holland & Knight LLP, a law firm, filed a civil summons in theSuperior court of the District of Columbia, claiming that it is entitled payment in the amount of $867,269plus accrued interest for past legal servicerendered to the Company. Management is in the process of filing an answer to this complaint. The Company has recorded a liabilityof $867,269 relating to this claim as of December 31, 2002.

On February 25, 2003, Bowne of New York City, LLC (“Bowne”), a financialprinting firm, filed a civil summons in the Supreme Court of County of New York in the State of New York, claiming that it isentitled payment in the amount of $276,374 plus accrued interest for past services rendered to the Company.  Management is in the process of filingan answer to this complaint denying Bowne’s allegations. The Company has recorded a liability of $276,374 relating to thisclaim as of December 31, 2002.

F-42
   
Reportof Independent Auditors

The Board of Directors and ShareholdersHigh Speed Net Solutions, Inc.

We have audited the accompanyingconsolidated statements of operations, shareholders’ deficit and cash flows of High Speed NetSolutions, Inc. for the year ended December 31, 2000.  Thesefinancial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements basedon our audit.

We conducted our audit in accordancewith auditing standards generally accepted in the United States. Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  Anaudit includes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements.  An audit also includes assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  Webelieve that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidatedstatements of operations, shareholders’ deficit and cash flows referred to above present fairly, in allmaterial respects, the consolidated results of operations and cash flows of HighSpeed Net Solutions, Inc. for the year ended  December 31, 2000,  in conformity with accounting principles generally accepted in theUnited States.

The accompanying financial statementshave been prepared assuming that High Speed Net Solutions, Inc. will continue asa going concern. As more fully described in Note 1, High Speed Net Solutions,Inc. has incurred operating losses since inception and will require additionalcapital in 2001 to continue operations. These conditions raise substantial doubtabout 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 Note1.  The financial statements do not include any adjustments that mightresult from the outcome of this uncertainty.

/s/ Ernst & YoungLLP                                                                

May 22, 2001,except for Note 9as to which the date is June 27, 2001Raleigh, North Carolina

F-43   
High Speed NetSolutions, Inc.Consolidated  Statementof OperationsYear ended December 31, 2000

 
Revenue$599,054  Costs of revenue
476,280  

Gross profit

122,774  

Selling, general and        administrative expenses

6,864,159*
Non-cash        compensation333,750  Interest expense15,192  Amortization expense116,200  Impairment charges3,953,182  Loss contingency        charges
1,281,946  

Net loss

$

(12,441,655)

Net loss applicable        to common shareholders:

Net        loss
$
(12,441,655)

Beneficial        conversion feature of preferred stock
(294,900)
Preferred        stock dividends

(133,333)

Net loss applicable        to common shareholders

$

(12,869,888)
 Net loss per share        (basic and diluted)
$

(0.60)
 Weighted average        common shares outstanding 
 21,619,618 

*  Selling, general andadministrative expenses in 2000 exclude $0.3 million of non-cash compensation charges.

*See accompanying notes.*

F-44   
High Speed NetSolutions, Inc.

Consolidated Statementof  Shareholders’ Deficit

 

** Preferred      Stock**
**Common      Stock**
**Additional      Paid-in**

**Accumulated**

**Treasury**

**Total      Shareholders’**

 

**Shares**

**Amount**

**Shares**

**Amount**

**Capital**

**Deficit**

**Stock**

**Deficit**
 
     
 

 

 

 

 

 

 

 

 

Balance at December      31, 1999

–

–  

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 

$22,115,157 

$(24,264,113)

$(227,619)

$        (351,652)
  
** **

*See accompanying notes.*

F-45   
High Speed NetSolutions, Inc.Consolidated Statementof  Cash FlowsYear Ended December 31, 2000

 

**Operating activities**
  
   

Net loss
$
(12,441,655)

Adjustments to reconcile net      loss  to net cash used in           operating activities:
  
Impairment      charge
 
3,953,182 

Non cash      compensation
 
333,750 

Stock      issued for partial settlement of loss contingency
 
1,410,311 

Depreciation      and amortization
 
282,494 

Common      stock issued to non-employees
 
550,286 

Changes      in operating assets and liabilities, net of acquisitions:
 
  

Accounts      receivable
 
261,716 

Increase      in other current assets
 
(23,329)

Accounts      payable and accrued expenses
 
2,105,990 

Loss      contingency accrual
 
(255,040)

Net cash used in operating      activities
 
(3,822,295)

 
 
 

**Investing activities**
 
 

Capital expenditures, net of      acquisitions
 
(1,032,528)

Cash received in acquisition
 
63,971 
             
Net cash used in investing      activities
 
(968,557)

 
 
 

**Financing activities**
 
 

Funds loaned to related party
 
(1,435,000)

Net proceeds from sale of common      stock
 
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 

Repayments to stockholders
 
(19,323)
             
Net cash provided by financing      activities
 
4,868,734 

Net increase in cash and cash      equivalents
 
77,882 

Cash and cash equivalents at      beginning of year
 
248,740 
             
Cash and cash equivalents at end      of year
$
   326,622 

 
 
  

**Supplemental disclosures of      cash flow information**
 
 
Cash paid for interest
$
    15,192 

 
 
  

**Non-cash investing and      financing activities**

 
 

Assets acquired under capital      leases
$
    201,157 

 
 
  

*See accompanying notes.*

F-46   
High Speed NetSolutions, Inc.

Notes to ConsolidatedFinancial 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 wasinactive from the time of its incorporation in 1984 until it acquired all of theassets of Marketers World, Inc. (“MWI”) on August 24, 1998. In September1998, in conjunction with the MWI asset acquisition, HSNS changed its name toZZAP.NET, Inc. and in January 1999 changed its name to High Speed Net Solutions,Inc. 

On April 24, 2000, HSNS acquired 100%of the issued and outstanding shares of common stock of JSJ Capital Corp., anon-operating shell company incorporated in Nevada (“JSJ”), in exchange for50,000 shares of common stock of HSNS. The shares were issued in a transactionexempt from registration under the Securities Act of 1933 and, as such, were “restrictedsecurities” as defined in Rule 144 under the Securities Act of 1933. JSJ wasthen merged into HSNS, with HSNS being the surviving corporation. Theacquisition was accounted for as an issuance of HSNS common stock in exchangefor the net monetary assets of JSJ, accompanied by a recapitalization.
 
F-47   
High Speed NetSolutions, Inc.

Notes to ConsolidatedFinancial Statements (continued)

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

The 50,000 shares issued by HSNS inconnection with the acquisition of JSJ are considered a nominal issuance toeffect the acquisition. All share and per share data presented herein have beenrestated to reflect the issuance of these shares. The pro forma impact of theJSJ acquisition is a $400,000 charge to retained earnings on HSNS’s balancesheet, 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 amajority 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 percentagewas 33.6% at December 31, 2000.

On July 10, 2000, HSNS acquired all ofthe issued and outstanding common stock of Douglas May & Co., Inc. (“DouglasMay & Co.”) in a business combination accounted for as a purchase (seeNote 3).  HSNS had been a development stage company since its inception andceased being a development stage company in the third quarter of 2000 upon itsacquisition of Douglas May & Co.  HSNS provides media creation servicesthrough Douglas May & Co., a wholly owned and fully operational subsidiary,which include creative design assistance and commercial content development,development of audio and video images and animation, as well as web site designand construction (see Note 3).

Effective  February 16, 2001, HSNSacquired all the assets and operations of  Summus, Ltd. under the terms ofan asset purchase agreement, dated October 30, 2000, as amended (the “AssetPurchase Agreement”).  The transaction was accounted for as a capitaltransaction, accompanied by a recapitalization.  As a result of thetransaction, the historical financial statements of Summus, Ltd., for accountingpurposes, are deemed that of the Company (see Note 9). 

The accompanying financial statementshave been prepared on a going concern basis, which contemplates the realizationof assets and the satisfaction of liabilities in the normal course of business.As shown in the financial statements presented herein, for the year endedDecember 31, 2000, HSNS incurred a net loss of $12,441,655 and had negative cashflows from operations. These factors, among others, indicate HSNS may be unableto continue as a going concern for a reasonable period of time. The financialstatements presented herein do not include any adjustments relating to therecoverability of assets and classification of liabilities that might benecessary should HSNS be unable to continue as a going concern.
 
F-48   
High Speed NetSolutions, Inc.

Notes to ConsolidatedFinancial Statements (continued)

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

Following the HSNS–Summus, Ltd. assetacquisition,  the post-transaction  company (which, for clarity ofreference, is referred to as the “Company”) will actively seek to expandbusiness opportunities and pursue additional financing from third parties. The Company’s management anticipates that it will be able to attractadditional capital to continue to fund operations.  However, there can beno assurance that management’s plans will be executed as anticipated. The Company’s continuation as a going concern is dependent on its ability togenerate sufficient cash flow to meet its obligations on a timely basis, toobtain additional financing or refinancing as required, and ultimately to attainprofitability.

**2.        Significant Accounting Policies**

**           *Principles of Consolidation***

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

**           *Use of Estimates***

The preparation of financial statementsin conformity with generally accepted accounting principles requires managementto make estimates and assumptions that affect the amounts reported in thefinancial statements and accompanying notes. Actual results could differ fromthose estimates.
 
F-49   
 

High Speed NetSolutions, Inc.

Notes to ConsolidatedFinancial Statements (continued)

**2.        Significant Accounting Policies (continued)**

**           *Equipment, Software and Furniture***

Depreciation expense in 2000was $166,294. Depreciation expense was calculated on astraight-line basis over the estimated useful lives of the assets ranging fromthree to five years.

**           *Stock-Based Compensation***

HSNS has adopted the disclosure-onlyprovisions of Statement of Financial Accounting Standards (“SFAS”) No. 123,“*Accounting for Stock-Based Compensation*.”  As permitted by theprovisions of SFAS No. 123, HSNS continues to follow Accounting Principles BoardOpinion No. 25, “*Accounting for Stock Issued to Employees*” andrelated interpretations for its stock-based awards.

In accordance with APB 25, HSNS hasvalued employee stock option awards and shares of HSNS common stock issued toemployees and directors for services performed based on the traded value of HSNS’scommon stock, or its estimated fair value prior to it becoming traded, at themeasurement date of the stock options and awards.

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

**           *Income Taxes***

Income taxes are accounted for usingthe liability method in accordance with Statement of Financial AccountingStandards No. 109, “*Accounting for Income Taxes”* (see Note 7).

**           *Loss Per Share***

Loss per share has been calculated inaccordance with Statement of Financial Accounting Standards No. 128, “*Earningsper Share*.” HSNS has potential common stock equivalents related to itsoutstanding stock options, preferred stock and common stock warrants. Thesepotential common stock equivalents were not included as outstanding for loss pershare purposes for all periods presented because the effect would have beenanti-dilutive.
 
F-50   
High Speed NetSolutions, Inc.

Notes to ConsolidatedFinancial Statements (continued)

**2.        Significant Accounting Policies (continued)**

***           Revenue Recognition***

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

***           New Accounting Pronouncements***

In June 1998, the Financial AccountingStandards Board issued Statement No. 133 “*Accounting for DerivativeInstruments and Hedging Activities*” (“SFAS 133”), which is required tobe adopted in years beginning after June 15, 2000. Because HSNS has nothistorically used derivative instruments, management does not anticipate thatthe adoption of this statement will have a significant effect on its operations,financial position or cash flows.

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

On June 29, 2001, the FinancialAccounting Standards Board (“FASB”) unanimously approved the issuance ofStatements of Financial Accounting Standards (“SFAS”) No. 141, “BusinessCombinations” and No. 142, “Goodwill and Other Intangible Assets,” SFAS141 eliminates the pooling-of-interests method of accounting for businesscombinations except for qualifying business combinations that were initiatedprior to July 1, 2001.  SFAS 141 also includes new criteria to recognizeintangible assets separately from goodwill.  The requirements of SFAS 141are effective for any business combination accounted for by the purchase methodthat is completed after June 30, 2001. Under SFAS 142, goodwill and intangibleassets 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 willcontinue to be amortized over their useful lives. The amortization provisions ofSFAS 142 requiring non-amortization of goodwill and indefinite-lived intangibleassets apply to goodwill and indefinite-lived intangible assets acquired afterJune 30, 2001.  The Company will adopt SFAS 142 in the fiscal yearbeginning January 1, 2002.  The effect of adopting SFAS 142 by the Companybeginning January 1, 2002, is not expected to have significant effect on theoperating results or financial condition of the company.

**3.        Business Combination**

On July 10, 2000, under the terms of ashare acquisition agreement dated as of June 30, 2000, by and between HSNS andDouglas May, HSNS acquired all of the issued and outstanding capital stock ofDouglas May & Co. by issuing to Mr. May 183,070 shares of HSNS common stockin 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 directbusiness.  This acquisition was expected to create synergies with HSNS’splanned rich media direct service offering.
 
F-51   
High Speed NetSolutions, Inc.

Notes to ConsolidatedFinancial Statements (continued)

 

**3.        Business Combinations (continued)**

The shares of HSNS common stock issuedin the transaction were valued at $1,376,000. Under the terms of the shareacquisition agreement, the 183,070 shares of HSNS common stock were issued inthree allotments. The first allotment corresponded to $500,000 of value. Atclosing, HSNS issued 50,000 shares of common stock, the number of such sharesbeing subject to adjustment if the Over-the-Counter Bulletin Board trading priceof the common stock on the first anniversary of the closing date of thetransaction was less than $10.00 per share. Under such circumstances, HSNS wasobligated to issue additional shares of common stock that, when added to the50,000 shares, and multiplied by the per share trading price on the firstanniversary of the closing date, equaled $500,000 in value.   Theissuance of the 50,000 shares was recorded at the “guaranteed” amount of$10.00 per share on the date of issuance, July 10, 2000. Payment or issuance ofany additional shares under the terms of the share acquisition agreement willnot change the recorded cost of the acquisition of Douglas May & Co. by HighSpeed Net Solutions, Inc.

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

The third allotment of shares of commonstock (45,572 shares) issued at closing corresponded to $300,000 of value. HSNScommitted to file a registration statement with the SEC to register the resaleof these shares.  If the shares were not freely tradable on or before theexpiration of 90 days from the closing date, Mr. May had the right to cause HSNSto repurchase these shares from him by releasing funds, in the amount of$300,000, which the share acquisition agreement provided be placed into anescrow account, the funds being from certain accounts receivable of Douglas May& Co. that were collected subsequent to the acquisition date. In January2001, based on the election of Mr. May, HSNS repurchased and retired theseshares for $300,000 using the funds from the escrow account. These shares weretreated as outstanding for loss per share purposes in accordance with theguidance set forth in SFAS No. 128. All shares issued that are subject torepurchase by HSNS have been presented on HSNS’s balance sheet as redeemablestock outside of shareholder’s equity.

The results of operations of DouglasMay & 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 Douglas May & Co.produced negative cash flows. Because of the decision made in the fourth quarterof 2000 not to further pursue the planned rich media direct business due tofunding constraints, management determined there was no basis upon which toproject positive future cash flows from Douglas May & Co. since the basisfor making the acquisition was originally related to expected synergies andexpected future prospects by incorporating the business of Douglas May & Co.into the planned rich media direct business. Thus, in accordance with theprovisions of SFAS 121, HSNS concluded that the unamortized portion of thegoodwill recorded in connection with the acquisition of Douglas May & Co.($1,058,177, net of the previously amortized amount of $116,260) had becomefully impaired and should be written off. HSNS recorded an impairment charge of$1,058,177 in the fourth quarter of 2000 to recognize the unamortized balance ofgoodwill written-off.
 
F-52   
High Speed NetSolutions, Inc.

Notes to ConsolidatedFinancial Statements (continued)

**3.        Business Combinations (continued)**

The following unaudited pro formasummary information presents consolidated results of operations for HSNS as ifthe acquisition of Douglas May & Co. had been consummated on January 1,2000. The pro forma information does not necessarily reflect the actual resultsthat would have been achieved, nor is it necessarily indicative of futureconsolidated results for HSNS.

 

**Year ended      December 31**

 

**2000**

Revenue

$
1,673,260       

Net loss

12,311,544       

Loss per share applicable to      common shareholders
$
 (0.59)      

**4.        Related Party Transactions**

In February 1999, HSNS entered into aMarketing License Agreement (“MLA”) with Summus, Ltd., a related party. Under the MLA, HSNS became obligated to pay Summus, Ltd. an up-frontfee of $3,000,000, payable in four installments of $750,000 each. The firstthree 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 ofHSNS. The final installment was satisfied by HSNS’s issuance of 1.5 millionshares of its restricted common stock.

HSNS determined the value of the 1.5million shares issued in lieu of the final cash payment due under the MLA byapplying a discount to the traded value of HSNS’s common stock at the time ofissuance based on the discount associated with private sales of shares of itscommon stock (such shares being “restricted securities” as defined in Rule144 under the Securities Act of 1933) within close proximity of the time of theissuance of such shares.
 
F-53   
High Speed NetSolutions, Inc.

Notes to ConsolidatedFinancial Statements (continued)

**4.        Related Party Transactions (continued)**

Under the terms of the MLA, HSNS hadthe right to resell stand-alone software products specified in the MLA. Sincethe specified products were completed and ready for resale, HSNS capitalized the$3.0 million value of the up-front fees under the MLA as prepaid softwareroyalties (essentially license fees) in accordance with the provisions ofStatement of Financial Accounting Standards No. 86, “*Accounting for theCosts of Computer Software to Be Sold, Leased, or Otherwise Marketed*,” aseach of the four software products specifically referred to in the MLA hadreached “technological feasibility” within the meaning of Paragraphs 4 and38 of that statement.

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

In August 1999, Summus, Ltd. acquired amajority of the outstanding shares of HSNS (this percentage was subsequentlyreduced to 44% by December 31, 1999 as Summus, Ltd. sold a portion of the sharesit acquired to third parties). In connection with this transaction, HSNS’sexisting management team was replaced with new management. Over the next severalmonths, the new management team determined to revise HSNS’s business plan.Rather than function as a reseller of Summus, Ltd. software products, managementdetermined that HSNS should function as a service bureau or application serviceprovider, utilizing Summus Ltd.’s wavelet-based technology for delivery ofmultimedia services over the Internet. As a result of this change in businessplan, HSNS entered into negotiations with Summus, Ltd., beginning in December1999, to modify the companies’ contractual relationship under the MLA. Thesenegotiations resulted in the execution of several agreements (i.e. a masteragreement, software license agreement, software maintenance agreement, revenuesharing agreement and software escrow agreement) in mid-February 2000, whichsuperseded in its entirety the MLA.

Under the new agreements, HSNS did notbecome obligated to make any additional payments, in cash or otherconsideration, to Summus, Ltd. for the software products to be providedthereunder. In fact, HSNS received approximately $2.2 million in credits towardfuture fees due and payable to Summus, Ltd. Therefore, HSNS determined that, inthe absence of information that would have caused management to conclude thatthe net realizable value of any of the products licensed under the MLA had beenadversely affected by HSNS’s change in business plan or that the unamortizedcapitalized costs exceeded the net realizable value of such products, noimpairment-related write off under SFAS No. 86 was appropriate as of December31, 1999. As of that date, HSNS fully expected to generate future revenues, inits 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.

F-54   
High Speed NetSolutions, Inc.

Notes to ConsolidatedFinancial Statements (continued)

**4.        Related Party Transactions (continued)**

The software license agreement providedHSNS with rights to the use of Summus, Ltd.’s MaxxSystem suite of products inits planned rich media direct service bureau business. The agreement did notpermit HSNS to resell any of the software products constituting MaxxSystem**.**Assuch, HSNS determined that the MaxxSystem suite of software products constituted“internal use” software subject to Statement of Position 98-1, “*Accountingfor the Costs of Computer Software Developed or Obtained for Internal Use*.”

The agreements were executed inmid-February 2000. However, the terms of such agreement had been substantiallynegotiated and agreed to at the time HSNS’s financial statements as of and forthe year ended December 31, 1999 were issued. SOP 98-1 requires an evaluation ofcapitalized software costs for impairment in accordance with FASB Statement No.121. Statement No. 121 requires an estimate of future cash flows to determine ifan asset that is in use is impaired. The change in HSNS’s business plan wasdriven primarily by the view that delivery of multimedia over the Internetthrough the use of the MaxxSystem suite of software products offered greaterfuture cash flows than the resale of the software products licensed under theMLA. In view of these considerations, HSNS determined that an impairment-relatedwrite off of the prepaid royalties was not appropriate as of December 31, 1999under SOP 98-1 and SFAS 121.

During 2000, HSNS observed acombination of market conditions and potential government regulatory actionsthat caused it to modify its short-term and long-term plans for revenuegeneration as a service provider of rich media content over the Internet. Marketresistance developed to the delivery of Internet services via “.exe” filetypes following the delivery of certain of such files with viruses. Indeed, thisprompted many companies to configure firewalls to block all files with an .exeextension. 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, theFederal Trade Commission initiated an investigation of the use of informationgathered by permission-based marketing through e-mails and banner ads.

Management determined in the fourthquarter of 2000 that it was unlikely that funding would be available to developand rollout the service bureau business model as previously planned. Under FASB121, when it is no longer probable that computer software will be placed inservice, the software should be reported at the lower of its carrying amount orfair value. Therefore, during the fourth quarter of 2000, management determinedthat all of the assets associated with HSNS’s rich media direct service bureaubusiness were impaired. Accordingly, an impairment charge of $2.9 million wasrecorded consisting of the net carrying value of the capitalized amountsassociated with MaxxSystem of approximately $2.2 million and other capitalizedcosts incurred in the development of the service bureau business ofapproximately $0.7 million.
 
F-55   
High Speed NetSolutions, Inc.

Notes to ConsolidatedFinancial Statements (continued)

 

**4.        Related Party Transactions (continued)**

As of December 31, 2000, Summus, Ltd.held a 33.6% ownership interest in HSNS. On February 16, 2001, HSNS purchasedall the assets and operations of Summus, Ltd.  The transaction wasaccounted for as a capital transaction, accompanied by arecapitalization   (see Note 9).

During 2000, in connection with thenegotiations of the Asset Purchase Agreement with Summus, Ltd., HSNS advancedcertain funds to Summus, Ltd. to assist Summus, Ltd. in funding its operatingexpenses. These advances, which were evidenced by a promissory note in favor ofHSNS, totaled $1,435,000 as of December 31, 2000. This balance accrued interestcompounded monthly at 8%, was collateralized by Summus, Ltd.’s investment inHSNS’s stock and was payable within 60 days. Upon the closing of the AssetPurchase Agreement on February 16, 2001, the entire balance of this note plusaccrued interest was canceled.

During 1999, Summus, Ltd. fundedcertain expenses of HSNS. The balance outstanding related to these advances asof December 31, 2000  was $134,677.

**5.        Shareholders’ Equity**

*           **Preferred stock***

On February 28, 2000, HSNS issued 2,000shares of its Series A Convertible Preferred Stock, par value $.001 pershare  (the “Series A Preferred Stock”), at a price of $1,000 pershare. Proceeds, net of issuance costs of $149,048, were $1,850,952. The holdersof the Series A Preferred Stock are entitled to receive cumulative cashdividends at a rate of 8% per annum of the initial liquidation preference of$1,000 per share (the “Liquidation Preference”). Dividends are cumulativefrom the date of issuance and are payable, when, as and if declared by the Boardof Directors on June 30 and September 30 of each year commencing on September30, 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 matterssubmitted to HSNS’s shareholders for voting. However, approval of holders of amajority of the Series A Preferred Stock is required prior to the issuance of anew series of preferred stock that ranks senior to the Series A Preferred Stock.

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

F-56   
High Speed NetSolutions, Inc.

Notes to ConsolidatedFinancial Statements (continued)

**7.        Shareholders’ Equity (continued)**

*           **Common stock***

During 2000, HSNS issued 1,544,291shares of its unregistered common stock and issued warrants to purchase anadditional 1,977,564 shares of common stock for gross cash proceeds of$4,777,553.  The warrants have exercise prices ranging from $4.00 to $4.625per share, a term of five years, and cannot be exercised within five months fromthe date of issuance.

*           **Stock options***

HSNS’s Board of Directors authorizedan amendment of HSNS’s Equity Compensation Plan (the “Plan”) in February2001 to increase the aggregate number of shares of its common stock availablefor issuance of stock awards under the Plan to 6,500,000. The Plan provides forthe issuance of stock options to employees, directors, advisors and consultantsof and to HSNS. Options granted generally have a ten-year term and vest overthree years from the date of grant. Certain of the stock options granted underthe Plan have been pursuant to various stock option agreements. Each stockoption agreement contains specific terms.

During 2000, HSNS granted options topurchase 50,000 shares of HSNS’s common stock to non-employees. Non-cashexpense of $468,171 related to these options was recognized based on the fairvalue of these options in accordance with SFAS No. 123.

In addition, HSNS granted options topurchase 15,000 shares of HSNS’s common stock to a Director that had anexercise price below the fair value of the underlying common stock. Non-cash compensation expense of $333,750 has been recognized based on thedifference between the exercise price and the traded value of the common stockon the date of grant.
 
F-57   
High Speed NetSolutions, Inc.

Notes to ConsolidatedFinancial Statements (continued)

**5.        Shareholders’ Equity (continued)**

A summary of HSNS’s stock optionactivity is as follows:

 

**Shares**

**Weighted      Average Exercise Price**
 
 

  

  

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 summarizesinformation about stock options outstanding at December 31, 2000:

**Options      Outstanding**

**Range of      Exercise Prices**

**Number      Outstanding**

**Weighted      Average Contractual Life**

**Weighted      Average 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      Exercise Prices**

**Number      Exercisable**

**Weighted      Average Exercise Price**
 
                 $      .01

282,000

   $      .02    

2.50 – 7.50

180,000

4.00
           
 

462,000

$1.57  
            
In accordance with SFAS 123, the fairvalue of each option grant was determined by using the Black-Scholes optionpricing model with the following weighted average assumptions for the twelvemonth 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. Theweighted average fair value at the date of grant was $6.36 per option. Had thecompensation expense for HSNS’s stock options been determined based on thefair value at the date of grant consistent with the provisions of SFAS 123, HSNS’snet loss and net loss per share would have been $(15.4) million and $(0.71) forthe twelve months ended December 31, 2000.

F-58   
High Speed NetSolutions, Inc.

Notes to ConsolidatedFinancial Statements (continued)

**6.       Leases**

During 1999, HSNS established itheadquarters in Raleigh, North Carolina and entered into a noncancelableoperating lease for office space and also entered into certain capital leasesfor office equipment. HSNS also leases office space and certain office equipmentin Dallas, Texas relating to the operations of its subsidiary, Douglas May &Co. Rent expense incurred during the year ended December 31, 2000 wasapproximately $124,000.

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

 

**Capital Leases**

**Operating      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 isincluded in depreciation and amortization expense.

**7.       Income Taxes**

No provision for income taxes has beenrecorded during the years presented due to HSNS’s significant operating lossesin each year.

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

F-59   
High Speed NetSolutions, Inc.

Notes to ConsolidatedFinancial Statements (continued)

**7.       Income Taxes (continued)**

 

**December 31**

 

**2000**

Deferred tax assets:
           
 

     Start-up      expenses
$
1,386,000 

     Loss      contingency accrual
 
199,000 

     Depreciation
 
4,000 

     NOL      carryforward
 
6,161,000 

Total deferred tax assets

 
7,750,000 

Deferred tax asset valuation      allowance

 
(7,750,000)

Net deferred taxes
**$**
**  –  **

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

At December 31, 2000, HSNS had federaland state net operating loss carryforwards of approximately $15,400,000 forincome tax purposes. The tax benefit of these carryforwards is reflected in theabove table of deferred tax assets. If not used, these carryforwards begin toexpire 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 followingcertain changes in ownership. If such a change occurs, the limitation couldreduce the amount of these benefits that would be available to offset futuretaxable income each year, starting with the year of ownership change.

**8.       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 ofHSNS common stock and $100,000 in cash in exchange for his shares of SummusTechnologies, Inc. stock, filed a lawsuit against HSNS. Former management ofHSNS had entered into an agreement with Dunavant which obligated HSNS toregister the 350,000 shares of HSNS common stock under the Securities Act of1933 (the “Securities Act”) within a specified time period. HSNS’s failureto register such shares resulted in a lawsuit against HSNS seeking damages of$13,300,000.

F-60   
High Speed NetSolutions, Inc.

Notes to ConsolidatedFinancial Statements (continued)

**8.       Loss Contingencies (continued)**

In June 2000, HSNS entered into asettlement agreement with Dunavant to resolve the lawsuit. This settlementagreement 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 Dunavant1,700,000 shares of its restricted common stock in 2000. The value of theseshares, totaling $1.4 million, was based on a discount applied to the tradedvalue of HSNS’s common stock on the date of issuance. The number of commonshares held by Dunavant at December 31, 2000, totaled 2,050,000. Additionally,HSNS became obligated to issue 25,000 shares of restricted common stock permonth and pay $25,000 in cash per month to Dunavant until a registrationstatement on Form S-1, covering the resale of Dunavant’s shares, is declaredeffective by the SEC, which will result in the HSNS shares owned by Dunavantbecoming freely tradable. The loss contingency accrual as of December 31, 2000,represents management’s best estimate of the monthly obligations subsequent toDecember 31, 2000 that HSNS would incur under the terms of the agreement withDunavant through completion of the registration process. The estimated value ofthe monthly share allotment was determined by applying an appropriate discountto the traded value of HSNS’s common stock as of December 31, 2000.

           ***The AIC Litigation***

On March 30, 2001, AnalystsInternational Corporation (“AIC”) filed a civil summons and complaint inGeneral Court of Justice, District Court Division, County of Wake, NorthCarolina, against High Speed Net Solutions, Inc. The complaint alleged that theCompany breached certain contracts with AIC, dated December 9, 1999, February11, 2000, April 25, 2000, May 9, 2000, and May 23, 2000, under which AICprovided HSNS with computer programming services. AIC has requested that thecourt enter judgment in its favor for $358,426, plus pre-judgment interest fromSeptember 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 andother relief the court deems equitable. The Company and AIC are negotiating toresolve the matter. The principal amount of $358,426 is included in accountspayable at December 31, 2000.

           ***Cale Yarborough Litigation***

On April 25, 2001, Cale Yarborough, aCompany shareholder, filed a summons and complaint against HSNS, David Gordon,Bear Steams Securities Corp., MidSouth Capital, Inc., and Interwest StockTransfer Co. in the United States District Court, District of South Carolina,Florence Division, alleging, among other things, (i) breach of an agreementMr. Yarborough entered into with David Gordon under which Mr. Gordon was toprovide an opinion letter as to Mr. Yarborough’s ability to resell shares ofour common stock in accordance with Rule 144 promulgated under the SecuritiesAct of 1933, (ii) violation of Rule 144, (iii) professional negligence andbreach of fiduciary duty, and (iv) violation of federal and state securitieslaws. All of the causes of action in the complaint stem from the alleged failureto properly advise Mr. Yarborough as to when the shares of our common stockcould properly be resold under Rule 144. On May 17, 2001, the complaint wasdismissed without prejudice. As such, it is subject to being reopened upon theshowing of good cause within the 60-day period following the issuance of thedismissal order. It is the Company’s understanding that Mr. Yarboroughand Mr. Gordon are in the process of reaching a settlement of this matter. The Company has not recorded a loss contingency relating to this complaintbecause, in management’s opinion, it is not probable that a loss contingencyexists and an amount cannot be reasonable estimated.

 

F-61   
 

High Speed NetSolutions, Inc.

Notes to ConsolidatedFinancial Statements (continued)

**9.       Subsequent Events**

           ***Summus, Ltd. Asset Acquisition***

On February 16, 2001, HSNS acquired allthe assets and operations of Summus, Ltd. Prior to the transaction, Summus, Ltd.was a technology company located in Raleigh, North Carolina that providedcontract engineering, research and development in applications related to imageand video compression and communication, and provided commercial technology indigital media through various methods, including generating software developmentkits for resale, licensing technology, and developing commercial softwareproducts. Its intellectual property included capabilities in encoding,manipulating, compressing, managing and distributing digital content. Its coretechnology for compression, partially derived from a field of mathematics knownas wavelets, used the brand name of Dynamic WaveletTM. Under thisbrand, Summus. Ltd. developed and supplied low-complexity, low bandwidth wavelettechnology for compression applications.

From HSNS’s perspective, the primarybusiness purpose of entering into the transaction with Summus, Ltd. was toacquire Summus, Ltd.’s compression technology.  Further, HSNS perceivedthe combination of the two companies as offering the potential to create moregrowth opportunities for the Company based on the expected enhanced access tocapital resources, plus it provided the opportunity for HSNS to capitalize onits prior investment in Summus, Ltd.

Prior to the closing of thetransaction, Summus, Ltd. was the largest shareholder of HSNS. It owned8,217,781 shares (33.2%) of HSNS’s common stock, approximately 27.6% on afully diluted basis. Immediately after the closing, Summus, Ltd.’s ownershipinterest in the Company increased to 20,593,352 shares (55.5%) of the Company’scommon stock on an as-converted basis, approximately (53.1%) on a fully-dilutedbasis. The Asset Purchase Agreement contemplates that Summus, Ltd. willliquidate following the completion of its distribution of the Company’ssecurities received in the transaction to the shareholders of Summus, Ltd. On March 13, 2001, Summus, Ltd. distributed certain of the shares of the Company’scommon stock received in the transaction to the shareholders of Summus, Ltd. inaccordance with their pro rata interests; the balance of such shares wasdistributed in mid-July 2001.

The transaction will be accounted foras a capital transaction, accompanied by a recapitalization. By accounting forthe transaction as a capital transaction, the transaction is effectively viewedas the issuance of stock by Summus, Ltd. in exchange for the cash of HSNS,accompanied by a recapitalization of Summus, Ltd.  The accounting for thetransaction 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, thehistorical financial statements of Summus, Ltd. for accounting purposes, aredeemed to be those of High Speed Net Solutions, Inc.  The equity accountsof Summus, Ltd. have been adjusted for a recapitalization to reflect the equitystructure of HSNS, the legal acquirer.  Specifically:

F-62   
 

High Speed NetSolutions, Inc.

Notes to ConsolidatedFinancial Statements (continued)

**9.       Subsequent Events (continued)**
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 waseffected by HSNS issuing shares of its common and Series B preferred stock, andother equity interests, in exchange for the net assets of Summus, Ltd. Theconsideration paid by HSNS to acquire the assets of Summus, Ltd. is describedbelow:
- 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.

F-63   
High Speed NetSolutions, Inc.

Notes to ConsolidatedFinancial Statements (continued)

**9.       Subsequent Events (continued)**
- 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 describedabove, the terms of the Asset Purchase Agreement provided for  HSNS’sassumption of approximately $2.8 million of liabilities of Summus, Ltd. to thirdparties.  All amounts owed by and between HSNS and Summus, Ltd. werecancelled upon the closing of the transaction.

In connection with the transaction, theCompany entered into a three-year employment agreement with Dr. Bjorn Jawerth.Under this employment agreement, in exchange for Dr. Jawerth’s covenant not tocompete with the Company for a period of 18 months from and after thetermination of his employment with the Company, the Company issued options toDr. Jawerth to purchase 166,667 shares of common stock at $0.50 per share and333,333 shares of common stock at $3.75 per share.  Non-cash compensationexpense of $541,688 was recorded upon the issuance of these options as ofFebruary 16, 2001, the closing date of the transaction.  The issuance ofthese options was in lieu of a $500,000 cash payment provided for in Dr. Jawerth’semployment agreement.

Under the Asset Purchase Agreement HSNSagreed to use reasonable commercial efforts to assist Dr. Jawerth in the privatesale 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 $1.50per share.  The Asset Purchase Agreement does not stipulate a date or timeperiod by which such sale is to occur.  Under the terms of Dr. Jawerth’semployment agreement, the Company is obligated to issue to Dr. Jawerth options,with an exercise price of $1.50 per share, exercisable for three times thenumber of shares of common stock sold in the private sale. The options will beexercisable during the second through the fifth year after the options areissued.  Non-cash compensation will be recorded upon the issuance of theseoptions. The non-cash compensation will be determined under the provisions ofAPB 25, pursuant to which the compensation cost will be based on the differencebetween the stock option exercise price of $1.50 per share and the traded valueof the HSNS common stock on the date the options are issued.

During the term of the employmentagreement, Dr. Jawerth will receive a base salary of $350,000 (which is subjectto an annual increase of at least 10%) plus other benefits including severancebenefits.
******
F-64   
High Speed NetSolutions, Inc.

Notes to ConsolidatedFinancial Statements (continued)

*** ***

**9.       Subsequent Events (continued)**

***The Dunavant Settlement***

On June 29, 2001, the Company enteredinto 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 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 Boardof Directors held on July 20, 2001, counsel to the Company advised the Boardthat, in counsel’s opinion, it was in the best interests of the Company andits shareholders to delay the filing of a registration statement with the SEC toregister the resale of all the shares of common stock held by Mr. Dunavant, hisspouse and his attorney.  Counsel’s views on this subject took cognizanceof, 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.
****
F-65   
High Speed NetSolutions, Inc.

Notes to ConsolidatedFinancial Statements (continued)

**9.       Subsequent Events (continued)**

The Company and its counsel, inaccordance with the June 29, 2001 settlement agreement, have kept Mr. Dunavant,through his counsel, apprised of the Company’s contemplated timing withrespect to the filing of the registration statement in view of theseconsiderations.  Further, the Company has initiated the process by whichall of its shareholders with registration rights, including Mr. Dunavant, havebeen sent a notice seeking an indication from such shareholders of their desireto have their shares subject to such registration rights covered by theregistration statement, the number of such shares and their intended plan ofdistribution.  The Company currently anticipates that it will file theregistration statement with the SEC within a matter of days after clearing theForm 10.

           ***Settlement of the AIC Litigation***

The Company and AIC entered into asettlement agreement and release, dated August 7, 2001, under which the Companyhas 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 thefollowing payment schedule: (i) $20,000 upon execution of the settlementagreement, (ii) $5,000 per month for a period of six months, commencing onemonth after execution of the settlement agreement, and (iii) $10,000 per monthuntil the balance of the Indebtedness is paid in full.  The Company alsoexecuted a consent order in favor of AIC providing for AIC’s entry of ajudgment by consent in the amount of the Indebtedness, less any payments madeunder the settlement agreement, in the event the Company defaults on itsobligations under the settlement agreement.

           ***The ENELF Litigation***

On March 15, 2001, ENELF, LLC filed acivil lawsuit in the United States District Court for Eastern District of Texasalleging patent infringement by Microsoft Corporation, Texas Instruments,Incorporated Aware, Inc. and Summus, Ltd. ENELF alleged that MaxxNote, MaxxShowand PhotoID SDK infringed upon ENELF’s U.S. Patent Number 4,599,567 entitled“Signal Representation Generator”. ENELF sought to enjoin Summus, Ltd. frommaking, selling, offering for sale, using, or importing its wavelet-based videoand image processing technology. In addition, ENELF sought an unspecified amountof monetary damages. The Company has filed an answer denying ENELF’sallegations, and seeking a declaratory judgment of non-infringement, invalidity,and unenforceability.  The Company has recently entered into settlementdiscussions with ENELF, but is prepared to provide a vigorous defense to thislawsuit.  The Company has not recorded a loss contingency relating to thiscomplaint because, in management’s opinion, it is not probable that a losscontingency exists and an amount cannot be reasonably estimated.

           ***Settlement Agreement with Brad Richdale Affiliates***

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

F-66   
 

**SIGNATURES**

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

**Summus, Inc. (USA)**

 By:     /s/ Robert S. Lowrey                                                Robert S. Lowrey         Chief Financial Officer

           Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacitiesand on the date indicated.
**Signature**
**Title****Date**   
          ***/s/ Dr. Bjorn D. Jawerth***        Dr. Bjorn D. Jawerth        Principal Executive        Officer,        Chief Executive Officer, and        Director        March 31, 2003          ***/s/ Robert S. Lowrey***        Robert S.        Lowrey        Principal Financial        and        Principal Accounting Officer,        Chief Financial Officer        March 31, 2003          ***/s/ Richard F. Seifert***        Richard F. Seifert        Director        March 31, 2003          ***/s/ George H. Simmons***        George H. SimmonsDirector        March 31, 2003          ***/s/ Neil R. Guenther***        Neil R. GuentherDirector        March 31, 2003   
Table    of Contents

**Certificate of Chief Executive Officer**

 I, Bjorn D. Jawerth, certify that:

1.             I have reviewed this annual report on Form 10-K ofSummus, Inc. (USA) (“Summus”).

2.             Based on my knowledge, this annual report does notcontain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light ofthe circumstances under which such statements were made, not misleading with respect to the period covered by this annualreport.

3.             Based on my knowledge, the financial statements andother financial information included in this annual report fairly present, in all material respects, the financial condition,results of operations and cash flows of Summus as of, and for, the periods presented in this annual report.

4.             Summus’ other certifying officers and I areresponsible for establishing and maintaining disclosure controls and procedures (as defined in the Exchange Act Rules 13a-14 and15d-14) for Summus and we have:

a. designed such disclosure controls and procedures to ensure that material information relating to Summus, including itsconsolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annualreport is being prepared;

 b. evaluated the effectiveness of Summus’ disclosure controls and procedures as of a date within 90 days prior tothe filing date of this annual report (the "Evaluation Date"); and

 c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures basedon our evaluation as of the Evaluation Date.

 5.             Summus’ other certifying officers and Ihave disclosed, based on our most recent evaluation, to our auditors and the audit committee of Summus’ board of directors:

 a. all significant deficiencies in the design or operation of internal controls which could adversely affectSummus’ ability to record, process, summarize and report financial data and have identified for Summus’ auditors anymaterial weaknesses in internal controls; and

 b. any fraud, whether or not material, that involves management or other employees who have a significant role inSummus’ internal controls. 

6.             Summus’ other certifying officers and I haveindicated in this annual report whether or not there were significant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

Date:    March 31, 2003 

/s/ Bjorn D.Jawerth                                          Bjorn D. Jawerth, Chairman of the Boardand Chief Executive Officer   
Table    of Contents

**Certificate of Chief Financial Officer**

I, Robert S. Lowrey, certify that:

1.             I have reviewed this annual report on Form 10-K ofSummus, Inc. (USA) (“Summus”).

2.             Based on my knowledge, this annual report does notcontain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light ofthe circumstances under which such statements were made, not misleading with respect to the period covered by this annualreport.

3.             Based on my knowledge, the financial statements andother financial information included in this annual report fairly present, in all material respects, the financial condition,results of operations and cash flows of Summus as of, and for, the periods presented in this annual report.

4.             Summus’ other certifying officers and I areresponsible for establishing and maintaining disclosure controls and procedures (as defined in the Exchange Act Rules 13a-14 and15d-14) for Summus and we have:

a. designed such disclosure controls and procedures to ensure that material information relating to Summus, including itsconsolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annualreport is being prepared;

b. evaluated the effectiveness of Summus’disclosure controls and procedures as of a date within 90 days prior to thefiling date of this annual report (the "Evaluation Date"); and

c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based onour evaluation as of the Evaluation Date.

5.             Summus’ other certifying officers and I havedisclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of Summus’ board ofdirectors:

a. all significant deficiencies in the design or operation of internal controls which could adversely affect Summus’ability to record, process, summarize and report financial data and have identified for Summus’ auditors any materialweaknesses in internal controls; and

b. any fraud, whether or not material, that involves management or other employees who have a significant role inSummus’ internal controls.

6.             Summus’ other certifying officers and I haveindicated in this annual report whether or not there were significant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

Date:    March 31, 2003 

 
____/s/ Robert S. Lowrey      Robert S. LowreyChief Financial Officer

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