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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549**

**FORM 10-K**

| ý     | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the Fiscal Year Ended December 31, 2003**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
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|    | **OR**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
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|  ̈        | **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)**(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 theSecurities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for the past 90 days.  YesþNo ̈

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

               Indicate by checkmark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).   Yes ̈  Noþ

               The aggregate market value of the shares of common stock held by non-affiliates of the Registrant as of June 30, 2003 wasapproximately $14,965,913 based on the average of the bid and asked price of the stock reported for such date.  For thepurpose 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 22, 2004 was71,277,220.

  
**SUMMUS, INC. (USA) FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003TABLE OF CONTENTS**

***PAGE***

**PART I**
 

** **

 

 

**ITEM 1  **
BUSINESS1
 
 
 

**ITEM 2 **

PROPERTIES 

 
10
 

** **

 

 
 
 

**ITEM 3 **

LEGAL PROCEEDINGS 

 
10
 

 

**ITEM 4 **

SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS 

 
10
 

 

**PART II**

 

 

**ITEM 5**

MARKET FOR REGISTRANT’S COMMON STOCK, RELATEDSHAREHOLDER MATTERS AND ISSUER PURCHASERS OFEQUITY SECURITIES
11
 

 

**ITEM6 **

SELECTED FINANCIALDATA   

 
14
 

 

**ITEM7   **

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATIONS 

 
16
 

 

**ITEM7A   **

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK 

 
40
 

**ITEM8   **

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 
40
 
 
 

**ITEM9   **

CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTSON ACCOUNTING AND FINANCIALDISCLOSURE  

 
40
 
**ITEM 9A**CONTROLS AND PROCEDURES40
 
 
 

**PART III**

 
 
 

**ITEM10   **

DIRECTORS ANDEXECUTIVE OFFICERS OFTHE REGISTRANT  

 
41
 
 
 

**ITEM11   **

EXECUTIVECOMPENSATION   
46
 
 
 

**ITEM 12 **

SECURITY OWNERSHIPOF CERTAIN BENEFICIAL OWNERSAND MANAGEMENT AND RELATED SHAREHOLDERMATTERS  

 
56
 
 
 

**ITEM 13   **

CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS 

 
58
 
 
 

**ITEM14   **
PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
58
 
 
 

**PART IV**

 
 
 

**ITEM15   **

EXHIBITS, FINANCIALSTATEMENT SCHEDULES, ANDREPORTS ON FORM 8-K  

        
60
 

 
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**EXPLANATORY NOTE**

*Change in Revenue Recognition Policy*

               After a careful review of the Company’s revenue recognition policies and giving consideration to guidance provided for inEmerging Issues Task Force No. 99-19 *Reporting Revenue Gross as a Principal versus Net as an Agent* (“EITF99-19”), the Company has changed certain revenue recognition policies affecting revenues earned by wireless applications andcontracts.  Prior to 4th quarter of 2003, the Company reported revenues earned by wireless applications and contracts andcost of revenues for wireless applications and contracts  net of certainthird-party costs in the statement of operations.  These transactionshave been reclassified to  reflect a gross revenue presentation with no effect on gross profit or net loss.  The amount by which revenues andcosts of revenues have been reclassified for the year ended December 31, 2003 is$635,989.  All revenues reported on this Form10-K for 2003 have been reported on the gross method.  Revenues and costs of revenues for 2002 have not been reclassified dueto immateriality.

**FORWARD-LOOKING STATEMENTS**

               This annual report on Form 10-K contains certain forward-looking statements that we believe are within the meaning of Section 27Aof the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safeharbors 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 each of theyears ended December 31, 2003, 2002 and 2001; 
-  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; 

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-  technological competition, which creates the risk of our technology being rendered obsolete or noncompetitive; 
-  the lack of patent protection with respect to our technology;  
-  potential infringement of the patent rights of third parties; and 
-  evolving technology trends.  

               Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of the assumptions could beinaccurate and actual results may differ from those indicated by the forward-looking statements included in this annualreport.  In light of the significant uncertainties inherent in the forward-looking statements included in this annual report,you should not consider the inclusion of such information as a representation by us or anyone else that we will achieve suchresults. We undertake no obligation to publicly update any forward-looking statements, whether as the result of new information,future events, or otherwise. You are advised, however, to consult any further disclosures we make in our subsequent quarterlyreports on Form 10-Q, current reports on Form 8-K, annual reports on Form 10-K, and other reports filed with the SEC. Also notethat we provide the following cautionary discussion 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 annualreport at the end of “Item 7 – Management’s Discussion and Analysis of Financial Conditions and Results ofOperations”.  These are factors that we think could cause our actual results to differ materially from expected andhistorical results. Other factors besides those listed there could also adversely affect us.

 

 

 

 

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**ITEM1.               BUSINESS**

               Except where otherwise indicated, the terms “Company,” “Summus” , “we,” “us” and“our” refer to Summus, Inc. (USA).  Our executive offices are located at 434 Fayetteville Street, Suite 600,Raleigh, N. C. 27601 and our telephone number is (919) 807-5600.  Our Internet website address is www.summus.com.  We make available free of charge on our website our annual, quarterly andcurrent reports, including amendments to such reports, as soon as practicable after we electronically file such material with, orfurnish such material to, the United States Securities and Exchange Commission (“SEC”). Our filings can also beobtained from the SEC website at www.sec.gov or by calling the SEC Office of Public Reference toll free at (800) 942-8090.However, the information found on our website or the SEC website is not part of this annual report.

**Corporate Overview**

               Summus’ predecessor company, High Speed Net Solutions, Inc., was founded in 1984.  Summus, Ltd. was merged into HighSpeed in February 2001.  High Speed changed its name in February 2002 to Summus, Inc. (USA).  Our goal is to be theleading developer of applications and information processing tools that optimize the wireless multimedia experience.  Oursolutions are developed using our BlueFuelTM platform and will enable the evolution of mobile and wireless devices fordynamically interacting with information resources.  We have designed, developed and deployed a suite of end-user applicationsbuilt on our BlueFuel platform.  Our BlueFuel platform enables information mobility, management and exchange tasks on low-,mid- and high-tier data-enabled cellular handsets, smart phones, personal digital assistants (PDA’s) and other handheldwireless devices.  The BlueFuel platform works over existing second generation (2G) wireless networks, as well as 2.5G and 3Gnetworks, and is not generally limited by the wireless network.  Our vision is to enable the mobile end-user to carry outeveryday tasks by seamlessly integrating the information resources (data, devices, and communication networks) involved inaccomplishing those tasks into an efficient, mobile interface.

**The Market Opportunity**

               Market research sources project significant growth in the mobile and wireless market.  Revenues in the multi-billions ofdollars are predicted over the next 2-4 years in several sectors within the mobile and wireless arena.  These sectors includestreaming media, multimedia services, location-based services and multimedia messaging.  Over the next ten years,Telecompetition, Inc., projects that the market for advanced mobile and wireless services will exceed $275 billion.  Inaddition, mobile data subscribers will increase to over 1.5 billion by 2010, a thirty-fold increase.Summus believes that ultimate success in the mobile and wireless market will require overcoming two significantchallenges:
-  developing and delivering compelling user experiences; and 
-  enabling the value chain through a strong business model, effective partnering strategies, and technical expertise. 

               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 devicemanufacturers.

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**Our Strategy**

               To become a leading provider of efficient information processing solutions for the mobile and wireless market, we intend to use ourstrategic content relationships, carrier distribution channels and our technology assets to build solutions that provide acompelling user experience for consumers in the mobile and wireless environment. Once established, Summus will employ a carefullydesigned intellectual property strategy to protect out market position.

               Our strategy is to apply our technology assets and experience with the objectives of:
-  exploiting the market opportunity for mobile and wireless solutions by delivering compelling consumer applications across mobileoperating systems for remote access to and processing of information resources via handheld devices, which in-turn will build andvalidate our BlueFuel platform; 
-  establishing Summus as a leading provider of wireless applications, solutions, tools and services in the wireless and mobilemarket by utilizing the BlueFuel platform for efficient information processing through mobile and wireless platforms; 
-  engaging a business model that leverages our strategic content relationships, carrier distribution channels and our BlueFuelplatform by providing all participants in the mobile information value chain with an economic motivation to offer their respectivepiece of the solution through the BlueFuel platform; 
-  recruiting partners and entering into agreements that complete and tie together the pieces necessary to deliver a total solutionto the consumer; and 
-  once established, providing a set of Application Program Interfaces (“APIs”), tools, and underlying efficientconnectivity components comprising the BlueFuel platform, that provide seamless integration with access points into the carrier“pipeline” for participants in the value chain. 

               We have secured a number of relationships across the value chain and continue to seek additional relationships to ensure that ourproducts and services will be compelling and available to end-users, as described below.

               We have designed and developed our BlueFuel platform to be compatible with QUALCOMM's Binary Runtime Environment for Wireless(BREWTM) wireless operating system, and other operating systems including Symbian, Java 2 Micro Edition (J2ME) and PocketPC.  BREW is an applications platform for wireless devices using a variety of air interfaces. Among these is CodeDivision Multiple Access (CDMA), which is expected to be the leading standard for third-generation, high-speed wireless voice anddata communications.  GSM is currently the de facto standard in Europe and Asia, with a reported 863.6  millionsubscribers worldwide as of  July 2003 (as reported by the GSM Association).  CDMA has a reported 162.3 millionsubscribers worldwide as of July 2003 (as also reported by the GSM Association).  CDMA  (1) has a greater networkcapacity, as a result of adjusting the transmission rate when there is no voice or data on the channel, (2) rapid and smoothmigration to high-speed data capability, thus minimizing service interruptions during technology upgrades, (3) growinginternational coverage, and (4) the highest transmission speed.  The BREW platform provides a standard programming environmentthat gives software developers the tools to create compelling wireless applications and services that can be offered by wirelesscarriers to their customers. 

               We continue to build applications on the J2ME operating system using our BlueFuel platform.  J2ME is deployed on millions ofdevices around the world and is currently supported by, among others, CDMA and GSM air interfaces.   The J2ME platform boastsrobust security, a flexible user interface, a broad range of built-in network protocols, and support for networked and disconnectedapplications. J2ME applications can be downloaded dynamically from the phone or a web interface, which is very convenient toconsumers. 

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***Content Providers***

               In seeking to build relationships with content providers, our approach is to: 
-  seek out major content brands, 
-  provide products for encoding and efficiently storing, viewing, and manipulating multimedia content for viewing on digital cellphones or PDAs, 
-  reduce the burden on the content provider to deliver applications and services on mobile devices, and 
-  provide a quick development cycle along with broad platform deployment support.  

Content providers are accustomed to traditional means of message delivery (i.e., printmedia and the Internet).  The mobile and wireless media extend the reach of content providers, thereby offering the potentialfor increased revenue generation.  We have entered into contracts with various content providers to deliver, for example,news, weather, financial information, and sports and entertainment content, using our BlueFuel platform.

               Our business development activities continue to expand with major content brands such as Sports Illustrated and Fujifilm. Throughout 2003, we have executed contracts with a variety of content providers to build applications utilizing our BlueFuelplatform.  We develop applications that enable the content to be deliveredto wireless devices and negotiate with carriers directly to gain access toend-users.  Summus retains and records revenue generated from the agreementwith the carrier and pays the content partner a percentage of revenue or amonthly fee based on a volume matrix of subscribers accessing that particularpartners' content. 

               Some of the content partners with which we have executed agreements and applications which contribute a significant portion to ourrevenues are listed below.  A complete list of our partners and products can be seen at www.summus.com.
-  *ZIO Interactive* - We incorporate aspects of our BlueFuel platform and are the primary distributor of ZIO’s mobileand wireless games in the U.S. market.  Currently, we have four games developed on the BREW platform: 
-  Nineball, a billiards game; 
-  Ultimate Golf Challenge, a golf simulation game; 
-  Fun2Link, a puzzle game; and 
-  Metallion, an action shooting game. 

The games or a subset of the games are available on the Verizon Wireless, US Cellular,ALLTEL, Western Wireless, Midwest Wireless, BellSouth International, Verizon International and Telstra networks for a one-timepurchase or through a monthly subscription. Nineball, Ultimate Golf Challenge, Fun2Link and Metallion are also beingdistributed by VIVO, a Brazilian wireless carrier utilizing the BREW platform.  Nineball is available for distribution on theJ2ME platform and is currently offered by T-Mobile, Telus and Bell Mobility.  
-  *Snapfish*– Snapfish Mobile provides subscribers complete access to their film and digital photos stored on the Snapfish.com website.  Subscribers are able to store, view,share and print digital camera photos, as well as save photos aswallpaper on the handset display via the Snapfish Mobile application.  Snapfish Mobile is available on the BREW platformthrough the Verizon Wireless and ALLTEL wireless networks and on the WAP platform through the Cingular Wireless and O2 Revolutionwireless networks, as well as the AT&T Wireless mMode service network.  Snapfish Mobile is also available on the J2MEplatform, but it has yet to be deployed on a carrier network in this format. 

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-  *The Associated Press*– We have developed the AP Photo, News & Sports application that providescurrent events and sports information through a cellular handset.  The subscriber logs in to the application to view topheadlines, photos and full stories from the Associated Press.  The application is available in English and Spanish.  APPhotos, News & Sports is available on the BREW platform through the Verizon, US Cellular, ALLTEL, Bellsouth International, andVerizon International networks.  This application is also available on the J2ME platform and has been deployed on the SprintPCS carrier network. 
-  *Fuji Photo Film U.S.A.* – Summus and Fuji Photo Films U.S.A. have developed and launched “Get the PictureTM” , a new mobile photo services for consumers. This application enables consumers to turn their phones into aphoto album to take anywhere. Users can display pictures from their Fujifilm.net album.  This new Fujifilm photo portalapplication is now available through AT&T Wireless’s mMode(SM) service on compatible wireless phones.  Thisapplication allows subscribers to view, store and share photos taken with traditional digital cameras, as well as Panasonic’sGU87 and Nokia’s 3650 camera phones, through Fujifilm.net.  This application is also being developed for the BREWplatform for deployment in the second quarter of 2004. 
-  *Sports Illustrated* – We have entered into an agreement with Sports Illustrated to provide wallpaper and screensavers based on the Sports Illustrated Swimsuit photos.  The SI Swimsuit photos are being made available to carriers in thefirst quarter of 2004.  Users can currently purchase the SI Swimsuit content through AT &T Wireless, T-Mobile, Cingularand Bell Mobility.  Users will be able to view and set as wallpaper or screen savers a new collection of SI swimsuit photoseach month through either a handset application or through their carrier’s wallpaper/screen saver download site.  

***                CellularCarriers***

               In building relationships with cellular carriers, we have focused on using our BlueFuel platform to provide the best userexperience and facilitate multimedia content transmission via specific carrier air interface networks (e.g., GSM, TDMA, CDMA) inconjunction with carrier device manufacturers.  We have launched several applications on multiple handsets on the followingwireless carrier networks.

*Domestic Wireless Carriers:*

*International Carriers:*
- Verizon Wireless
- US Cellular
- ALLTEL
- Cingular Wireless
- AT&T Wireless
- Sprint PCS
- T-Mobile
- Midwest Wireless
- Western Wireless
- Metro PC
- Nextel
- Telstra in Australia
- VIVO in Brazil
- O2 in Europe
- Bell Mobility in Canada
- Telus Mobility in Canada
- Telefonica Moviles in Peru
- BellSouth International in Latin America
- Verizon International in Latin America

***                Mobile Virtual NetworkOperators***

               Mobile Virtual Network Operators (MVNOs) represent an excellent early stage market opportunity for Summus to provide a completesolution to the end-user as this market evolves.  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.  This will allow MVNOs to provide interoperability with carriers and simplifiedintegration of new multimedia content and services.  Our business model for MVNOs includes a guaranteed revenue stream toSummus for preloaded applications and revenue sharing with the MVNO for downloaded premium applications.  Primarily, the typeof applications included in each bundle will determine price points for preloaded applications.  We are structuring thebusiness model for the MVNO’s as a combination of licensing fees and revenue sharing.

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               Under our agreement with Single Touch Interactive, Inc., an MVNO, they were obligated to pay us guaranteed amounts of approximately$60,000 per month for the 12 months beginning October 14, 2003.  We were not receiving those amounts owed to us by SingleTouch, and we asked for arbitration pursuant the terms of our agreement.  On March 8, 2004, Single Touch and Summus enteredinto a settlement agreement in which Single Touch agreed (1) to pay Summus $35,000 a month for twelve (12) months and (2) enterinto a  new agreement in which Summus will provide a suite of wireless applications to Single Touch for use in kiosks andwireless retail outlets to be deployed by Single Touch.        

**Our Products**

***                Our BlueFuelPlatform***

               Summus’ BlueFuel platform is the foundation upon which mobile and wireless activities can be effectively and efficientlyexecuted and is the foundation for a majority 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 incorporates a distributed architecture that operates within information-supplying appliances, networkservers, storage devices, and end-user devices, including PDAs, handsets, and PCs.  Collectively, these are referred to as“information resources.”  The components that comprise the BlueFuel architecture are the “glue” thatbinds the various elements of the mobile information value chain into a compelling end-user solution and experience and turns thecellphone into a simple, easy-to-use device for the individual’s data services.

               The BlueFuel platform is constructed from a set of modules, Application Programmers Interfaces (APIs) and services that connectvarious elements of the value chain from content provider to mobile devices through the wireless carrier’s channel. Architecturally, these modules, APIs and services are segmented into various layers addressing specific actions involved withinformation interaction in the mobile environment.  The platform occupies the space that bridges across the mobile value chainfrom content provider to mobile consumer.  The architecture is organized into client and server services, each providingaccess to applications and information resources through specific APIs and toolkits.

               The BlueFuel platform is being built from the wireless applications in a systematic development process.  As we develop newapplications, we extend, adjust, and validate the value and advantages of the BlueFuel platform.  Currently, the platform isused in support of the development and deployment of Summus developed applications.  In the future, we anticipate offeringthird party tools for similar development and deployment by independent third parties.  The platform is in its secondgeneration, and applications designed on the second-generation platform will be available in the second quarter of 2004.

***                PictureThis!TM***

               With our Picture This! application, formerly known as ***exego******TM***, a user can load all of their pictures to their Picture This! account to view and share from theirmobile phone. A user can easily send pictures phone-to-phone with other Picture This! users, or access their phone’s addressbook to email pictures to friends and family. Picture This! comes with the enhanced BlueFuel image solution for crystal clearimages, plus it allows the user to save pictures locally to the phone, and as wallpaper or caller ID (where available). The PictureThis!  application is currently available on Verizon Wirless , ALLTEL, Telstra, Verizon International and BellSouthInternational networks.

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***                Content Provider Applications***

               Summus has developed several products and services for its content partners using our BlueFuel platform.  These applicationsare described above in “Our Strategy- Content Providers.”

***                Legacy Products***

               In addition to our products aimed at the wireless and mobile market, we have legacy proprietary commercial software products forcomplex imaging, information management, object recognition and multimedia compression with existing applications in the fields ofmobile and wireless communications 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. 

***               Future Products ***

*                               BlueFuel SDK*

               Our BlueFuel SDK will enable software companies other than Summus to develop mobile applications, that can be used on a variety ofwireless devices and capture the advantages of the BlueFuel platform features and capabilities. We expect this to be available before the end of the fourth quarter of 2004.

*                               Personal ServerTM*

               Our Personal Server will enable a user to view, share, email and publish documents stored on his or her home PC, connected to theInternet, from a mobile device.  This PC application provides all the functions and features needed to enable auser’s PC for secure management and access through  their mobile device.  This product is expected to becommercially available by the end of the fourth quarter of 2004.

                              *Multimedia Messaging Services(MMS)*

               Summus has recently developed an MMS client prototype for the BREW platform. This MMS solution will enable BREW handsets toexchange multimedia messages with other MMS handsets, including non-BREW MMS handsets (e.g., WAP).  The Summus MMS solutioncan also provide MMS messaging capability for legacy BREW handsets already in the market that are not MMS enabled.  This willallow carriers to reach a larger user base for MMS messaging.  Summus plans to incorporate its MMS solution into its BlueFuelplatform.  We expect this to be available before the end of the third quarter of 2004.

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**Sales and Mar****keting**

               We intend to market our solutions primarily through our direct sales force, through leading device designers and manufacturers,wireless carriers, content partners, distribution portals and programming providers. Our marketing efforts, primarily focused inthe U.S., are directed at increasing awareness of our applications, the capabilities of our solutions and developing relationshipswith content providers, wireless carriers and Internet portals.  We market our products through;
-  industry trade shows; 
-  press releases; 
-  public relations initiatives; 
-  our website; 
-  the wireless carriers’ advertising and promotions; 
-  carrier websites; 
-  partners’ websites 
-  partners’ customer newsletters; and 
-  carrier sales training 

               As we build closer relationships with wireless carriers we can gain more access to their retail sales channel and end usercustomers.  We have participated in carrier trainings where we go on location to teach sales associates about ourproducts.  If the sales associates are familiar with our applications, we believe they will be more inclined to promote theproducts to their customers.  We are also getting involved with carriers by sending product promotional material to retailstores, developing contests for sales associates and consumers, doing giveaways and creating flash demonstrations of ourproducts.

**Competition**

               We compete principally with a growing number of independent developers in the mobile and wireless market.  Our primarycompetition with respect to our Picture This! application is the additional photo applications from Pictavision, Vindigo, Kodak,RunMedia, infrastructure provider Lightsurf, as well as our own Fuji “Get The Picture” and Snapfish Mobileapplications. In addition, existing simple messaging services and multimedia messaging services are entering the marketplace fromNokia, LightSurf, OpenWave, Ericsson, as well as specific carrier offerings.

               Our primary competition with respect to wireless games is with JAMDAT, and a growing community of independent gamedevelopers.  JAMDAT is an early market participant and has secured major branded content and is embedded with all majorwireless carriers.   Our financial resources prohibit us from competing directly by securing branded content forgames.  Instead, we look for niche opportunities to introduce games into the market. 

               Our primary competion with respect to wireless information , screensaver and wallpaper applications is Vindigo and UIEvolution.  Both utilize the same strategy of partnering with name brand content providers and developing applications for theBREW and J2ME operating environments using their own platforms.   Each company has partnered with large brand partnersthat have strong distribution outlets and are well funded. 

**Intellectual Property Rights**

               Currently, we have not been awarded any patents.  We have filed for four (4) patent applications. The first is in the videocompression technology area, which incorporated six (6) of our previous provisional patents and for which we abandoned three (3) ofour previous provisional patents that contained redundant information to the video patent.  The second is in the mobilemapping 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 relevant and important information contained in these provisional patentsis protected through trade secret and confidentiality agreements.  The third is in the image and graphics compressionarea.  The fourth is in the information navigation area.   In addition to patents, we rely on copyright andtrademark laws, trade secrets, confidentiality provisions and other contractual provisions to protect our proprietary rights. Thesemeasures, which require the expenditure of substantial resources, afford our intellectual property only limited protection becauseour competitors and third parties independently may develop similar technologies or may infringe our intellectual property. We currently have seven trademarks protected by common law trademark marking (tm) and are in the process of securing registeredmarks in the United States for these marks.  We have one trademark registered with the U.S. Patent and TrademarkOffice.

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               We regard our copyrights, trademarks, trade secrets and similar intellectual property as critical to our success and attempt toprotect our rights by relying on patent, trademark, service mark, copyright and trade secret laws and restrictions on disclosureand transferring title and other methods. We have filed United States trademark applications for various components and conceptsupon which the BlueFuelTM platform depends.  There can be no assurances that these steps will be adequate to protect ourintellectual property completely, that we will be granted the patents we submit, that we will be able to secure trademarkregistrations for all of our marks in the United States or other countries or that third parties will not infringe upon ormisappropriate our 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 ourproducts may be distributed and policing unauthorized use of our proprietary information will be difficult, if notimpossible.

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

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

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

**Government Regulation**

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

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

**Employees**

               As of March 15, 2004, we had 22 full-time employees, including 3 in marketing and sales, 16 in development and 3 in corporateoperations and administration. We also have engaged 13 consultants,  12 in product development (of which 7 are in Croatia and1 in Sweden) and 1 in administration.  We are not subject to any collective bargaining agreements and believe that ourrelationship with our employees is good. Our success depends to a significant extent upon the performance of our executive officersand other key personnel.

** **
** **
** **

** **

** **

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**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 $250,945and will decrease to approximately $240,816 by the last year of the term.   

**ITEM 3.           LEGAL PROCEEDINGS.**

**Bowne**

               On February 25, 2003, Bowne of New York City, LLC (“Bowne”) filed a civil lawsuit in the Supreme Court of the State ofNew York in the County of New York against Summus.  In this suit, Bowne claims that it is entitled to $276,374, plus interest,for services rendered to Summus.  Summus disputes this amount and is still in the process of negotiating a resolution to thismatter.    

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

               On December 2, 2003, Summus held its 2003 Annual Meeting of Shareholders. The following items were presented to a vote of theholders (the “Shareholders”) of the Company’s issued and outstanding Common Stock.  The holders of theCompany’s Series A, C, D and E convertible preferred stock had no voting rights at this Annual Meeting.

(1)

The election of Jere A. Ayers, Neil R. Guenther, Bjorn D. Jawerth and George H. Simmons tothe Company’s Board of Directors, whose terms expire at the Company’s 2004 Annual Meeting of Shareholders.

(2)

Amendment to the Company’s Amended and Restated Articles of Incorporation toincrease the number of shares of common stock authorized for issuance to 185,000,000 shares. 

(3)

The ratification of the appointment of Ernst & Young LLP as the Company’sindependent auditors for the 2003 fiscal year.

               The number of votes cast for each of the above is summarized in the table below. All numbers in the table below represent shares ofCommon Stock.

**Item Submitted to Shareholders**

**For**

**Against**

**Abstain **

** Broker Non-Votes**

**Total**

**                                                                                **
     
**(1) Election of Directors**

 

 

 

 

 
      
Election of Jere A. Ayers 

47,196,536

568,921  

238,730

0

48,004,187

Election of Neil R. Guenther

47,196,336

569,121  

238,730

0

48,004,187

Election of Bjorn D. Jawerth **(1)**

45,590,850

2,174,607  

238,730

0

48,004,187

Election of George H. Simmons**(2)**

47,207,536

557,921  

238,730

0

48,004,187

  
     
**(2) Increase in Number of Authorized Shares of Common Stock to185,000,000**

46,439,262

1,413,731

151,194

0

48,004,187

 
     
**(3) Ratification of Ernst & Young, LLP**
     
**as auditors for the year ending December 31, 2003**

47,917,284

77,922

8,981

0

48,004,187

**_____________**
     
(1) Dr. Jawerth resigned  as a Director on March 5, 2004. (2) Dr. Simmons resigned as a Director on January 3, 2004.

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**PART II**

**ITEM5.                MARKET FOR REGISTRANT’S COMMONSTOCK AND RELATED SHAREHOLDER MATTERS.**

**Market Information**

               Our common stock, par value $.001 per share, currently trades on the Over-the-Counter Bulletin Board®.  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, 2003 and 2002, and for the first quarter of 2004 through March 22, 2004, on the OTCBulletin Board®, as provided by the National Quotation Bureau, Inc.  These quotations reflect inter-dealer prices withoutmarkup, markdown or commissions and may not necessarily represent actual transactions.

**2002**

**Low**

**High**

    First Quarter

$1.15

$2.55

    Second Quarter

$0.61

$1.39

    Third Quarter

$0.24

$0.60

    Fourth Quarter

$0.37

$0.57
   
**2003**

**Low**

**High**

    First Quarter

$0.35

$0.52

    Second Quarter

$0.27

$0.45

    Third Quarter

$0.26

$0.40

    Fourth Quarter

$0.18

$0.47

**                                                          **

**                       **

**            **

**2004**

**Low**

**High**

    First Quarter   (through March 22, 2004)

 $0.12

 $0.19

               On March 22, 2004, the closing sale price for our common stock as reported on the OTC Bulletin Board® was $0.13.  As ofMarch 22, 2004, we had approximately 71,277,220 shares of common stock outstanding and approximately 570 shareholders ofrecord.

               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.  These dividends are cumulative from the date oforiginal issue, which was February 28, 2000, and shall be payable when, as, and if declared by our Board of Directors.  Anydividends payable on the Series A preferred stock may be paid in additional shares of Series A preferred stock at ouroption.

               The holders of Summus’ Series C, D and E convertible preferred stock are not paid any dividends under the their respectiveterms.  

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**Penny Stock**

               Our common stock is subject to the provisions of Section 15(g) and Rule 15g-9 of the Securities Exchange Act of 1934 (the“Exchange Act”), commonly referred to as the “penny stock rule.”  Section 15(g) sets forth certainrequirements for transactions in penny stocks and Rule 15g-9(d)(1) incorporates the definition of penny stock that is found in Rule3a51-1 of the Exchange Act.

               The SEC generally defines penny stock to be any equity security that has a market price less than $5.00 per share, subject tocertain exceptions.  If our common stock is deemed to be a penny stock, trading in the shares will be subject to additionalsales practice requirements on broker-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 her spouse).  For transactions covered by this rule, a broker-dealer must make aspecial suitability determination for the purchaser and have received the purchaser’s written consent to the transactionprior to sale.  The rule also requires the delivery, prior to the transaction, of a risk disclosure document mandated by theSEC relating to the penny stock market.  The broker-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 of broker-dealers to sell our securities and may adversely affect the ability ofshareholders to sell their shares in the secondary market.

**Recent Sales of Unregistered Securities**

               During the three-month period ended December 31, 2003, the Company issued
-  an aggregate of 60 shares of our Series C convertible preferred stock to one (1) investor (which is convertible into 240,000shares of the Company’s common stock); 
-  an aggregate of 3,350 shares of our Series D convertible preferred stock to twelve (12) investors (which is convertible into16,750,000 shares of the Company’s common stock); and 
-  an aggregate of 200 shares of our Series E convertible preferred stock to one (1) investor (which is convertible into 1,000,000shares of the Company’s common stock).  

These securities were not registered under the Securities Act of 1933. Except as notedbelow, the securities described below were issued in transactions deemed to be exempt from registration under Section 4(2) of theSecurities Act as transactions by an issuer not involving any public offering. All of such securities are deemed to be "restrictedsecurities" as defined in Rule 144(a)(3) under the Securities Act. Except as noted below, no commissions were paid in connectionwith any of the issuances.  The Company has filed a registration statementon Form S-1 registering the shares of common stock underlying these securities.

**Stock Issuances for Cash**

**                Series C Convertible PreferredStock**

               On November 11, 2003, we issued an aggregate of 60 shares of our unregistered Series C convertible preferred stock, stated value of$1,000 per share, to one (1) investor for an aggregate consideration of $60,000.  Each share of the Series C convertiblepreferred stock, which has an issue price and liquidation preference of $1,000 per share, is convertible into 4,000 shares ofcommon stock at any time after nine months from its issuance date. In connection with this capital raising activity, we paid nocommissions.  The shares were issued in transactions deemed to be exempt from registration under the Securities Act inreliance upon the exemption provided by Rule 506 of Regulation D. 

Name of Purchaser

Number of Shares

 Neil R. Guenther

60

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**                Series D Convertible PreferredStock**

               During October 2003, we issued an aggregate of 3,350 shares of our unregistered Series D convertible preferred stock, stated valueof $1,000 per share, to twelve (12) investors for an aggregate consideration of $3,350,000.  Each share of the Series Dconvertible preferred stock, which has an issue price and liquidation preference of $1,000 per share, is convertible into 5,000shares of our common stock.  In connection with this capital raising activity, we paid commissions of $111,000 to J. WinderHughes, one of our Directors.  The shares were issued in transactions deemed to be exempt from registration under theSecurities Act in reliance upon the exemption provided by Rule 506 of Regulation D. 

Name of Purchaser

Number of Shares

JDS Capital LP

1,500

Empire Capital Partners, LP

700

London Family Trust

400

Rodney Baber, Jr.

300

Ponte Vedra Partners

200

Peter Massaniso

100

Stephen M. Finn Revocable Trust

75

Massiniso & Co.

20

Massiniso Family Limited Partnership

20

Pinnacle Asset Management

20

Frank P. Massaniso Irrevocable Trust

10

Karen Massaniso

5

**                Series E Convertible PreferredStock**

               During October 2003, we issued an aggregate of 200 shares of our unregistered Series E convertible preferred stock, stated value of$1,000 per share, to one (1) investor for an aggregate consideration of $200,000.  Each share of the Series E convertiblepreferred stock, which has an issue price and liquidation preference of $1,000 per share, is convertible into 5,000 shares of ourcommon stock. In connection with this capital raising activity, we paid commissions of $6,000 to J. Winder Hughes, one of ourDirectors . The shares were issued in transactions deemed to be exempt from registration under the Securities Act in reliance uponthe exemption provided by Rule 506 of Regulation D. 

Name of Purchaser

Number of Shares

RHP Master Fund, Ltd.

200

 

** **

** **

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**ITEM 6.         SELECTED FINANCIAL DATA**.

On February 16, 2001, Summus (formerly High Speed Net Solutions, Inc.)acquired all the assets and operations of Summus, Ltd. under the terms of an asset purchase agreement, dated October 30, 2000, assubsequently amended.  In legal form, the transaction was effected by Summus issuing shares of its common and Series Bconvertible preferred stock, and other equity interests, in exchange for the net assets of Summus, Ltd.  This transaction hasbeen accounted for as a capital transaction of Summus, Ltd., accompanied by a recapitalization. As a result of the transaction, thehistorical financial statements of Summus, Ltd. are, for accounting purposes, deemed to be those of Summus.

The following selected historical annual financial data has been derived fromthe financial statements of Summus (notwithstanding that such selected historical annual financial data has been labeled as that ofSummus, Ltd.). The financial statements for each of the three years ended December 31, 2003, 2002 and 2001, have been audited byErnst & Young LLP, independent auditors, as indicated in their report included elsewhere in this annual report on 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 in conjunction with“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our auditedfinancial statements and notes, which are contained elsewhere in this annual report. 

We have presented all amounts, except    share amounts, indollars.

 

 

 

 

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**SUMMUS, INC. (USA)**

**SELECTED FINANCIAL DATA**
  **1999** **2000** **2001** **2002** **2003**  
**Consolidated Statement of Operations Data:**
                        
 

Revenues

$

515,216 

$

1,068,658 

$

749,758 

$

   406,952 

$

1,699,274

 

Costs of revenues

 

281,254 

 

398,326 

  

299,554 

  

182,109 

1,074,239

 

Selling, general and administrative expenses

 

3,797,067 

 

6,180,862 

  

7,740,867 

6,155,416 

4,597,036

 

Non-cash compensation and consulting

2,670,050 

2,127,962 

956,321 

1,251,992 

304,885

 

Research and development

1,356,686 

1,159,833 

952,605 

918,948 

1,056,770

 

Non-cash settlements

— 

— 

1,132,352 

— 

(1,525,698)

 

Loss before Other income (expense)

(7,589,841)

(8,798,325)

(10,331,941)

(8,101,513)

(3,807,958)

 

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

(119,180)

— 

— 

— 

— 

 

      Interest income (expense), net

(5,239)

23,911 

(56,570)

(469,571)

(69,343)

 

           Total other income(expense)

(1,257,139)

(2,652,956)

(56,570)

(469,571)

(69,343)

 

Loss from continuing operations

(8,846,980)

(11,451,281)

(10,388,511)

(8,571,084)

(3,877,301)

 

Loss from operations of discontinued     Rich Media Direct business(3)

—

—

(135,798)

—

—

 

Loss on disposal of Rich Media Direct business(3)

—

—

(215,500)

—

—

 

Net loss

$

(8,846,980)

$

(11,451,281)

$

(10,739,809)

$

(8,571,084)

$

(3,877,301)

 

Net loss applicable to common shareholders:

 

     Net loss

$

(8,846,980)

$

(11,451,281)

$

(10,739,809)

$

(8,571,084)

$

(3,877,301)

 

     Accretion of Beneficial conversion featureof             preferred stock

 

— 

— 

— 

— 

(3,286,251)

 

     Preferred stock dividends

— 

— 

(153,700)

(183,039)

(171,265)

 

Net loss applicable to common shareholders

$

(8,846,980)

$

(11,451,281)

$

(10,893,509)

$

(8,754,123)

$

(7,334,817)

 

Per share amounts (basic and diluted):

 

Loss applicable to common shareholders from     continuing operations

$

(0.27)

$

(0.35)

$

(0.30)

$

(0.19)

$

(0.12)

 

Loss applicable to common shareholders from     discontinued operations

—

—

(0.01)

— 

— 

 

Net loss applicable to common shareholders     (basic and diluted)

$

(0.27)

$

(0.35)

$

(0.31)

$

(0.19)

$

(0.12)

 
 
 

 

 

 

 

Weighted average shares of common stock      outstanding giving effect to the     recapitalization

32,820,110 

32,938,803 

34,730,337 

47,149,301

61,491,196

 

 

December 31
** **

**1999**

**2000**

**2001**

**2002**

**2003**

**Balance Sheet Data:**

Cash

$     647,704

$     208,495 

$      115,992 

$         25,990 

$  2,188,645

Total assets

7,382,646

1,406,271 

1,003,524 

701,174 

2,880,938

Total shareholders' equity (deficit) 

$  3,345,692

$ (4,653,812)

$ (5,708,495)

$   (4,464,054)

$     286,025

**_________________________**

(1)

Gain on sale of stock of investee during 1999 and 2000 reflects the gain Summus, Ltd.realized upon the sale of common shares of Summus  (whose legal name was then High Speed Net Solutions, Inc.) it acquired in1999.
  
(2)

Participation in loss of equity investee during 1999 and 2000 reflects Summus,Ltd.’s share of Summus’s losses for 1999 and 2000.  During 1999 and 2000, Summus, Ltd. accounted for itsinvestment in Summus using the equity method of accounting.
  
(3)

During 2001, Summus disposed of its Rich Media Direct business and accordingly reportedthe operating activity as discontinued operations in 2001.

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**ITEM7.                MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION                                   AND RESULTS OFOPERATIONS.**

The following discussion contains forward-looking statements that involverisks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as aresult of certain factors, including the risk factors included in this report in the section entitled “Factors That MayAffect Our Business, Future Operating Results and Financial Condition.” The following discussion is qualified in its entiretyby, and should be read in conjunction with, the more detailed information in our consolidated financial statements and the notesthereto appearing elsewhere in this annual report on Form 10-K.

**Change in Revenue Recognition Policy**

               After a careful review of the Company’s revenue recognition policies and giving consideration to guidance provided for inEmerging Issues Task Force No. 99-19 *Reporting Revenue Gross as a Principal versus Net as an Agent* (“EITF99-19”), the Company has changed certain revenue recognition policies affecting revenues earned by wireless applications andcontracts.  Prior to 4th quarter 2003, the Company reported revenues earned by wireless applications and contractsand cost of revenues for wireless applications and contracts  net of certainthird-party costs in the statement of operations.  Thesetransactions have been reclassified to  reflect  a gross revenue presentationwith no effect on gross profit or net loss.  The amount by whichrevenues and costs of revenues have been reclassified for the year ended December 31, 2003 is$635,989.  All revenues reportedon this Form 10-K for 2003 have been reported on the gross method.  Revenues and costs of revenues for 2002 have not beenreclassified due to immateriality.

**Overview**

               Summus’ predecessor company, High Speed Net Solutions, Inc., was founded in 1984.  Summus, Ltd. was merged into HighSpeed in February 2001.  High Speed changed its name in February 2002 to Summus, Inc. (USA).  Our goal is to be a leadingdeveloper of applications and information processing tools that optimize the wireless multimedia experience.  Our solutionsare developed using our BlueFuelTM platform and will enable the evolution of mobile and wireless devices for dynamicallyinteracting with information resources.  We have designed, developed and deployed a suite of end-user applications built onour BlueFuel platform.  Our BlueFuel platform enables information mobility, management and exchange tasks on low-, mid- andhigh-tier data-enabled cellular handsets, smart phones, personal digital assistants (PDA’s) and other handheld wirelessdevices.  The BlueFuel platform works over existing second generation (2G) wireless networks, as well as 2.5G and 3G networks,and is not generally limited by the wireless network.  Our vision is to enable the mobile end-user to carry out everyday tasksby seamlessly integrating the information resources (data, devices, and communication networks) involved in accomplishing thosetasks into an efficient, mobile interface.

                 During the second half of 2002, the Company shifted its business focus from providinggovernment contract services and the commercial licensing of its established technology to the development of solutions for themobile and wireless markets.  The Company’s focus through 2003 was and continues to be wireless application developmentand delivery to mobile end-users.

                 To date, the Company has experienced significant operating losses as we have madeinvestments in research and development of our underlying BlueFuel Platform and application development.  We expect tocontinue to make investments in those areas; however, the Company is more focused on the development and delivery of applicationsand the marketing of those applications to make substantial progress in revenue generation.  We plan to expand our marketpresence by partnering with additional wireless carriers as well as increasing subscriber adoption of our applications.  Ourability to generate profits and positive cash flow from operations will depend primarily on increasing revenues as well asimplementing cost reduction measures. 

**Key Developments in 2003**

*Focus on Mobile and Wireless Market; Development of BlueFuelTMPlatform*

               Summus is continuing to develop applications and information processing tools that optimize the wireless multimediaexperience.  Our solutions are developed using our mobile solutions platform, called BlueFuel, which will enable the evolutionof mobile and wireless devices for dynamically interacting with information resources.  The Company’s vision is toenable mobile end-users to experience an entirely new mobile environment, one that frees an individual from location and timedependence and opens new possibilities as to how mobile devices are used.  Focused on the end-user experience, BlueFuelenables application developers, device manufacturers, wireless infrastructure providers, and content providers to bring a reliable,high quality mobile information experience to consumers through their mobile devices.

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               Summus is focused on delivering compelling end-user applications across multiple mobile operating systems for remote access to andprocessing of information via handheld devices, which in-turn will build and validate our BlueFuel platform.  The strategyincorporates the release and distribution of revenue-generating products, each building to the Company’svision. 

*Relationships with Content Providers and New Application Development*

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

               Our business development activities continue to expand with major content brands, such as Sports Illustrated, The Associated Press,and Fuji Film.  Through 2003, we have executed contracts with a variety of content providers to build applications utilizingour BlueFuel Platform.  Currently, up to eleven (11) wireless carriers in the United States and eight (8) internationalcarriers  deploy at least one or a combination of the twenty-five (25) wireless applications that have been completed bythe Company. 

*Non-cash settlements*

               During the year ended December 31, 2003, the Company executed seven settlement agreements with creditors of the Company.  Thedetail of each of the settlement agreements has been provided in the Results of Operations, set forth below.  The aggregategains of these non-cash settlements totaling $1,525,698 have been recorded as reductions to the Company’s operating expensesin the Company’s Statement of Operations for the year ended December 31, 2003.

**Results of Operations**

The following discussion and analysis of our results of operations and financial conditionshould be read in conjunction with our financial statements and related notes included in this report.

**Year ended December 31, 2003 compared to Year endedDecember 31, 2002**

Change in Revenue Recognition Policy

               After a careful review of the Company’s revenue recognition policies and giving consideration to guidance provided for inEmerging Issues Task Force No. 99-19 *Reporting Revenue Gross as a Principal versus Net as an Agent* (“EITF99-19”), the Company has changed certain revenue recognition policies affecting revenues earned by wireless applications andcontracts.  Prior to 4th quarter 2003, the Company reported revenues earned by wireless applications and contractsand cost of revenues for wireless applications and contracts  net of certainthird-party costs in the statement of operations.  Thesetransactions have been reclassified to  reflect a gross revenue presentationwith no effect on gross profit or net loss.  The amount by whichrevenues and costs of revenues have been reclassified for the year ended December 31, 2003 is$635,989.  All revenues reportedon this Form 10-K for 2003 have been reported on the gross method.  Revenues and costs of revenues for 2002 have not beenreclassified due to immateriality.

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*Revenues*

               *Wireless**Applications and Contracts.*  Revenue from wireless applications and contracts increased $1,191,163 to$1,395,296 during the year ended December 31, 2003, up 584% from $204,133 in the year ended December 31, 2002.  The increase inrevenue from wireless applications and contracts resulted from the increase in sales of existing wireless applications andadditional wireless applications developed by the Company, launched by several wireless carriers and purchased by end-users. During the year ended December 31, 2003, up to eleven (11) wireless carriers in the United States and eight (8) internationalcarriers currently deployed at least one or a combination of the twenty-five (25) wireless applications that have been completed bythe Company.  Each of the applications deployed were developed following agreements with a content partner to provide accessto their content, except the **Picture This!TM** (formerly **exegoTM**) application, which was internally developedby Summus.

               Revenue earned from wireless applications is recognized upon delivery and acceptance by the end-user either as a one-time purchaseper use or a monthly subscription.   Revenue totaling $100,000 from wireless applications and contracts during the year endedDecember 31, 2002, resulted solely from a strategic partnership agreement related to the mobile and wireless markets.  Revenueunder this agreement was recognized ratably over the year ended December 31, 2002.

               *Wireless License Fees.* Revenue earned from wireless license fees totaled $249,951 in the year ended December 31, 2003. During this period, the Company had sold and delivered existing image software for use in wireless transmission applications. During the year ended December 31, 2002, the Company did not generate any revenue or costs of revenue related to wireless licensefees.

*                Contracts and LicenseFees. * Revenue from contracts and license fees decreased $148,792 to $54,027 in year ended December 31, 2003, down73% from $202,819 in the year ended December 31, 2002.  The decrease in contract and license fees resulted from the Companyshifting its primary focus during the second quarter of 2002 from providing governmental contract services and the commerciallicensing of its established technology in non-wireless environments to the development of solutions for the mobile and wirelessmarkets.  Revenues earned during the years ended December 31, 2003 and 2002 were generated from providing governmentalcontract services and the commercial licensing of technology.

*Costs of Revenues*

               *Wireless Applications and Contracts.*  Costs of wireless applications and contracts increased $946,380 to $1,064,643 duringthe year ended December 31, 2003, up 800% from $118,263 for the year ended December 31, 2002.  These costs are directcosts associated with the sale and delivery of wireless applications and primarily consist of third-party hosting fees, carrierdistribution and fees associated with content information provided by our content providers for wireless applications which weredeployed during the year ended December 31, 2003.  The costs related to third-party hosting and carrier distribution areincurred on a monthly basis and are primarily fixed in nature regardless of the revenue generated by the relatedapplications.  During the year ended December 31, 2002, there were no direct costs associated with $100,000 of wirelessapplications and contracts revenue earned from a strategic partnership agreement because there were no specific, direct costsassociated with the agreement related to the mobile and wireless markets.* *

               *Wireless License Fees. * There were no costs of revenues regarding wireless license fees during the year ended December31, 2003 since the license fee agreements consummated during this period related to technology that had been previously developedby the Company. During the year ended December 31, 2002, the Company did not generate any revenue or costs of revenue related towireless license fees.

*                Contracts and LicenseFees. * Costs of contracts and license fees decreased $54,250 to $9,596 during the year ended December 31, 2003,down 85% from $63,846 for the year ended December 31, 2002.  The decrease in costs of contract and license fees resulted fromthe Company shifting its primary focus during the second quarter of 2002 from providing governmental contract services and thecommercial licensing of its established technology in non-wireless environments to the development of solutions for the mobile andwireless markets.  Costs of contracts and license fess consisted primarily of salaries and other related costs of providinggovernmental contract services, as well as any direct costs related to the sale, delivery and installation of its commercialsoftware.

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*Gross Profit*

*                Wireless Applications andContracts. * Gross profit resulting from the development and deployment of wireless applications totaled $330,653 or24% of wireless applications and contracts revenue for the year ended December 31, 2003.  During the year ended December 31,2002, the Company generated a gross profit of $85,870 or 42% of wireless applications and contract revenue. The gross profitresulting from these activities is a result of deducting costs consisting mostly of third-party hosting fees, testing fees, andcontent information provided by our content providers, from the related earned revenue.  During the year ended December 31,2002, the Company earned $100,000 under a strategic partnership agreement related to the mobile and wireless markets.  Therewere no specific direct costs associated with this contract.

*                Wireless LicenseFees. *   Gross profit resulting from wireless license fees totaled $249,951.  The Company did not incurany specific direct costs associated with the sale, delivery, or installation of the software underlying the license agreementsconsummated during the year ended December 31, 2003.  Additionally, the Company does not expect to incur any futureobligations relating to these license fees. During the year ended December 31, 2002, the Company did not generate any revenue,costs of revenue or gross profit related to wireless license fees.

*                Contracts and LicenseFees. * Gross profit resulting from governmental contract services and the commercial licensing of technology duringthe year ended December 31, 2003 totaled $44,431 or 82% of contracts and license fee revenue.  During the year ended December31, 2002, the Company generated a gross profit of $138,973 or 69% of contracts and license fees revenue.  The gross profitfrom these activities resulted from deducting primarily salaries and other related costs from the related earned revenue.

*Expenses*

               *Selling, General and Administrative Expenses.*  Selling, general and administrative expenses consist primarily ofsalaries, consulting fees, office operations, administrative and general management activities, including legal, accounting andother professional fees. Selling, general and administrative expenses for the year ended December 31, 2003, were $4,597,036,compared to $6,155,416 for the year ended December 31, 2002.  The decrease in selling, general and administrative expensesduring the current period as compared to the prior period reflect a reduction in several expense categories, primarily salaries,third-party consulting fees, travel and general office administration costs.  The reductions in these categories reflectcontinued cost reduction efforts implemented by management. 

*                Non-CashCompensation.*  Non-cash compensation for the year ended December 31, 2003 was $185,255 compared to $364,000 for theyear ended December 31, 2002.  Non-cash compensation for the year ended December 31, 2003, reflects the amortization fortwelve months of deferred compensation resulting from stock options granted in prior years and during the year ended December 31,2003, at prices below the fair value of the underlying common stock.

                Non-cash compensation forthe year ended December 31, 2002, of $364,000 includes $202,642 of amortization for twelve months of deferred compensationresulting from stock options granted in prior years, at prices below the fair value of the underlying common stock. The remainingamount of $161,358 reflects stock options that were granted to an employee with exercise prices below the estimated fair value ofthe underlying common stock.

*                Research andDevelopment.*  Research and development expenses for the year ended December 31, 2003, were $1,056,770 compared to$918,948 for the year ended December 31, 2002.  The increase in research and development expenses is a result of twofactors.  First, there was an increase in the number of new wireless applications the Company has contracted to develop. In order to minimize these expenses, the Company increased its utilization of software developers in Croatia.  Personnel costsin Croatia are lower than those in the United States.  Second, the increase of the research and development costs in thecurrent period as compared to the prior period resulted from a reallocation of employees who previously worked on governmentalcontracts.  Beginning in late 2002, the Company shifted its focus to developing wireless applications from providinggovernmental contract services and the commercial licensing of its technology in non-wireless environments.  Accordingly, allemployees who were previously assigned to work on such contracts were assigned to work on research and development activities inthe mobile and wireless sector.

*                Non-*C*ash ConsultingExpense. * Non-cash consulting expense for the year ended December 31, 2003, in the amount of $119,630 is attributable to:(1) the issuance of 179,257 shares of restricted common stock issued to consultants for services valued at $65,803; (2) 103,400stock options granted to consultants for services valued at $29,888, such value was determined by using the Black-Scholesoption-pricing model; (3) the $20,000 of amortization of a deferred expense recorded in 2002 relating to the issuance of 55,555shares of restricted common stock, valued at $22,500, for consulting services to be rendered over a 4.5 month period; and (4)$3,939, representing the fair value, as determined using the Black-Scholes option-pricing model, of stock warrants granted to aconsultant of the Company.

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                 Non-cash consulting expense for the year ended December 31, 2002, in the amount of $887,992 is attributable to thefollowing: (1) the issuance of 394,567 shares of restricted common stock and 453,532 options and warrants to purchase restrictedcommon stock to consultants for services valued at $765,477; (2) stock options granted to three new members of our Advisory Boardduring the year ended December 31, 2002, resulting in deferred consulting expense of $103,950, of which $97,515 was charged toexpense during the year ended December 31, 2002; and (3) a stock option granted to a member of our Advisory Board for consultingservices resulting in total deferred consulting expense of $40,000, of which $25,000 was charged to expense during the year endedDecember 31, 2002.  The remaining amounts of deferred compensation not charged to expense will be charged to expense as futurevesting of the stock options occurs.   The value of the stock options granted to consultants, including the members ofthe Board of Advisors, was determined by using the Black-Scholes option-pricing model.  

*                InterestExpense.*  Interest expense for the year ended December 31, 2003, was $69,343, compared to interest expense of$469,571 for the year ended December 31, 2003. Net interest expense for the year ended December 31, 2003 related to interest costsassociated with capital lease obligations and note payable agreements.

                Net interest expense forthe year ended December 31, 2002, was $469,571 and includes interest costs associated with capital lease obligations and notepayable agreements of $49,321, plus the following items related to 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 thedebentures 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, theses 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 adiscount to the $500,000 face value of the debentures.  This discount was to be amortized to interest expense over the term ofthe debentures. Since all of the debentures were converted into common stock during the year ended December 31, 2002, the totalvalue assigned to the warrants was fully amortized to interest expense during this period. The beneficial conversion feature wasrecorded since the conversion price of the debentures was below the fair market value of our common stock on the date theconvertible debentures were issued.  This non-cash charge was recorded immediately as interest expense because the debentureswere convertible upon issuance.

*                Non-cashSettlements. * Non-cash settlements totaling $1,525,698, during the year ended December 31, 2003, is comprised ofsettlements with seven creditors of the Company noted below.

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

               On February 27, 2003, Holland & Knight LLP (“H&K”) filed a civillawsuit in the Superior Court for the District of Columbia against Summus.  In this suit, H&K claims that it was entitledto $867,268, plus interest, for services rendered to Summus.  Summus and H&K entered into an agreement on May 23, 2003settling this litigation, whereby both parties agreed to the following terms:
-  $217,268 of the total balance due was forgiven by H&K, resulting in a portion of thesettlement gain of this transaction.$325,000 of the total balance due will be paid over a three-year period with monthly installments of $9,028, commencing on June1, 2003.  The settlement agreement did not provide for an interest rate component pertaining to the three-year paymentplan.  Therefore, an interest rate of 20% per annum was used to present value the note, resulting in a net present value of$242,926.  The difference between the face value of $325,000 and the net present value of $242,926, totaling $82,074, wasrecorded as a portion of the settlement gain.  The 20% rate of interest was considered appropriate to fair value the notebased on the Company’s financial condition, including its negative working capital and negative net worth position.  Inthe event that the Company fails to make a scheduled payment as set forth in this settlement agreement, H&K may execute on aconsent judgment and seek to satisfy the judgment from the assets of the Company in accordance with the laws of the State of NorthCarolina. 
The remaining amount of the recorded liability due to H&K of $325,000 was satisfied through the issuance to H&K of738,636 shares of the Company’s unregistered common stock, with registration rights.  The fair value of the 738,636shares of unregistered common stock was estimated at $273,295, based on the traded value of the Company’s common stock on thedate the settlement agreement became effective.  The difference between the estimated fair value of the 738,636 unregisteredcommon shares and the recorded value of the liability of $325,000, totaling $51,705, was recorded as a portion of the settlementgain. The unregistered shares have since been registered, and H&K has contractually agreed to sell no more than 18,000 sharesin any one (1)-business day.
Therefore, the aggregate settlement gain resulting from this transaction totaled$351,047.The settlement agreement also provided that if the Company raised $5.0 million or more incapital at one time, all remaining unpaid amounts owed under the $325,000 note agreement shall become immediately due andpayable.  This note is unsecured, and upon default of the terms of the agreement, the unpaid balance shall become immediatelydue and payable and such amount shall include pre-judgment interest in the amount of 6% accruing as of April 3, 2002 and post-judgment interest at a rate to be determined.
               On June 7, 2002, AT&T filed a civil lawsuit in the United States District Court for the Eastern District of North Carolinaagainst Summus, Inc. (USA).  In this suit, AT&T claims that it is entitled to payment in the amount of $238,783 fortelephone calls and services rendered to the Company.  In March 2003, the Company and AT&T settled the claim between them,whereby both parties agreed to reduce the total amount owed by the Company to AT&T to $120,000 and this reduced amountto berepaid over an 18 month period commencing in March 2003.  The settlement gain resulting from this transaction was$118,783.

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

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

               During 1999, the Company entered into an agreement with Raytheon Company (“Raytheon”) to repurchase 1,533 shares of itscommon stock from Raytheon for an aggregate value of $268,373, of which $268,075 represented a termination fee for a developmentcontract and $298 represented the fair value of the shares repurchased.  In connection with this agreement, the Companyentered into a promissory note with Raytheon whereby the Company agreed to pay approximately $10,000 per month over a 27-monthperiod to fund this transaction.  The Company did not make all required monthly installments and thus defaulted on thepromissory note.  Consequently, the note began accruing interest at 18% per annum.  On September 30, 2003, the Companyexecuted a settlement agreement with Raytheon whereby both parties agreed to the following terms.
-  $ 49,128 of the total balance due was forgiven by Raytheon, resulting in a portion of the settlement gain of thistransaction. 
-  $87,516 of the total balance due will be paid over a 22 month period, with an initial payment of $10,000; six (6) equal monthlyinstallments of $3,000; fourteen (14) monthly installments of $4,000; and one final installment of $3,516.  The settlementagreement did not provide for an interest rate component pertaining to the 22-month payment plan.  Therefore, an interest rateof 20% per annum was used to present value the note, resulting in a net present value of $74,306. The difference between the facevalue of $87,516 and the net present value of $74,306, totaling $13,210 was recorded as a portion of the settlement gain.  The20% rate of interest was considered appropriate to fair value the note based on the Company’s financial condition, includingits negative working capital and negative net worth position.  In the event that the Company fails to make a scheduled paymentas set forth in this settlement agreement, Raytheon may execute on a consent judgment and seek to satisfy the judgment from theassets of the Company in accordance with the laws of the State of North Carolina.  
-  The remaining amount of the recorded liability due to Raytheon of $87,516 was satisfied through the issuance to Raytheon of295,662 shares of the Company’s unregistered common stock, with registration rights.  The fair value of the 295,662shares of unregistered common stock was estimated at $94,613, based on the traded value of the Company’s common stock on thedate the settlement agreement became effective.  The difference between the estimated fair value of the 295,662 unregisteredcommon shares and the recorded value of the liability of $87,516, totaling $7,097, was recorded as an offset to the settlementgain.  Raytheon has contractually agreed to sell no more than 15,000 shares in any one (1) business day. 
-  Therefore, the aggregate settlement gain resulting from this transaction totaled $55,241. 

               During 2003, the Company issued 333,333 warrants to purchase common stock to a consultant as payment for $200,000 of fees.  The warrants were valued at $83,333using the Black-Scholes option-pricing model.  The non-cash settlement gain resulting from this transaction totaled$116,667.

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

               The total aggregate settlement gain resulting from these transactions in 2003was $1,525,698 and has been recorded as areduction to the Company’s operating expenses in the Company’s Statement of Operations for the year ended December 31,2003.

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                *Net Loss.*  As a result of the factors discussed above, the net lossesfor the years ended December 31, 2003 and 2002 were $3,877,301 and $8,571,084, respectively.

**Year ended December 31, 2002 compared to Year ended December 31, 2001**

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

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

                Commencing in the second quarterof 2002, the Company’s resources were dedicated to the development of solutions for the mobile and wireless markets. Revenues earned from providing these services totaled $204,133, which included $100,000 earned under a strategic partnershipagreement where the Company provided its expertise to assist its partner in the development of market and business plans andopportunities in the wireless and mobile market, $55,980 earned under non-recurring engineering agreements and licensingagreements, and $48,153 earned from the deployment of wireless applications.

*                Cost of Revenues.*  Total cost of revenues decreased $117,445 to $182,109 in the year ended December 31, 2002, down 39.2% from $299,554 in theprior year. The decrease in cost of revenues 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 first quarter of 2002.

                Costs of providing governmental contract services and license fees during the firstquarter of 2002 and for the year ended December 31, 2001 were comprised primarily of salaries and related costs of providinggovernment contract services.  Specific costs of license-fee revenue have historically been insignificant and not separatelymaintained.

                Commencing in the second quarter of 2002, costs of revenues were primarily comprised ofdirect costs associated with the sale and delivery of our solutions for the mobile and wireless market.  These costs consistedprimarily of fixed costs consisting of monthly third-party hosting fees.

               *Gross Profit*.  Total gross profit decreased $225,361, or 50.1%, to$224,843 for the year ended December 31, 2002, compared with $450,204 for the year ended December 31, 2001. The decrease in grossprofit primarily resulted from a shift in the Company’s focus from providing governmental contract services and thecommercial licensing of technology to developing solutions for the mobile and wireless market during thefirst quarter of2002.

                Gross profit resulting from governmental contract services and commercial licensing oftechnology during the year ended December 31, 2002, totaled $138,973 or 68.5% compared to $450,204 or 60.1% in the prior year. Theincrease was primarily attributable to more license-fee income earned in the year ended December 31, 2002 compared to the prioryear. License-fee income generates a higher gross profit percentage compared to contract revenues.

                Gross profit resulting from thedevelopment and deployment of solutions for the mobile and wireless market during the year ended December 31, 2002, totaled$85,870, or 42.1%.  The gross profit resulting from these activities is a result of deducting costs that are primarily fixedin nature, primarily third-party hosting fees, from the related earned revenue.

                *Selling, General and Administrative Expenses.*   Selling, general andadministrative expenses consist primarily of salaries, consulting fees, office operations, administrative and general managementactivities, including legal, accounting and other professional fees. Selling, general and administrative expenses for the yearended December 31, 2002, were $6,155,416, compared to $7,740,867 for the year 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 costreduction efforts during 2002, offset by additional cost associated with the launching ofthe first commercial applications in themobile and wireless market.  Selling, general and administrative expenses for the year ended December 31, 2001, include legaland administrative costs associated with the Company’s efforts to regain its listing status on the OTC bulletin Board. Similar costs were not incurred in 2002.

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                *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-cash compensation for the year ended December 31, 2002 of$364,000 reflects $202,642 of amortization of deferred compensation resulting from stock options granted in prior years, at pricesbelow the fair value of the underlying common stock. The remaining amount of $161,358 reflects stock options that were granted toan employee, who was also a director of Summus, with exercise prices below the estimated fair value of the underlying commonstock.

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

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

                *Non-Cash Consulting Expense. * Non-cash consulting expense for the yearended December 31, 2002, in the amount of $887,992 is attributable to the following: (1) the issuance of 394,567 shares of unregistered common stock and 453,532 options and warrants to purchase  unregistered common stock to consultants for servicesvalued at $765,477; (2) stock options granted to three new members 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 forconsulting 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 the stock options granted to consultants, including the members of theBoard of Advisors, was recorded using the fair value method of accounting.

                *Non-Cash Settlements. * Non-cash settlements for the year ended December31, 2001, in the amount of $1,132,352, are attributable to the settlement of claims of Van Ernst Jakobs N.V. valued at $1,051,915and the settlement of the ENELF LLC lawsuit valued at $80,437.  For further disclosure, see footnote 17 to the auditedconsolidated financial statements included in this report. 

                *Net Interest Income (Expense).* Net interest expense for the year endedDecember 31, 2002, was $469,571, compared to net interest expense of $56,570 for the corresponding period of the prior year. Netinterest expense for the year ended December 31, 2002, includes interest costs associated with capital lease obligations and notepayable agreements of $49,321, plus the following items 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 the1,724,138 warrants issued to the debenture 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.
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                The value of the warrants issuedto the debenture holders was initially recorded as a discount to the $500,000 face value of the debentures.  This discount wasto be amortized to interest expense over the term of the debentures.  Since all of the debentures were converted into commonstock during the year ended December 31, 2002, the total value assigned to the warrants was fully amortized to interest expenseduring the year.  The beneficial conversion feature was recorded since the conversion price of the debentures was below thefair market value of our common stock on the date the convertible debentures were issued.  This non-cash charge was recordedimmediately as interest expense because the debentures were convertible upon issuance.

                Net interest expense for the yearended December 31, 2001, includes interest costs associated with capital lease obligations and note payable agreements of$56,750.

                *Loss from Discontinued Rich Media Direct Operations*.  Summus recordeda loss from operations of its “Rich Media Direct” business of $135,798, as well as a loss on disposal of theseoperations of $215,500, for the year ended December 31, 2001.  Our divestiture of this business includes the sale of DouglasMay & Co. to Mr. May on September 19, 2001.

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

**Liquidity and Capital Resources**

                As of December 31, 2003, we had $2,188,645 of cash on hand, working capital ofapproximately $305,958, and approximately $2,378,981  in current liabilities.  During 2003, we funded our operationsprimarily through: (1) the sale of 2,704,153 shares of our restricted common stock and warrants to purchase 316,000 shares ofcommon stock to individual accredited investors, for gross cash proceeds of $1,337,582; (2) the sale of 1,310 shares of ourunregistered Series C convertible preferred stock along with warrants to purchase 5,240,000 shares of the unregistered common stockto individual accredited investors for gross proceeds of $1,310,000; (3) the sale of 4,000 shares of our unregistered Series Dconvertible preferred stock along with warrants to purchase 10,000,000 shares of the unregistered common stock to individualaccredited investors for gross proceeds of $4,000,000; and (4) the sale of 200 shares of our unregistered Series E convertiblepreferred stock along with warrants to purchase 500,000 shares of the unregistered common stock to individual accredited investorsfor gross proceeds of $200,000. 

                We anticipate that the sale of our equity securities will continue to represent theprimary source of our liquidity until we obtain funding from institutional sources and generate positive cash flow fromoperations.  We are currently discussing funding with various institutional investment groups; however, we cannot guaranteethat we will be able to raise the necessary capital or that, if we do so, it will be on favorable terms.  We may have to sellequity at below market rates, and any future sales of our capital stock to finance our business plan will dilute our existingshareholders’ ownership.  Our continuation as a going concern depends on our ability to generate sufficient cash flow tomeet our obligations on a timely basis, to obtain additional financing as may be required and ultimately to attainprofitability.  In light of our financial condition and operating losses, our auditors have included in their report on ouraudited consolidated financial statements an explanatory paragraph which expresses substantial doubt about our ability to continueas a going concern.

               Through the end of 2003, we had entered into settlement agreements or arrangements with several of our vendors 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.  As of the date of this filing, we have been able tomake 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 December 31, 2003, we had approximately $1.35 million in accountspayable, of which approximately $0.8 million were greater than 90 days old. 

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               As of the date of this report, we are a party to one unsettled lawsuit, whereby the claimant has sued us for non-payment ofservices provided to the Company.  The aggregate value of this claim is $276,374 (which has been accrued), plusinterest.  Summus has disputed the total amount claimed and is in the process of attempting to negotiate a settlement with thecreditor.

                Commencing August 15, 2002, theCompany adopted an alternative compensation arrangement for its executives.  Under the terms of the new arrangement, electingexecutives may receive a portion of their annual cash compensation in the form of fully vested stock options.  The stockoptions will have an exercise price equal to the fair market value of the Company’s common stock based on the closing pricesof the common stock at the end of each respective 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% commencingwith a minimum level of 15% of the participant’s annual compensation.  The number of shares underlying each option willbe determined by dividing the dollar value of the target compensation by the closing price at the end of each respective payrollperiod.  Once this election is made, it will remain effective for a minimum of three months and can be terminated early at thefull discretion of the Company.  Beginning on August 15, 2002, five executives elected to participate in this alternativepayment plan at reduced salary levels ranging between 25% and 35% of the participant’s annual compensation.  During theyears ended December 31, 2003 and 2002, the Company issued 490,292 and 241,431, respectively, fully vested stock options withexercise prices ranging between $0.23 and $0.51 per share under this plan.  As of the date of this filing, there are not anyexecutives participating in this arrangement. 

                The success and growth of ourbusiness is dependent in large part on our ability to partner and develop relationships within the wireless industry.  Inorder for us to execute on our business plan, we anticipate that it will require approximately $2.0 to $3.0 million in workingcapital within the next 12 months to achieve positive cash flow, bring additional applications to market and continue the rolloutof our operations.  We are currently discussing funding with various institutional investment groups; however, we cannotguarantee that we will be able to raise the necessary capital or that, if we do so, it will be on favorable terms.  We mayhave to sell equity at below market rates, and any future sales of our capital stock to finance our business plan will dilute ourexisting shareholders’ ownership. 

                Subject to our liquidity constraints (including our need to dedicate cash flow to meet ourobligations on a timely basis), we intend to invest a larger portion of our working capital on:
-  increasing subscriber adoption of our applications through marketing andpromotions;securing top-tier brands;the development and delivery of new wireless applications; andthe marketing of those applications to lay the foundation of future substantial revenuegeneration.
                *Cash Flow used in Operating Activities.*   Net cash used in operatingactivities was $5,221,600 in the year ended December 31, 2003, compared to $6,794,822 in the prior year.  The decrease in netcash used in operating activities was primarily due to a decrease in the net loss for 2003 as compared to 2002, resulting primarilyfrom decreases in operating costs and payments of outstanding vendor obligations.  The Company has increased efforts onreducing operating expenses.  In addition, cash collections have increased with the corresponding increase in revenues.  

                *Cash Flow from Investing Activities. * Net cash provided by investingactivities was $949 in the year ended December 31, 2003, representing the net of computer equipment purchases and proceeds receivedfrom sale of equipment and furniture.  Net cash used in investing activities was $91,212 in the year ended December 31, 2002,representing computer equipment purchases. 

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                *Cash Flow from Financing Activities.*   Net cash provided by financingactivities was $7,383,306 in the year ended December 31, 2003, compared to net cash provided by financing activities of $6,796,052in the prior year.  Net cash provided by financing activities in the year ended December 31, 2003 related to:
-  sale of 2,704,153 shares of unregistered common stock, along with warrants to purchase anadditional 316,000 shares of common stock, and the repricing of  6,609,645 previously issued warrants. These transactions werein two forms.  The first form involved purchases of common stock at prices which were above the traded value and allowed theseinvestors to reduce the exercise price of a certain number of their previously purchased warrants, typically allowing them toreprice 2 warrants for every share purchased.  The other form allowed warrant holders to reduce the exercise price ofpreviously issued warrants if the holder exercised those repriced warrants immediately. The original exercise prices of therepriced warrants ranged between $0.60 and $5.25, per share.  The repriced exercise prices ranged between $0.20 and $1.69, pershare.  Total cash proceeds from the sale of the shares and issuance of the new warrants were $1,337,582;sale of 1,310 shares of unregistered Series C convertible preferred stock, along withwarrants to purchase an additional 5,240,000  shares of common stock for gross proceeds of $1,310,000;sale of 4,000 shares of unregistered Series D convertible preferred stock, along withwarrants to purchase an additional 10,000,000 shares of common stock for gross proceeds of $4,000,000;sale of 200 shares of unregistered Series E convertible preferred stock, along withwarrants to purchase an additional 500,000 shares of common stock for gross proceeds of $200,000;issuance of 3,491,243 shares of unregistered common stock upon the exercise of warrantswith exercise prices ranging from $0.20 to $0.50 per share.  Of the 3,491,243 exercised warrants, 2,881,343 were exercised inconnection with the repricing of the exercise price of the warrants as described in the previous paragraph.  The initialexercise prices of the warrants ranged between $0.60 and $5.25.  The repriced exercise prices ranged between $0.20 and $1.69.The exercise of these warrants generated gross proceeds of $928,675;payment of stock issuance costs of $184,515; andprincipal payments on notes payable and capital lease obligations of$208,436.
                Net cash provided by financing activities in the year ended December 31, 2002, relatedto:
-  sale of 9,053,167 shares of our common stock, along with warrants to purchase an additional 17,779,104 shares of common stock,at exercises prices ranging aggregate from $0.48 to $4.00 per share, along with cash collections on a stock subscription receivabletotaling $10,000, generating proceeds of $6,449,307; 
-  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  generating aggregate gross proceeds of $500,000; 
-  proceeds from exercise of stock options of $12,750 for 290,300 shares of common stock and the proceeds from the exercise ofstock purchase warrants of $79,813 for 189,624 shares of common stock; and 
-  principal payments on notes payable and capital lease obligations of $245,818. 

**Significant Concentrations**

               For the year ended December 31, 2003, one customer accounted for 45% and 59% ofthe Company's consolidated revenues and accounts receivable, respectively. Should this wireless carrier discontinue the demployment of the Company'sapplications, the Company's businesswould be adversely affected.

**New Accounting Pronouncements**

               In January 2003, the EITF published EITF Issue 00-21, "Revenue Arrangements with Multiple Deliverables," which requires companiesto determine whether an arrangement involving multiple deliverables contains more than one unit of accounting.  In applyingEITF Issue 00-21, revenue arrangements with multiple deliverables should be divided into separate units of accounting if thedeliverables in the arrangement meet certain criteria.  Arrangement consideration should be allocated among the separate unitsof accounting based on their relative fair values.  EITF Issue 00-21 is effective for revenue arrangements entered into infiscal periods beginning after June 15, 2003.  The adoption of EITF Issue 00-21 is not expected to have a material impact onthe Company's financial statements.

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                In January 2003, the FASB issuedInterpretation No. 46, "Consolidation of Variable Interest Entities", which addresses the consolidation by business enterprises ofvariable interest entities as defined in the Interpretation.  The Interpretation applies immediately to variable interests invariable interests entities created after January 31, 2003, and to variable interest in variable interest entities obtained afterJanuary 31, 2003.  The adoption of this Interpretation did not have an impact on the Company's financial statements. TheInterpretation becomes effective for entities created before February 1, 2003 as of the beginning of the first period afterDecember 15, 2003.  We do not anticipate the application   of this provision of the Interpretation to have a materialimpact on the Company's financial statements.

               In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilitiesand Equity."  SFAS No. 150 establishes standards for how an issuer of financial statements classifies and measures certainfinancial instruments that have characteristics of both liabilities and equity. SFAS No. 150 is effective for financial instrumentsentered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginningafter June 15, 2003.  The adoption of SFAS No. 150 did not have a material impact on the Company's financialstatements.

**Description of Critical Accounting Policies**

                The preparation of our financialstatements in conformity with accounting principles generally accepted in the United States requires us to make estimates andjudgments that affect our reported amounts of assets and liabilities, revenues and expenses.  We have identified the followingcritical accounting policies that affect the more significant estimates and judgments used in the preparation of our financialstatements.  On an ongoing basis, we evaluate our estimates, including those related to the matters described below. These estimates are based on the information that is currently available to us and on various other assumptions that we believe tobe reasonable under the circumstances.  Actual results could vary from those estimates under different assumptions orconditions.

*Revenue Recognition and Related Costs*

                Change in Revenue Recognition Policy

                After a careful review of the Company’s revenue recognition policies and givingconsideration to guidance provided for in Emerging Issues Task Force No. 99-19 *Reporting Revenue Gross as a Principal versus Netas an Agent* (“EITF 99-19”), the Company has changed certain revenue recognition policies affecting revenues earnedby wireless applications and contracts.  Prior to 4th quarter 2003, the Company reported revenues earned bywireless applications and contracts and cost of revenues for wireless applications and contracts  netof certain third-party costs  in the statement ofoperations.  These transactions have been reclassified to  reflect a grossrevenue presentation with no effect on gross profit or netloss.  The amount by which revenues and costs of revenues have been reclassified for the year ended December 31, 2003 is$635,989.  Revenues and costs of revenues for 2002 have not been reclassified due to immateriality.

                Wireless applications and contracts

                Commencing during the second quarter of 2002, our resources were dedicated to thedevelopment of solutions for the mobile and wireless markets.  Revenues earned from wireless applications are recognized upondelivery and acceptance by the end-user either as a one-time purchase or a monthly subscription.  For content delivery partnerarrangements, whereby the Company remits a portion of the revenues earned through the sale of the Company’s applications,revenue is recorded on a gross basis in accordance with EITF 99-19.  The Company recognizes the cost of revenue share paymentsto the content providers as a cost of revenues.  Wireless applications and contracts cost of revenues includes all third-partyhosting, testing and/or carrier distribution fees.  These costs are incurred on a monthly basis and are primarily fixed innature regardless of the revenue generated by the related applications. 

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

                Periodically, we enter intonon-recurring engineering arrangements with our content partners.  Generally, under the terms of these agreements, we receivefunding upfront to complete projects. The funding we receive upfront is recorded as deferred revenue and is recognized as revenueunder the terms of the individual arrangements.  Deferred revenue represents amounts received for which the Company has notyet completed its contractual obligations.

               Wireless License Fees 

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

               There were no costs related to the wireless license fee revenue generated during the year ended December 31, 2003 as the licensefee revenue related to technology that had been previously developed by the Company, and there were no costs for installation,delivery or customization, or other related costs.

               Contracts and license fees 

               We derive certain revenues primarily from research and development contracts for governmental agencies and the commercial licensingof our technology.  We recognize revenue on these contracts at the time services are rendered based upon the terms ofindividual contracts.  Regarding the commercial licensing of our technology, we follow the provisions of AICPA Statement ofPosition 97-2, “Software Revenue Recognition”, as amended by AICPA Statement of Position 98-9 “Modification ofSOP No. 97-2 Software Revenue Recognition with Respect to Certain Transactions.” Revenue from software license fees isgenerally recognized upon delivery provided that a contract has been executed, the vendor fee is fixed or determinable, nosignificant vendor obligations or uncertainties surrounding customer acceptance remain, and collection of the resulting receivableis deemed probable.

                *Valuation of Equity Instruments*

                We have utilized our equitysecurities, including unregistered common stock and options/warrants to purchase unregistered common stock, to pay for services andto settle obligations owed to or claimed by creditors. The issuance of equity instruments as payment for services rendered toSummus results in the recording of non-cash compensation or consulting expense as the services are performed.  We utilize theBlack-Scholes option-pricing model to determine the value of options or warrants issued as payment for services.  Underlyingthe Black-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. Management evaluates each of these assumptions on a periodic basis in order to determine the value of the equity instruments usedas payment for services as well as to record the associated expense.  As conditions change, our evaluation of the assumptionsunderlying the Black-Scholes option-pricing model may change resulting in differing values of equity instruments issued forservices between reporting periods. 

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**FACTORS THAT MAY AFFECT OUR BUSINESS, FUTUREOPERATING RESULTS AND FINANCIAL CONDITION**

***An investment in our common stock involves a high degree of risk.  You shouldcarefully consider the following risks before making an investment decision.  You should also refer to the other informationset forth in this annual report on Form 10-K,  including our financial statements and the related notes.                ***

Ø

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

               We require substantial working capital to fund and sustain our business operations. For us to implement our business plan, weanticipate that we will need approximately $2 million to $3 million in additional working capital in the next twelvemonths.** ** If adequate funds are not available or are not available on acceptable terms, we may be unable to developfurther or enhance our products and services, take advantage of future opportunities, respond to competitive pressures or continuein business.

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 liquidity constraints, we have issued equity securities in several instances in lieu of effecting payment in cashof amounts due (or alleged to be due) vendors, consultants, current and former officers and directors, andshareholders. 

               In addition, we have the ability to issue options and other stock-based awards under our Amended and Restated 2000 EquityCompensation Plan to directors, officers, employees and consultants, and have reserved up to 8,500,000 shares of our common stockunder the plan, 6,993,202 of which have been granted as of March 15, 2004.  We also have outstanding warrants for 44,556,228shares of our common stock as of March 15, 2004.

               Issuances of certain shares of our common stock or other equity interests have been at (or are exercisable for) a price thatrepresents a discount to the then traded value of our common stock. In any event, past and anticipated future issuances ofadditional shares of our common stock or other equity interests have and will continue to dilute the proportional ownershipinterests 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 from the issuance of shares of our common stock in private placements toinvestors.  The Company currently has 185,000,000 shares of common stock authorized for issuance.  As of March 15, 2004,the Company has approximately 141,934,931 shares of its common stock either issued and outstanding or reserved for issuance asfollows:
-  71,277,220 shares are issued and outstanding; 
-  44,556,228 are reserved for the issuance of shares underlying warrants; 
-  163,678 are reserved for the conversion of 2,078 shares of the Company’s Series A Stock, plus accrued but unpaiddividends; 
-  5,240,000 are reserved for the conversion of 1,310 shares of the Company’s Series C Stock; 
-  12,625,000 are reserved for the conversion of 2,525 shares of the Company’s Series D Stock; 
-  650,000 are reserved for the conversion of 130 shares of the Company’s Series E Stock;    
-  6,993,202 are reserved for issuance in connection with the outstanding options granted under the Company’s Amended andRestated  2000 Equity Compensation Plan; and 
-  429,603 are reserved for issuance in connection with outstanding options granted outside of the Company’s Amended andRestated Equity Compensation Plan.      

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               If we are successful in our capital raising efforts, existing shareholders will almost certainly experience dilution of theirpercentage ownership interests in Summus.  In addition, the new equity securities may have rights, preferences or privilegessenior to those of existing holders of shares of our common stock.

               If we raise additional capital in conjunction with entering into strategic alliances or licensing our technology to wirelesscarriers, wireless and mobile device manufacturers, or content providers, we may be required to relinquish some rights to ourtechnologies or products, or grant licenses on terms that are not favorable to us.

Ø

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

               We have generated (and expect to continue to generate in the foreseeable future) operating losses and negative cash flow. We hadnet losses, including non-cash charges for stock-based employee compensation and non-cash consulting expenses, of approximately$305,000 and $1,252,000 for the fiscal year periods ended December 31, 2003 and December 31, 2002, respectively. As of December 31,2003, we had an accumulated deficit of $50,396,562 and  working capital of $305,958.  As a result, we will need togenerate significant revenues to be profitable in the future.  In light of our financial condition and operating results, ourauditors have included in their report on our consolidated financial statements an explanatory paragraph, which expressessubstantial doubt about our ability to continue as a going concern.

Ø

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

               We have a limited operating history and have generated limited revenue from our operations.  Our prospects must be consideredin light of the risks, expenses and difficulties frequently encountered by growing companies in new and rapidly evolvingmarkets.  We will need to increase significantly our revenues to achieve and maintain profitability. We believe thatincreasing our revenues will depend in large part on our ability to:
-  raise additional capital; 
-  deploy our applications and our BlueFuel  platform; 
-  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 than anticipated or if operating expenses increase morethan expected, or are not reduced sufficiently, we may never achieve profitability.  If we achieve profitability, we cannot becertain that we will be able to sustain or increase that profitability in the future.

Ø

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

               For the fiscal year ended December 31, 2003, we had revenues of $1,699,274, of which $1,395,296  relate to thewireless and mobile market. For the fiscal year ended December 31, 2002, we had revenues of $406,952, of which $204,133 relates tothe wireless and mobile market.  We have only a limited operating history upon which you may evaluate our business andprospects. You should consider our prospects in light of the heightened risks and unexpected expenses and difficulties frequentlyencountered by companies in an early stage of development.  These risks, expenses and difficulties, which are describedfurther in this “Risk Factors” section, particularly apply to us because the mobile and wireless market (i.e., themarket for remote access and processing of information resources via small handheld wireless devices) is very much in its infancyand is likely to rapidly evolve.

               Successfully commercializing our applications using BlueFuel, as well as our other current and contemplated products will entailsignificant sales and marketing, competitive, technological and financing risks.  We believe our efforts to negotiate andenter into strategic relationships will enable us to market and deploy our products on a commercial basis.  These operationsprovide limited information for you to consider in assessing 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 relatively brief operating history and the rapidly changing and uncertain nature of the markets in which wecompete, our quarterly and annual revenues and operating results are likely to fluctuate from period to period, and period toperiod comparisons are not likely to be meaningful. These fluctuations are caused by a number of factors, many of which are beyondour control. Our future operating results could fall below the expectations of public market analysts or investors, which couldsignificantly reduce the market price of our common stock. Fluctuations in our operating results will likely increase thevolatility of our stock price.   Our research and development and sales and marketing efforts, and other businessexpenditures generally, are partially based on predictions regarding certain developments for wireless handset availability andcarrier deployment of data services.  To the extent that these predictions prove inaccurate, our revenues may not besufficient to offset our expenditures, and our operating results may be harmed.

Ø

**A substantial portion of our revenues are derived from our relationship with Verizon Wireless, and the termination oralteration of our contract with Verizon could materially and adversely affect our business.**

               In fiscal year 2003, we derived approximately  55% of our wireless application revenue from our relationship with VerizonWireless.  If this contract were to be terminated or altered, our business would bematerially and adversely affected. 

Ø

**If our BREW developer agreement        with Qualcomm were terminated, it would have a material and adverse        effect on our business.**

               In fiscal year 2003, we derived approximately 90% of our revenues from BREWservices offered by a number of BREW carriers in North, South and CentralAmerica.  Access to these BREW services is enabled through Summus'relationship with Qualcomm.  If Summus' agreement with Qualcomm wereterminated, Summus' access to BREW services would be materially and adverselyaffected.

Ø

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

               The trading price of our common stock has been and is likely to continue to be highly volatile.  Our stock price could besubject to wide fluctuations in response to 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; 

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-  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 market in general, and the OTC Bulletin Board and the market for wireless, wireless-related and technologycompanies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionateto the operating performance of these companies.  These broad market and industry factors have in the past and may in thefuture reduce our stock price, regardless of our operating performance.

Ø

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

               Of the 71,277,220 shares of our common stock outstanding as of March 15, 2004, an aggregate of 38,705,484 shares are freelytradable without restriction in the public market unless the shares are held by "affiliates," as that term is defined in Rule144(a)(1) under the Securities Act of 1933.

               In addition, as of March 15, 2004, there were outstanding warrants to purchase 44,556,228 shares of our common stock and options topurchase 7,422,805 shares of our common stock, 7,004,410 of which were fully vested.  The Company has also currentlyissued:
-  2,078 shares of its Series A Stock, plus accrued and unpaid dividends, which are convertible into 161,246 shares of theCompany’s common stock; 
-  1,310 shares of its Series C Stock, which are convertible into 5,240,000 shares of the Company’s common stock; 
-  2,525 shares of its Series D Stock, which are convertible into 12,625,000 shares of the Company’s common stock; and 
-  130 shares of its Series E Stock, which are convertible into 650,000 shares of the Company’s common stock.  

               The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in themarket, or the perception that such sales could occur. These sales might also make it more difficult for us tosell equity securities in the future at a price that we think is appropriate, if at all.  A large volume of sales by theselling shareholders could have a significant adverse impact on 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 and rapidly evolving. Wireless service providers are only beginning to offercommercial services that could result in utilization of our software.  As a result, we cannot assess current or future demandfor remote management of resources, the creation and interaction with multimedia content via cellular handsets and other mobiledevices, and enhanced quality of remote communications. We also do not know whether this market will be large enough to sustain ourbusiness. We may not be able to develop and introduce software, software enhancements or services that respond to market demands,technology developments, increased competition or industry standards on a timely basis, or at all. If this market does not evolvein the manner or in the timeframe that we anticipate, or if we are unable to respond to new market developments promptly, ourbusiness and prospects may suffer. 

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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 our ability to develop relationships and enter into agreements with companies in key industry groups,including:
-  wireless service providers that we expect will deploy our technology 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 into contractually binding agreements with wireless service providers, device manufacturers, andcontent providers in order to generate any significant revenues from our technology and product applications.  If we areunable to establish a sufficient number of strategic relationships and enter into contractual arrangements on terms commerciallyfavorable to us, our business, revenue, and prospects 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 on timely deployment by wireless service providers of our applications using our BlueFuel productsuite in their networks. Wireless service providers may not deploy, or may be slow in deploying, our software due to a number offactors including the availability of competing products, lack of subscriber demand, as well as interoperability, implementation,support or maintenance concerns. In addition, if our current applications with wireless service providers are unsatisfactory, theymay not deploy our software or may require costly or time-consuming modifications to our software before deployment.

               Even if wireless service providers offer content services based on our software, their subscribers may not be willing to buy theseservices. Subscribers are accustomed to viewing content on the comparatively large displays of television screens and PC monitorsand may not be willing to use mobile information devices, which typically have smaller screen sizes, to view content. Additionally,subscribers may not be willing to pay to view content on mobile information devices because this content can be viewed at a lowercost using other connections, such as satellite and wireline connections. Moreover, subscribers may not be willing to purchase newdevices or upgrade 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 information devices will be the principal means for the wireless delivery of content. Only a smallpercentage of these devices are currently capable of receiving and displaying content. In order to enhance the viewing of suchcontent, new or upgraded devices that offer more advanced displays and support higher bandwidth wireless services are required. Ifsemiconductor and device designers and manufacturers are unable to design, manufacture and widely distribute mobile informationdevices capable of displaying content in a timely manner, our business will suffer.

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

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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 to introduce, on a timely basis, new products and product upgrades to add new features, functionality andtechnology that our target customer base desires. No assurances can be provided that we will be able to successfully complete thedevelopment of currently planned or future products in a timely and efficient manner. Due to the complexity of these products,internal quality assurance testing and customer testing of pre-commercial releases may reveal product performance issues ordesirable feature enhancements that could lead us to postpone the release of products or product upgrades. In addition, thereallocation of resources associated with any such postponement would likely cause delays in the development and release of otherfuture products or enhancements to our currently available products. This could have a material adverse effect on our results ofoperations.

Ø

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

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

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               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 industry is experiencing rapid and significant technological change. This change includes the increasein pace of upgrades in existing wireless systems, evolving and constantly changing industry standards, ongoing improvements in thecapacity and quality of digital and compression technologies, and changes in consumer needs and preferences. Alternativetechnologies may develop for the provision of wireless services and other compression technologies to wireless services that aresuperior to those that we plan to offer to the wireless market. These alternative technologies may render our products andtechnologies obsolete in the future. Accordingly, our success depends on our ability to adapt to these changes, particularly todevelop or adapt products and services or acquire new products and services that can compete successfully. There can be noassurance that we will select and develop appropriate technology and products on a timely basis. Our failure to develop or obtainappropriate technology could adversely affect our ability to be competitive.

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 the steps we take to ensure that such technology is free of errors or defects, particularly whenfirst introduced or when new versions or enhancements are released, may not be successful. We cannot guarantee that current orenhanced versions of our products will be free of significant software defects or bugs. Despite our testing, and testing by thirdparties, current or future products may contain serious defects. Serious defects or errors could result in lost revenue or delay inmarket acceptance of our products and could seriously harm our credibility and materially affect the market acceptance and sales ofour products. The occurrence of these types of problems could materially adversely affect our business, results of operations andfinancial condition.

               Errors in our products may also be caused by defects in third-party hardware or software incorporated into our products. If so, wemay be unable to fix these defects without the cooperation of third-party providers. Because these defects may not be assignificant to these providers as they are to us, we may not receive the rapid cooperation that may be required to avoid seriousharm to our business and operating results. Errors, defects or other performance problems with our products could also harm ourcustomers' businesses or result in potential product liability claims. Even if unsuccessful, a product liability claim broughtagainst us would likely be time-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 a limited presence into international operations. To do so, we would likely have to enter intorelationships 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.

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Ø

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

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

               Changes in regulatory environments governing the wireless telecommunication industry could negatively affect our plans to offerproducts and services. The licensing, ownership and operation of wireless communications systems and the grant, maintenance orrenewal of applicable licenses and radio frequency allocations are all subject to significant government regulation. Governmentregulation may have an adverse effect on the wireless telecommunications companies to which we plan to market and sell our productsand services under development.  Delays in receiving required regulatory approvals and licenses or the enactment of new andadverse regulatory requirements may adversely affect our ability to offer our technology and other new products and services. Inaddition, legislative, judicial and regulatory agency actions could negatively affect our ability to offer new technologies towireless telecommunications companies.

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 or companies in the future. Entering into an acquisition entails many risks, any of which could harmour 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 awarded any patents.  We have filed for four (4) patents.  The first is in the videocompression technology area, which incorporated six (6) of our previous provisional patents and for which we abandoned three (3) ofour previous provisional patents that contained redundant information to the video patent.  The second is in the mobilemapping 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 relevant and important information contained in these provisional patentsis protected under trade secrets and by confidentiality agreements.  The third is in the image and graphics compressionarea.  The fourth is in the information navigation area.  These patent applications may not be granted or, if granted,the resulting patents may be challenged or invalidated.  In addition to patents, we rely on copyright and trademark laws,trade secrets, confidentiality provisions and other contractual provisions to protect our proprietary rights. These measures, whichrequire the expenditure of substantial resources, afford our intellectual property only limited protection because our competitorsand third parties independently may develop similar technologies or may infringe our intellectual property. Infringement isdifficult to detect and costly to prevent. With respect to the protection of our proprietary rights internationally, the laws ofsome foreign countries may not protect our proprietary rights adequately. In addition, we will not have patent protection incountries where we do not file patent applications. Thus, the measures we are taking to protect our proprietary rights in theUnited States and abroad may not be adequate and our business may be harmed as a result.

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Ø

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

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

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 December 31, 2003, we had approximately $1.35 million in accounts payable, of which approximately $0.8 million weregreater than 90 days old. 

               During 2003, we negotiated new settlement agreements with several vendors and service providers that resulted in a reduction in ourrecorded liabilities of $2.4 million in 2003 resulting in non-cash settlement gains of approximately $1.5 million.  Underthese settlement agreements, such vendors agreed to our payment of less than the initial amounts due, the extension of paymentsterms by up to 36 months and/or the satisfaction of amounts due through a combination of cash and common stock of Summus.  Wehave issued approximately 1.5 million shares of our restricted common stock in connection with these settlement agreements during2003.  There can be no assurance that we will be able to generate sufficient funds in order to stay current under thesesettlement agreements and arrangements and maintain the scheduled payments thereafter. 

               If the cash flow from our operating and financing activities is insufficient, we may be required to continue to take actions suchas delaying or reducing capital expenditures, attempting to restructure or refinance debt, seeking to have creditors agree topayment in the form of our common stock or other equity securities in lieu of cash, selling assets or operations, or takingmeasures to reduce our expenses. Any or all of these actions may not be sufficient to allow us to service our debts and otherobligations, avoid litigation by creditors or continue in business.

Ø
**Our Directors and Executive Officers beneficially own approximately 12.26% 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, 2004, our executive officers, directors and affiliated persons beneficially owned approximately 12.26% 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. 

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

Ø

**We depend on the services of key personnel to operate our business and implement our strategy.  If we lose the servicesof our key personnel or are unable to attract other qualified personnel, we may be unable to implement our strategy. **

               Our future success depends, in part, on our ability to identify, hire and retain qualified employees.  We have at-willemployment relationships with  our management and other employees.  We do not currently maintain any "key person" lifeinsurance policies on any members of management or any other employees.  Competition for qualified personnel is intense. If we are unsuccessful in attracting new personnel or retaining and motivating our current personnel, our business could beadversely affected.  For information on our key personnel, please see “Item 10 – Directors and Executive Officersof the Registrant” in this annual report on Form 10-K.  

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 of such stockin the secondary trading market.**

               Federal regulations under the Securities Exchange Act of 1934 (the "Exchange Act") regulate the trading of so-called "pennystocks," which are generally defined as any security not listed on a national securities exchange or NASDAQ, priced at less than$5.00 per share and offered by an issuer with limited net tangible assets and revenues. Since our common stock currently trades onthe OTC Bulletin Board 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 potential purchaser priorto any trade.

               In addition, because our common stock is not listed on the NASDAQ Stock Market or any national securities exchange and currentlytrades 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 certain steps prior to selling a "penny stock," which include:

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

               Because of these requirements, many broker-dealers are unwilling to sell penny stocks at all.  If these "penny stock" rulesare not followed by the broker-dealer, the investor has no obligation to purchase the shares. The application of thesecomprehensive 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.

**ITEM 7A .             QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.**

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

**ITEM 8.                FINANCIAL STATEMENTS AND SUPPLEMENTARYDATA.**

                The financial statements andsupplementary data filed with this report are set forth in the “Index to Consolidated Financial Statements andSchedules” following Part IV of this annual report. 

**ITEM 9.                CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON                                ACCOUNTING AND FINANCIALDISCLOSURE.**

Not Applicable.

**ITEM9A.                CONTROLS ANDPROCEDURES.**

**               **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 and principalfinancial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that thematerial information required to the included in our Securities and Exchange Commission (“SEC”) reports is recorded,processed summarized and reported within the time periods specified in SEC rules and forms relating to the Company, including, ourconsolidated subsidiaries, and was made known to them by others within those entities, particularly during the period when thisreport was being prepared.

                In addition, there were nosignificant changes in our internal controls or in other factors that could significantly affect these controls subsequent to theEvaluation Date. We have not identified any significant deficiencies or material weaknesses in our internal controls, and thereforethere were no corrective actions taken.
 
 

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**PART III**

****

**ITEM10.                DIRECTORS AND EXECUTIVE OFFICERS OFTHE REGISTRANT**

 **Board of Directors**

                The following table providesinformation regarding the members of our Board of Directors including their ages, the year they were first elected as directors andthe expiration of their terms as directors.

**Name**

**Age**

**First Year elected as Director**

**Term Expires**

**                                            **

**               **

** **

** **

Jere A. Ayers

61

2003

2004

Stephen M. Finn

54

2004

2004

Neil R. Guenther

50

2003

2004

J. Winder Hughes

45

2003

2004

Bjorn D. Jawerth**(1)**

50

2000

N/A

George H. Simmons**(2)**

52

2002

N/A

**                               _______________                              ** (1) Dr. Jawerth resigned fromthe Board of Directors effective March 5, 2004.                                (2) Dr. Simmons resigned from the Boardof Directors effective January 3, 2004.

               Pursuant to a letter agreement between Summus and Hughes Capital Investors, L.L.C. dated September 26, 2003, Summus agreed that (i)upon the receipt by the Company of a minimum of $2,000,000 in equity financing from the Series D convertible preferred stock, beingarranged by Hughes Capital, it could nominate one (1) director to the Board of Directors of the Company and (ii) upon the receiptby Summus of a minimum cumulative amount of $4,000,000 in equity financing from the Series D convertible preferred stock, HughesCapital could nominate one (1) additional director (for a total of two (2) Directors) to the Board of Directors of theCompany.  Subject to (i) the approval of the then current Board of Directors, whose approval was not to be unreasonablywithheld, and (ii) the satisfactory completion of an investigation of such nominees by an investigative service selected by theCompany, in its sole discretion, such nominees were to be appointed by the Board of Directors to serve as Directors and to besubmitted to the shareholders of the Company at its next annual meeting of shareholders for election.

               A total of $4,000,000 was raised in the offering of the Series D convertible preferred stock.  On December 22, 2003, HughesCapital nominated J. Winder Hughes to the Board of Directors.  On February 2, 2004, Hughes Capital nominated Stephen M. Finnto the Board of Directors.  After an investigation of each nominee by an investigative service selected by the Company, eachof these nominees were unanimously approved by Summus’ full Board of Directors.  Both Mr. Hughes and Mr. Finn will serveuntil Summus’ 2004 annual meeting of shareholders or until their successors have been appointed or elected andqualified.  Mr. Hughes and Mr. Finn will also be nominated and their names submitted to Summus’ shareholders forelection as Directors to serve a one-year term beginning with the 2004 annual meeting.     

**Advisory Board Members **

               Our Board of Directors has an advisory board.  The current member of the advisory board is Bob Bruggeworth.  Members ofthe advisory board are appointed through resolution of the Board and consult and advise the Board and our senior officers as to,among other things:
-  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 

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-  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 provides information regarding our executive officers, the capacity in which they serve Summus, when theyassumed office, and their ages.

**Name**

**Office**

**Officer Since**

**Age**

Bjorn D. Jawerth**(1)**

Chief Executive Officer, President, and Chief Scientist

2001

50

Gary E. Ban**(2)**

Chief Executive Officer

2001

40

Donald T. Locke

General Counsel and Chief Financial Officer

2004

44

Leonard Mygatt

  Executive Vice President-   Technology

  2001

43

Andrew L. Fox

Vice-President – Sales and Business Development    

2001

40

**______________________**

(1)   

The Board of Directors did not renew Dr. Jawerth’s employment contract, whichexpired on February 16, 2004.

(2)

Mr. Ban was elected as Summus’ Chief Executive Officer on February 17, 2004. Mr. Ban had been Summus’ Chief Operating Officer since February 16, 2001. 

**Business Experience of Directors, Officers, Advisory Board Members, and Other KeyEmployees**

**                Jere A. Ayers** wasappointed to our Board of Directors in August 2003.  Mr. Ayers has been the owner of Cari Fabrics, a producer of knittedapparel fabrics since 1989, and founded My Garb, Inc., a producer of printed T-shirts sold through the Internet, in 2000.  Mr.Ayers is a founder and formerly a member of the board of directors of ACW Management, a large dry cleaning company located in NorthCarolina and Virginia.  Mr. Ayers is also a member of the advisory board of directors of Wachovia Bank for the High Point,North Carolina area.  Mr. Ayers received his Bachelor of Science degree in business and economics from the University of NorthCarolina in 1964. 

**                Gary E. Ban** joinedSummus as its Chief Operating Officer in February 2001 and was elected as Summus’ Chief Executive Officer on February 17,2004.  In his past role as Chief Operating Officer of Summus, Ltd., Mr. Ban had supervisory responsibility over companyoperations, information technology and human resources. Prior to joining Summus, Ltd. in September 1999, Mr. Ban held a variety ofexecutive-level management positions establishing direction and operational implementation for business, financial and engineeringsystems integration.  From November 1996 through August 1999, Mr. Ban served as Director of Customer Integration for ABB PowerT&D Inc.'s electricity metering group, where he was responsible for global systems integration for large-scale informationmanagement solutions.  From June to November 1996, Mr. Ban served as Director of Re-Engineering Services for the PinnacleGroup, a consulting company, where he was instrumental in establishing a consulting business offering re-engineering processmanagement focused on enterprise resource planning. Mr. Ban holds an M.B.A. from Duke University and a bachelor's degree inindustrial management and an associate applied science degree in computer engineering from the Milwaukee School of Engineering.

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

**                Stephen M. Finn** wasappointed to our Board of Directors on February 2, 2004. Mr. Finn currently serves as president of Solstice, a media production andtechnology consulting firm. He began a career as an award-winning professional photographer, extending his skills to the worlds ofcomputer graphics and video production as these technologies evolved. Based on this experience, Mr. Finn founded Solstice in 1978specializing in corporate theater, sales and marketing development, product introduction and branding.  Solstice also focuseson translating technology advances into strategic product concepts.

**                Andrew L. Fox** has been Summus’ Vice President – Sales andBusiness Development since February 2001.  Mr. Fox is responsible for sales, business development and content acquisitionactivity for Summus and has been responsible for putting partnerships in place with Disney, ESPN, Fujifilm, The Associated Pressand other high profile media brands.  Before joining Summus, Mr. Fox was marketing director at RealNetworks, a provider ofsoftware products and services for Internet media delivery. At RealNetworks, he was part of the initial RealAudio and RealVideolaunch teams, and also started and ran RealNetworks Enterprise Group. He also served as a Sales and Marketing Manager for IBM'sWireless Data Division and a Product Manager at IBM's Networking Hardware Division. Mr. Fox holds a master of businessadministration degree and an undergraduate degree in computer science and electrical engineering from Duke University.

**                Neil R. Guenther** was appointed to our Board of Directors in February2003.  Dr. Guenther has been a shareholder of Anesthesiology Associates of Wisconsin since 1992 and has served as thePresident of its Board of Directors since January 2002.  Dr. Guenther received his Bachelor of Science degree from theUniversity of Wisconsin in 1977 and his medical degree from the Medical College of Wisconsin in 1983.  Dr. Guenther is amember of the National Association of Corporate Directors. 

**                J. Winder Hughes** wasappointed to our Board of Directors on December 22, 2003.  Mr. Hughes is the founder of Hughes Capital Investors L.L.C., aninvestment group that he formed in 1995. He established the investor partnership, The Focus Fund L.P., in 1999, for which he servesas the managing general partner.  Mr. Hughes, who received his Bachelor of Arts degree in economics from the University ofNorth Carolina in 1980, brings more than 20 years of investment community experience to the Summus board. **  **

                 **Donald T. Locke** joined Summus as a consultant in October 2001,and has served as its General Counsel.  In March2004, he was appointed as Summus’ Chief Financial Officer.  Prior to Summus, Mr. Locke was Of Counsel to KilpatrickStockton LLP, a large southeastern law firm, where his practice focused on Securities and Exchange Commission, financing and mergerand acquisition issues for public companies, with an emphasis on small- to medium-sized public companies.  Mr. Locke receivedhis bachelor’s degree from Furman University in 1980 and his M.B.A and Law degrees from the University of South Carolina in1986 and 1987, respectively.        

**                Leonard T. Mygatt, III**has been our Executive Vice President -Technology, since our acquisition of Summus, Ltd.'s assets in February 2001.  In thisposition Mr. Mygatt is responsible for technical development and strategy, maintaining technical and standards awareness, providingtechnical review of new and competitive technologies, managing and protecting the Company's intellectual property, and technicalsupport for business development, contracts, and proposals.  Mr. Mygatt began with Summus, Ltd. in December 1995 and heldvarious management and technical roles in developing Summus, Ltd.'s technical capabilities and business.  Prior to hisassociation with Summus, Ltd., Mr. Mygatt was employed by Magnavox Electronic Systems Company, where he served as a project leaderfor the design, development and production of advanced tactical data link systems and as a project manager and leader for aresearch and development project investigating image and video compression.  Mr. Mygatt received a bachelor's degree inelectrical engineering from the University of California at San Diego in 1983.

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

**Family Relationships**

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

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

               Our Board of Directors is responsible for establishing broad corporate policies and for our overall performance.  During thefiscal year ended December 31, 2003, the Board of Directors held 4 meetings.  The Board of Directors has an Audit Committee,Compensation Committee, and Nominating Committee. 

               During the fiscal year ended December 31, 2003, the Company’s Audit Committee met 4 times.  Its members during the lastfiscal year were George H. Simmons and Neil R. Guenther.  Dr. Simmons resigned from the Board of Directors of the Company onJanuary 3, 2004.  Our Board of Directors appointed J. Winder Hughes to the Audit Committee on March 26, 2004.  The AuditCommittee reviews the Company’s auditing, accounting, financial reporting, and internal control functions and makesrecommendations to the Board of Directors for the selection of independent accountants.  In addition, the Audit Committeemonitors the quality of the Company’s accounting principles and financial reporting, as well as the independence of and thenon-audit services provided by the Company’s independent accountants.  The Audit Committee discusses with the auditorstheir independence and obtains at least annually the auditors’ written statement describing their independentstatus.

               Neither of the members of the Audit Committee qualifies as an “Audit Committee Financial Expert”, as such term isdefined in the rules and regulations of the Securities and Exchange Commission.  However, the Board of Directors hasdetermined that each Audit Committee member has sufficient knowledge in financial and auditing matters to serve on theCommittee.  The Board of Directors will consider adding a qualified member to the Board of Directors and the Audit Committeewho will meet the requirements of an “Audit Committee Financial Expert”.  Until that time, the Audit Committee hasthe authority to engage legal counsel or other experts or consultants as it deems appropriate to carry out itsresponsibilities.  

               During the fiscal year ended December 31, 2003, the Compensation Committee met 2 times.  Its members during the last fiscalyear were George H. Simmons and Neil R. Guenther.  Dr. Simmons resigned from the Board of Directors of the Company on January3, 2004.  Our Board of Directors reconstituted the Compensation Committee  and appointed J. Winder Hughes and Stephen M.Finn to such committee on March 26, 2004.  The Compensation Committee determines, reviews, approves, and reports to the Boardof Directors on all elements of the compensation for the Company’s executive officers including salaries, bonuses, stockoptions, benefits, and other compensation arrangements.

               During the fiscal year ended December 31, 2003, the Nominating Committee met 2 times.  Its members during the last fiscal yearwere George H. Simmons and Neil R. Guenther.  Dr. Simmons resigned from the Board of Directors of the Company on January 3,2004.  The Nominating Committee shall consider candidates for the Board of Directors of the Corporation and shall make allnominations for Directors to the full Board of Directors. 

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               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 ofDirectors. 

**Code of Ethics**

               We have adopted a Code of Ethics within the meaning of Item 405(b) of Regulation S-K of the Securities Exchange Act of 1934. This Code of Ethics applies to all Directors, officers and employees of Summus.  A copy of this Code of Ethics is publiclyavailable on our website at www.summus.com. 

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

**               ** Section 16(a) of theSecurities Exchange Act of 1934 requires Summus’ executive officers, Directors and persons who beneficially own more than 10%of Summus’ common stock to file reports of ownership and changes in ownership with the Securities and Exchange Commission andNASDAQ.  Officers, Directors and beneficial owners of more than 10% of Summus’ common stock are required by theCommission regulations to furnish Summus with copies of all Section 16(a) forms that they file.

                Based solely on review of thecopies of such reports furnished to us, or written representations that no reports were required, we believe that for the periodfrom January 1, 2003 through December 31, 2003, all executive officers, Directors and greater than 10% beneficial owners compliedwith all Section 16(a) filing requirements applicable to them, except that the Company was late in making the Form 3 filings foreach of Jere A. Ayers and Stephen M. Finn.    

 

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**ITEM11.                EXECUTIVE COMPENSATION**

**Executive Compensation**

**               **Thefollowing table provides certain summary information concerning the compensation paid during the fiscal years ended 2003, 2002, and2001 to (i) the Chief Executive Officer and (ii) to each of the four other most highly compensated executive officers of theCompany (based on salary and bonus received during the last fiscal year) who were serving as executive officers of the Company atthe end of the fiscal year ended December 31, 2003, and whose aggregate compensation exceeded $100,000 (the “Named ExecutiveOfficers”).    

**Summary Compensation Table (1)**

** **

 

**Annual Compensation**

**Long-term Compensation Awards**

 

**Name andPrincipal Position**

**FiscalYear**

**Salary ($)**

**Restricted StockAwards ($)**

**Securities UnderlyingOptions (#) (2)**

**All OtherCompensation ($)**
 
 

Bjorn D. Jawerth

2003

     $301,688**(12)**

--

231,540**(7)**

$4,609

 

Chief Executive

2002

$282,782

$29,988**(9)**

929,603**(7)**

$4,415

 

Officer **(3)**

2001

$326,261

--

          512,000

$3,391

 
 
 

Gary E. Ban

2003

      $171,237**(16)**

--

116,226**(8)**

$1,650

 

Chief Executive

2002

$144,552

$15,250**(9)**

464,803**(8)**

$1,185

 

Officer **(4)**

2001

$143,887

--

  18,919     

$1,153

 
 
 

Donald T. Locke

2003

      $125,911**(14)**

--

--

  $200,000**(15)**

 

General Counsel and 

2002

       $35,900**(14)**

--

60,000

--

 

Chief Financial**(13)**

 

Officer

 
 
 

Robert S. Lowrey

2003

$156,519

--

79,037**(6)**

--

 

Chief Financial

2002

$123,397

$13,172**(9)**

89,828**(6)**

   $75,000**(11)**

 

Officer**(5)**

2001

$141,459

--

  306,107      

--

 
 
 

Leonard Mygatt

2003

$124,840

$2,656

 

Executive Vice

2002

$119,932

40,105

$2,441

 

President, Advanced

2001

$109,648

          348,462

$2,333

 

Technology**(10)**

 
 
 

______________

(1)

The aggregate amount of perquisites and other personal benefits, if any, did not exceedthe lesser of $50,000 or 10% of the total amount of salary and bonus for any year for any of the Named Executive Officers and hastherefore been omitted.

(2)

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

(3)

Dr. Jawerth became Co-Chief Executive Officer on February 16, 2001, and Chief ExecutiveOfficer in November 2001.  The Board of Directors did not renew Dr. Jawerth’s contract, which expired on February 16,2004.

(4)

Mr. Ban became Chief Operating Officer on February 16, 2001.  The Board of Directorselected Mr. Ban as Summus’ Chief Executive Officer on February 17, 2004.

(5)

Mr. Lowrey became Chief Financial Officer and Vice President of Finance on June 1,2000.  Mr. Lowrey resigned from all positions with Summus on November 14, 2003.

(6)

79,037 and 44,255 of these options received by Mr. Lowrey in 2003 and 2002, respectively,were granted pursuant to the Company’s Alternative Compensation Plan in lieu of cash compensation owed tohim.   

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(7)

231,540 and 103,266 of these options received by Dr. Jawerth in 2003 and 2002,respectively,  were granted pursuant to the Company’s Alternative Compensation Plan in lieu of cash compensation owed tohim.

(8)

116,226 and 51,634 of these options received by Mr. Ban in 2003 and 2002, respectively,were granted pursuant to the Company’s Alternative Compensation Plan in lieu of cash compensation owed to him.

(9)

These amounts were paid to the Dr. Jawerth and Messrs. Ban, and Lowrey by the issuance of29,988, 15,250, and 13,172 restricted shares, respectively, of the Company’s common stock in lieu of cash compensation forsalary owed to them.  The restrictions on these shares lapsed on April 25, 2003. 

(10)

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

(11)

In lieu of a $75,000 bonus to which Mr. Lowrey was contractually owed under the terms ofhis employment contract with Summus as of February 16, 2001, he received 75,000 shares of common stock and warrants to purchase150,000 shares of Summus common stock.  These warrants have an exercise price of $2.00 per share

(12)

$26,165 of the total amount of cash salary compensation paid to Dr. Jawerth in 2003 wasfor salary owed to him since 2000.

(13)

Mr. Locke was appointed as the Company’s Chief Financial Officer on March 26,2004.  Prior to this date Mr. Locke was a consultant serving as the Company’s General Counsel since October2001.  

(14)

All amounts paid to Mr. Locke in 2002 and 2003 were paid to him as a consultant to theCompany. 

(15)

Mr. Locke converted $200,000 owed to him for services rendered to the Company as aconsultant from October 2001 until December 2002 into warrants to purchase 333,333 shares of Summus common stock with an exerciseprice of $0.60 per share.

(16)

$39,000 of the total amount of cash salary compensation paid to Mr. Ban in 2003 was for abonus amount owed to Mr. Ban since February 16, 2001 pursuant to his employment agreement with Summus. 

** Option Grants During Last Fiscal Year**

               The following table sets forth information concerning options to purchase shares of common stock granted during the fiscal yearended December 31, 2003, to the Named Executive Officers.

 

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**Name**

**Number of Securities Underlying Options/SARsGranted (#) (1)(2)**

**Percent of Total Options/SARs Granted To Employees InFiscal Year(3)**

**Exercise Or Base Price($/Sh)**

**ExpirationDate**

**Grant DatePresent Value ($)(4)**

Bjorn D. Jawerth

7,149

0.805%

$0.51

1/15/13

$3,217

8,286

0.933%

$0.44

1/31/13

$3,232

7,926

0.892%

$0.46

2/14/13

$3,250

8,681

0.977%

$0.42

2/28/13

$3,212

8,681

0.977%

$0.42

3/14/13

$3,212

8,681

0.977%

$0.38

3/31/13

$2,952

8,479

0.955%

$0.43

4/15/13

$3,222

9,348

1.052%

$0.39

4/30/13

$3,272

10,127

1.140%

$0.36

5/15/13

$3,241

10,723

1.207%

$0.34

5/30/13

$3,217

10,723

1.207%

$0.34

6/16/13

$3,217

11,393

1.283%

$0.32

6/30/13

$3,190

9,115

1.026%

$0.40

7/15/13

$3,190

12,572

1.415%

$0.29

7/31/13

$3,269

12,153

1.368%

$0.30

8/19/13

$3,281

12,572

1.415%

$0.29

9/2/13

$3,269

23,521

2.648%

$0.31

9/30/13

$6,351

19,707

2.219%

$0.37

10/31/13

$6,109

31,703

3.569%

$0.23

12/1/13

$6,024

                                         

Gary E. Ban

3,574

0.402%

$0.51

1/15/13

$1,608

4,143

0.466%

$0.44

1/31/13

$1,616

3,963

0.446%

$0.46

2/14/13

$1,625

4,340

0.489%

$0.42

2/28/13

$1,606

4,340

0.489%

$0.42

3/14/13

$1,606

4,797

0.540%

$0.38

3/31/13

$1,631

4,239

0.477%

$0.43

4/15/13

$1,611

4,674

0.526%

$0.39

4/30/13

$1,636

5,064

0.570%

$0.36

5/15/13

$1,620

5,362

0.604%

$0.34

5/30/13

$1,609

5,362

0.604%

$0.34

6/16/13

$1,609

5,697

0.641%

$0.32

6/30/13

$1,595

4,557

0.513%

$0.40

7/15/13

$1,595

6,286

0.708%

$0.29

7/31/13

$1,634

6,076

0.684%

$0.30

8/19/13

$1,641

6,286

0.708%

$0.29

9/2/13

$1,634

11,761

1.324%

$0.31

9/30/13

$3,175

9,854

1.109%

$0.37

10/31/13

$3,055

15,851

1.784%

$0.23

12/1/13

$3,012

 

Robert S. Lowrey

3,064

0.345%

$0.51

1/15/13

$1,379

3,551

0.400%

$0.44

1/31/13

$1,385

3,397

0.382%

$0.46

2/14/13

$1,393

3,720

0.419%

$0.42

2/28/13

$1,376

3,720

0.419%

$0.42

3/14/13

$1,376

4,112

0.463%

$0.38

3/31/13

$1,398

3,634

0.409%

$0.43

4/15/13

$1,381

4,006

0.451%

$0.39

4/30/13

$1,402

5,787

0.651%

$0.36

5/15/13

$1,852

4,596

0.517%

$0.34

5/30/13

$1,379

4,596

0.517%

$0.34

6/16/13

$1,379

4,883

0.550%

$0.32

6/30/13

$1,367

3,906

0.440%

$0.40

7/15/13

$1,367

5,388

0.607%

$0.29

7/31/13

$1,401

5,208

0.586%

$0.30

8/19/13

$1,406

 

5,388

0.607%

$0.29

9/2/13

$1,401

10,081

1.135%

$0.31

9/30/13

$2,722

_________________

(1)

All of these options are subject to the terms of the Company’s Amended and RestatedEquity Compensation Plan.  These options were granted to the Named Executive Officers in lieu of cash compensation owed tothem pursuant to their employment agreements with the Company.  All of these options were fully vested on their date ofgrant.

(2)

All options were granted at an exercise price equal to the fair market value of theCompany’s common stock on the date of grant

(3)

The cumulative percent of total stock options granted to Dr. Jawerth, and Messrs. Ban andLowrey  in 2003, relative to all options granted by the Summus in 2003 were 17.6%, 8.8% and 6.0% respectively.

(4)

The values in this column have been prepared using the Black-Scholes model.  Thecalculations made pursuant to this model assume (a) volatility ranging from 1.218 to 1.379, (b) a risk-free rate of return rangingfrom 2.75% to 3.46%, (c) a dividend yield of 0%, and (d) an expected option life of five years.

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**Aggregated Option Exercises and Fiscal Year-End Option Values**

               The following table sets forth information concerning the number and intrinsic value of stock options held by the Named ExecutiveOfficers on December 31, 2003. Year-end values are based on the fair market value of $0.20 per share as of December 31, 2003, asreported on the OTC Bulletin Board System.  They do not reflect the actual amounts, if any, which may be realized upon thefuture exercise of remaining stock options and should not be considered indicative of future stock performance.  No NamedExecutive Officer exercised any options during the 2003 fiscal year.

**Name**

**Number of Securities Underlying Unexercised Optionsat Fiscal Year-End (#)**

**Value of Unexercised In-the-MoneyOptions at Fiscal Year-End ($)**

**Exercisable**

**Unexercisable**

**Exercisable**

**Unexercisable**

Bjorn D. Jawerth

1,601,143

60,000

$0

$0

Gary E. Ban

569,948

30,000

$0

$0

Donald T. Locke

68,167

0

$0

$0

Robert S. Lowrey

574,972

0

$0

$0

Leonard T. Mygatt

316,131

72,436

$0

$0

**Employment Agreements**

*                Employment Agreement with BjornD. Jawerth*

               On February 16, 2001, Summus entered into a three-year employment agreement with Bjorn D. Jawerth, our Chief ExecutiveOfficer.  Dr. Jawerth’s employment agreement expired on February 16, 2004, and was not renewed by the Board ofDirectors.  Under Dr. Jawerth’s expired employment agreement he received:
-  an initial base salary of $350,000, which was to be increased on an annual basis by at least 10%; however, Dr. Jawerth electedto defer any increase in cash compensation to this initial base salary.  As of February 17, 2002 and February 17, 2003, Dr.Jawerth was to receive an annual salary of $385,000 and $423,500, respectively, pursuant to his agreement.  Dr. Jawerthelected on July 31, 2002, to reduce his cash compensation temporarily to $262,500 on an annual basis to help lower theCompany’s cash consumption.  The difference between the original contract amount of $350,000 and the cash salary amountof $262,500 was paid to Dr. Jawerth on a bi-monthly basis in the form of options to buy common stock under the Company’sAlternative Compensation Plan.  These options were priced at the closing market price of the Company’s common stock atthe end of each bi-monthly pay period .  The difference between the increased salary amounts of $385,000 for the periodFebruary 17, 2002 to February 16, 2003 and $423,500 for the period February 17, 2003 to February 16, 2004, respectively, owed toDr. Jawerth and his original base salary of $350,000 in his employment agreement was being deferred and accrued by the Companyuntil the Board of Directors and Dr. Jawerth determine when and how these deferred and accrued amounts may be paid; 
-  performance bonuses and options as were 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; 
-  health insurance, and other benefits. 

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

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               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.  In addition, under the terms of Dr. Jawerth’s employment agreement, Summus wasobligated to issue him options, with an exercise price of $1.50 per share, exercisable for three times the number of shares ofcommon stock sold in the private sale as described above.  As of the date of this report, no shares subject to this agreementhave been sold.  The Board of Directors believes that it has no further obligations regarding this sale ofshares. 

                Pursuant to the terms of his employment agreement and in accordance with corporate policy, all intellectual property developed by Dr. Jawerth in connection with his employment by the Company is the exclusive property of the Company.  Without any impact on the Company’s ownership of the intellectual property, Dr. Jawerth’s employment agreement granted to him, 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 were developed during the twelve months following the closing (the “Closing”) of the asset purchase agreement between Summus, Ltd. and High Speed Net Solutions, Inc.  This license was to terminate on the later of the date twelve months from the Closing or such later date as may be set by the Board, excluding Dr. Jawerth.  Pursuant to the terms of Dr. Jawerth’s employment agreement, the Board of Directors terminated Dr. Jawerth’s license on February 4, 2004. 

               *Employment Agreements with Messrs. Ban and Lowrey*

**               ** Summus entered intoemployment agreements with each of Gary E. Ban and Robert S. Lowrey on February 16, 2001.  Mr. Lowrey resigned from Summus onNovember 14, 2003, and Mr. Ban’s employment agreement expired on February 16, 2004.  The employment agreements named Mr.Ban as the Chief Operating Officer and Mr. Lowrey as Chief Financial Officer, at annual base salaries as follows:

 

Name of Executive

Annual Base Salary

                                           

       

                                 

Gary E. Ban

$175,000

Robert S. Lowrey

$150,000

                Messrs. Ban and Lowrey elected on July 31, 2002 to reduce their cash compensation temporarily to help lower the Company’scash consumption.  From July 31, 2002 to December 1, 2003 in the case of  Mr. Ban, and to November 14, 2003, in the caseof Mr. Lowrey, Messrs. Ban and Lowrey cut their cash compensation to  $131,250 and $112,500, respectively, on an annualbasis.  The difference between the contract amount identified in the table above for each of Messrs. Ban and Lowrey and theircurrent cash salary amount was paid to them on a bi-monthly basis in the form of options to buy common stock of the Company underthe Company’s Alternative Compensation Plan.  These options had an exercise price based on the closing market price ofthe Company’s common stock at the end of each bi-monthly pay period.   

               Under their employment agreements executed in February 2001, each of Messrs. Ban and Lowrey also received a one-time bonus equal to50 percent of his annual base salary, payable as mutually agreed between Summus and Mr. Ban and Mr. Lowrey, as applicable. This bonus was equal to $75,000 in Mr. Lowrey’s case and $87,500 in Mr. Ban’s case.   Since the Company didnot have available funds to pay Mr. Lowrey in cash, he entered into an amendment to his employment agreement with the Company inwhich he agreed to accept 75,000 restricted shares of the Company’s common stock and 150,000 warrants to purchase shares ofcommon stock; these warrants have an exercise price of $2.00 per share.  Mr. Ban entered into an amendment to his employmentagreement in which he and the Company agreed to pay him his bonus amount in cash by within six-months of November 23, 2002, basedon available funds.  If funds were not available to pay Mr. Ban this amount as of such date, he had the option, in his solediscretion, of having Summus pay him this bonus amount or receiving restricted shares of Summus common stock and warrants, based onterms offered to third party investors of Summus, for the unpaid bonus amount owed to him.  Mr. Ban was also owed $10,938 inback salary from 2003.  In November 2003, the Company agreed to pay Mr. Ban all of his bonus amount and back salary owed tohim in cash over a four-month period, plus $2,500 in interest.  Mr. Ban received $77,000 of these owed amounts, and hesubsequently agreed to receive 184,139 shares of Summus’ common stock for the remaining $23,938 owed tohim.       

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**Stock Option Plan**

               The following summary description of our Amended and Restated 2000 Equity Compensation Plan (the “Plan”) is notintended to be complete and is qualified by reference to the copy of the Plan, filed as Exhibit 10.8 to the Company’s AnnualReport on Form 10-K for the fiscal year ended December 31, 2003.

               The Plan, as adopted by the shareholders on January 27, 2000, and subsequently amended by the Board of Directors is intended toprovide 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 CompensationCommittee (the “Committee”), consisting of two or more members of the Board of Directors, administers the Plan. The Committee 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 maybe granted 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 AppreciationRights.*  Stock appreciation rights may be granted to eligible participants in tandem with an ISO or non-qualifiedoption or may be granted independent of any related option.  A tandem stock appreciation right entitles the holder of theoption, within the period specified for exercise of such option, to surrender the unexercised option or a portion thereof andreceive in exchange a payment in cash or shares of common stock having an aggregate value equal to the amount by which the FairMarket Value of each share of common stock underlying the option (or portion thereof) surrender exceeds the per share optionexercise price, multiplied by the number of underlying shares of common stock surrendered.  Each tandem stock appreciationright is subject to the same terms and conditions as the related option.

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

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

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

*                Deferred Stock.* The Committee may make deferred stock awards, together with cash dividend equivalents, to participants in the Plan, conditionedupon the attainment of specified performance goals or other factors or criteria as the Committee determines. Deferred stock awardsmay not 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.* Stock awards are to be granted only in payment of compensation that has been earned or as compensation to be earned.  Allshares of common stock subject to a stock award are to be valued at no less than 100% of the Fair Market Value of such shares onthe date of the stock award’s grant. Shares of common stock subject to a stock award may be issued or transferred to theparticipant at the time of grant or at a subsequent time, or in installments, as the Committee determines. A stock award will besubject to the terms and conditions the Committee determines; however, upon issuance of the shares, the participant shall beentitled to receive dividends, exercise voting rights and exercise all other rights of a shareholder except as otherwise providedin the stock award.

*                PerformanceShares.*  Performance shares may be awarded to participants as an incentive for the performance of future servicesto Summus.  Awards of performance shares may be made either alone or in addition to or in tandem with other awards grantedunder the Plan. The Committee is to determine and designate those participants to whom performance shares are to be awarded, theperformance period and/or performance objectives (e.g., minimum earnings per share or return on equity), and any adjustments to bemade to such objectives, applicable to such awards, the form of settlement of performance shares, and the other terms andconditions of such awards.

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

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*                Administration.* The Plan provides that the Committee may make equitable adjustments in the aggregate number of shares of common stock that may beawarded under the Plan, the number of shares and class of stock that may be subject to an award, the purchase price to be paid pershare under outstanding options, and the terms, conditions or restrictions of any award in the event of any reorganization,recapitalization, reclassification, stock split, stock dividend, merger or consolidation or separation, including a spin-off, 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 of common stock of Summus, shares of common stock that are not delivered or purchased under thePlan, and shares reacquired by Summus, for reasons including a forfeiture, termination of employment, expiration or cancellation ofan option, can be issued under the Plan. Under the Plan, 2,000,000 shares of common stock were initially reserved for issuance. OnFebruary 13, 2001, the Board adopted 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, 2004, wehave issued 6,993,202 options to purchase shares of common our stock; 6,574,807 of these options are currently vested.

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

**Alternative Compensation Plan**

               In order to conserve the Company’s 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 could elect toreceive any portion of their compensation in the form of fully vested non-qualified stock options.  The options have anexercise price equal to the Fair Market Value of the Company’s common stock based on the closing price of the Company’scommon stock at the end of each bi-monthly payroll period.  All of the options granted under this plan are issued under theAmended and Restated 2002 Equity Compensation Plan. 

               Officers could elect a percentage starting at a minimum level of 15% of their cash compensation that they may receive under theAlternative Plan.  The election could be terminated at the sole discretion of the Board of Directors.  Dr. Jawerth andMessrs. Ban and Lowrey elected to receive 25% of their compensation under the Alternate Plan until February 15, 2004, December 1,2003 and November 14, 2003, respectively. 

**Inventions Awards Plan**

               The following summary description of our Inventions Awards Plan is not intended to be complete and is qualified by reference to thecopy of the Inventions Awards Plan, filed as Exhibit 10.16 to the Company’s annual report on Form 10-K for the fiscal yearended December 31, 2003.  This plan was terminated by the Board of Directors effective March 26, 2004. 

               Summus established the Inventions Awards Plan, effective October 30, 2000, in connection with the then contemplated merger betweenSummus, Ltd. and High Speed Net Solutions, which closed on February 16, 2001, to provide incentives to eligible employees byproviding them with opportunities to receive additional compensation as a result of their development of enhancements or newmethods involving the business of Summus that would generate revenue for us (“New Technology”).  New Technology isdefined under the plan to exclude existing technology of ours or technology acquired from Summus, Ltd.

               Under the plan, we were to set aside 5% of the gross revenues derived from the licensing or sale of New Technology (or productsincorporating such technology) for distribution among eligible employees.  Dr. Jawerth and a designee of the Board ofDirectors were, on a quarterly basis, to calculate the amount of funds to be set aside and the amounts to be received by eligibleemployees.  If Summus sold the rights to New Technology, eligible employees were to be entitled to an award of 10% of thegross proceeds.  If an eligible employee (other than Dr. Jawerth) ceased to be employed by Summus, for any reason, suchemployee’s right to awards under the plan were to cease.

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               All eligible employees execute our standard agreement concerning assignment to Summus of inventions developed by such employeeswhile employed by us.  Eligible employees could 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 eligibleemployee(s) shall receive an award equal to 5% (10%, if two or more eligible employees submit the Outside Technology) of the grossrevenues derived from the licensing or sale of such technology (or products incorporating such technology).  No eligibleemployee made application for the commercialization of any Outside Technology prior to the termination of the Inventions AwardsPlan.

               Under the Inventions Awards Plan, Summus could, at its option, initiate a spin-off company to develop a New Technology or anaccepted Outside Technology.  In such event, eligible employees could be selected to join the spin-off company.  If theeligible employee(s) were to accept a position in the spin-off company, his or her rights to awards under the plan were to besurrendered for 25% of the founders’ equity in the spin-off company.  No spin-off company was initiated prior to thetermination of the Inventions Awards Plan. 

               Dr. Jawerth sent correspondence to the Company on February 17, 2004, seeking payment for certain inventions.  Management andthe Board of Directors have evaluated these assertions and determined that no amounts are due Dr. Jawerth or other employees underthe provisions of the Inventions Awards Plan.  If litigation is pursued by Dr. Jawerth for any payments under the InventionsAwards Plan, Summus will vigorously defend against any such action.  If Dr. Jawerth were to be successful in any suchlitigation, there may be a material adverse impact to  the Company.      

**Compensation of Directors**

*               * The members of theBoard of Directors who 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 initialappointment; 
-  an annual grant of options to purchase 40,000 shares of our common stock on April 1 of each year, or a pro rataportion if the Director’s service begins 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 ofDirector’s on which he serves; and 
-  the reimbursement of travel expenses for travel by members of the Board of Directors who reside outside of thelocal area.  

                Each ofthese grants to members of our Board of Directors as described above have an exercise price equal to the fair market value of ourcommon stock on the date of grant; vest quarterly over a one-year period from the date of grant; and have a ten-yearlife. 

          During fiscal year2003, the outside members of our Board of Directors were issued the following grants of options opposite their names.

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******
**Name**

**Options Issued**

**Issuance Date**

**Exercise Price**
 
**Jere A. Ayers**

30,000

8/26/03

$0.26

23,946

8/26/03

$0.26
 
**Neil R. Guenther**

30,000

2/13/03

$0.47

5,796

2/13/03

$0.47

40,000

4/1/03

$0.36

5,000

4/1/03

$0.36
 
**J. Winder Hughes**

30,000

12/22/03

$0.19

11,095

12/22/03

$0.19
 
**George Simmons****(1)**

40,000

4/1/03

$0.36
 
5,000

4/1/03

$0.36

____________________

(1)          

Dr. Simmons resigned from the Board on January 3, 2004 and vested in only 33,750 of theseoptions.

**Compensation Committee Interlocks and InsiderParticipation**

**               ** During the fiscal yearended December 31, 2003, George H. Simmons and Neil R. Guenther served as members of the Compensation Committee of theCompany’s Board of Directors, none of which is or has been an officer or employee of the Company.  Dr. Simmons resignedas a Director of the Company and as a member of the Compensation Committee as of January 3, 2004.  The Compensation Committeecurrently consists of Mr. Hughes and Mr. Finn, neither of which is or has been an officer or employee of the Company.  Nointerlocking relationship existed during the fiscal year ended December 31, 2003, between the Company’s Board of Directors orCompensation Committee and the board of directors or compensation committee of any other company.

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**ITEM12.                SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS**

               The following table sets forth, as of March 15, 2004, 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 the Company to own beneficially more than 5% ofthe outstanding shares of our common stock.  As of March 15, 2004, we had 71,277,220 shares of common stock issued andoutstanding.  As of that date, we also had 2,078 shares of  Series A convertible preferred stock; 1,310 shares of SeriesC Stock; 2,525 shares of Series D Stock; and 130 shares of Series E Stock issued and outstanding.  Each of Series A, C, D andE convertible preferred stock are non-voting, except in certain instances under Florida law.   

               Beneficial ownership is determined in accordance with rules of the Securities and Exchange Commission and includes generally votingpower and/or investment power with respect to securities. Shares of common stock subject to options currently exercisable orexercisable within 60 days of March 15, 2004, 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.

               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 of Beneficial Owner(1)**

**Shares Owned Beneficially**

**Percent of Shares of Common Stock Outstanding**

**                                                         **

                                                       

**                                                      **

Bjorn D. Jawerth**(2)**

13,652,008**(3)**

18.62%

Jere A.  Ayers

663,946 **(4)**

*

Stephen M. Finn

587,500**(5)**

*

Neil R. Guenther

2,452,682 **(6)**

3.37%

J. Winder Hughes

3,068,595**(7)**

4,21%

Gary E. Ban

953,853 **(8)**

1.33%

Andrew L. Fox

550,180**(9)**

*

Donald T. Locke

401,500 **(10)**

*

Leonard T. Mygatt, III

764,870 **(11)**

1.07%

JDS Capital Management, LLC

11,250,000 **(12)**

14.99%

Donald D. Hammett

6,501,429**(13)**

8.73%

John A. Williams

4,000,000**(14)**

5.46%
  
All Executive Officers and Directors as a Group (8 persons)**(15)**

****9,443,126 **(16)**

12.26%

 

**__________________***      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 the Securities and Exchange Act of1934, as amended (the "Exchange Act").(2)Dr. Jawerth’s employment agreement expired on February 16, 2004, andwas not renewed by the Board of Directors.  Dr. Jawerth resigned as a Director effective March 5, 2004.  
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(3)Includes (i) 1,647,196 shares of common stock and 274,991shares of common stock underlying warrants owned by Kerstin Jawerth with respect to which Dr. Jawerth has sole voting power and(ii) 1,757,053 shares of common stock underlying options that are exercisable within 60 days of March 15, 2004.(4)Includes 400,000    shares of common stock underlying warrants and 38,946 shares of common stock    underlying options that are exercisable within 60 days of March 15, 2004. (5)Includes (i) 212,500 shares of common stock underlying warrants that areexercisable within 60 days of March 15, 2004 and (ii) 375,000 shares of common stock issuable upon conversion of theCompany’s Series D Stock that are convertible within 60 days of March 15, 2004.    (6)Includes (i) 40,000 shares of common stock held in the names of Dr.Guenther’s children, (ii) 1,409,924 shares of common stock underlying warrants and 80,796 shares of common stock underlyingoptions that are exercisable within 60 days of March 15, 2004, and (iii) 80,000 shares of common stock underlying warrants held inthe names of Dr. Guenther’s children that are exercisable or convertible within 60 days of March 15, 2004.(7)Includes 1,550,000 shares of common stock underlying warrants (750,000 of which are held in the name of The Focus Fund L.P., ofwhich Mr. Hughes is the managing partner), (ii) 18,595 shares of common stock underlying options that are exercisable within 60days of March 15, 2004 and (iii) 1,500,000 shares issuable upon conversion of the Company’s Series D Stock within 60 days ofMarch 15, 2004, which are held in the name of the Focus Fund L.P., of which Mr. Hughes is the managingpartner.   (8)Includes 619,137    shares of common stock underlying options and 12,546 shares of common stock    underlying warrants that are exercisable within 60 days of March 15, 2004.(9)Includes 544,844    shares of common stock underlying options that are exercisable within 60    days of March 15, 2004.(10) Includes 68,167    shares of common stock underlying options and 333,333 shares of common stock    underlying warrants that are exercisable within 60 days of March 15, 2004.(11)Includes 339,249    shares of common stock underlying options and 16,728 shares of common stock    underlying warrants that are exercisable within 60 days of March 15, 2004.(12)Includes 7,500,000 shares of common stock issuable upon conversion of the Company’s Series D Stock and 3,750,000 shares of common stock underlying warrants that areexercisable within 60 days of March 15, 2004.(13)Includes 2,000,000 shares of common stock issuable upon conversion of the Company’s Series C Stock and 3,214,286 shares of common stock underlying warrants that areexercisable within 60 days of March 15, 2004. (14)Includes 2,000,000 shares of common stock issuable    upon conversion of the Company’s Series C Stock and 2,000,000 shares of    common stock underlying warrants that are exercisable within 60 days of    March 15, 2004. (15)Includes shares    beneficially owned by all current directors and executive officers. (16)Includes 1,709,734    shares of common stock underlying options, 4,015,031 shares underlying    warrants, and 1,875,000 shares underlying Series D Stock that are    exercisable or convertible within 60 days of March 15, 2004.
**Securities Authorized for Issuance Under Equity Compensation Plans**

               The 2000 Amended and Restated Equity Compensation Plan was created in 2000 for the purpose of granting incentive or non-qualifiedstock options to employees of, or contractors for, or directors of the Company. A total of 2 million shares were initiallyauthorized under the plan.   Subsequently, the Board amended the plan two times to increase the authorized shares to 6.5million and then to 8.5 million.  Options granted under this plan were priced either at the fair market value of our commonstock on the date of grant or at prices below the fair market value of our common stock and have a life of ten (10) years fromtheir date of grant, subject to earlier termination as set forth in such plan.  As of December 31, 2003, this plan is still ineffect.

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Equity Compensation Plans Not Approved by the Shareholders ofSummus

Number of Securities to be Issued Upon the Exercise of OutstandingOptions

Weighted Average Exercise Price of Outstanding Options

Number of Securities Remaining Available for Future Issuance under EquityCompensation Plans**(3)**

                                         

(a)

(b)

(c)

2000 Amended and Restated Equity Compensation Plan**(1)**

7,280,026

$1.82

425,527

Stock Options Issued Outside of Equity Compensation Plans**(2)**

429,603

$1.44

N/A
 
(1)

The 2000 Amended and Restated Equity Compensation Plan was originally approved byshareholders and authorized 2,000,000 shares for issuance. The plan was subsequently amended twice by the Board to increase theauthorized number of shares to 8,500,000 and is therefore classified as a plan not approved by our shareholders.

(2)

These options were granted to Dr. Jawerth outside of the 2000 Amended and Restated EquityCompensation Plan since only a maximum of 500,000 options can 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.

**ITEM13.                CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

               Pursuant to a letter agreement between Summus and Hughes Capital Investors, L.L.C. dated August 26, 2003, Summus agreed that itwould pay Hughes Capital commissions of (i) 3.0% in cash and (ii) 5% in warrants to purchase shares of Summus common stock, of allamounts raised by Hughes Capital and accepted by Summus in connection with its Series D and Series E convertible preferred stock,except for any amounts of the Series D and E convertible preferred stock purchased by affiliates or entities under common controlwith Hughes Capital.  J. Winder Hughes, who became a Director of Summus on December 22, 2003, is the principal of HughesCapital.  We raised $4,000,000 from the sale of the Series D convertible preferred stock and $200,000 from the sale of theSeries E convertible preferred stock.  Hughes Capital received $117,000 in cash commissions and warrants to purchase 800,000shares of Summus common stock.  All warrants received by Hughes Capital have an exercise price of $0.35 per share and areexercisable for a period of three years from their date of issuance.     

**ITEM14.                PRINCIPAL ACCOUNTANT FEES ANDSERVICES**

**Audit Fees**

            The aggregatefees billed to the Company by Ernst & Young LLP for the audit of the Company’s annual financial statements and for thereview of the financial statements included in its quarterly reports on Form 10-Q for the fiscal years ended December 31, 2003 and2002 totaled $137,746 and $132,349, respectively.

**Audit-Related Fees**

               The Company did not incur or pay any fees to Ernst & Young LLP, and Ernst & Young LLP did not provide any services relatedto audit-related fees in either of the last two fiscal years.

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**Tax Fees**

               The aggregate fees billed to the Company by Ernst & Young LLP for tax compliance, tax advice, and tax planning for the fiscalyears ended December 31, 2003 and 2002 totaled $0 and $2,660, respectively.

**All Other Fees**

                  The aggregate feesbilled to the Company by Ernst & Young LLP for products and services, other than those as reported above for Audit Fees,Audit-Related Fees and Tax Fees, for the fiscal years ended December 31, 2003 and 2002 totaled $0 and $0, respectively.

            It is the auditcommittee’s policy to pre-approve all services provided by Ernst & Young LLP.  All services provided by Ernst &Young LLP during the years ended December 31, 2002 and 2003 were pre-approved by the audit committee.

            As of the dateof this filing, the Company’s current policy is to not engage Ernst & Young LLP to provide, among other things,bookkeeping services, appraisal or valuation services, or internal audit services. The policy provides that the Company engageErnst & Young LLP to provide audit, tax, and other assurance services, such as review of SEC reports or filings.

              The AuditCommittee considered and determined that the provision of the services other than the services described under “AuditFees” is compatible with maintaining the independence of the independent auditors.

 

 

 

 

 

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**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 conditions underwhich 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.  TheExhibits designated by (*)  have been previously filed with the Securities and Exchange Commission and are incorporated byreference herein.

 

ExhibitNumber

ExhibitDescription

                 

3(I).1*

Amended and Restated Articles of Incorporation, filed February 28, 2000 (incorporated byreference to Exhibit 3.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30 , 2003) 

 

 

3(I).2*

Articles of Amendment and Statement of Rights and Preferences of the 8% Series AConvertible Preferred Stock, filed March 3, 2000 (incorporated by reference to Exhibit 3.2 to our Quarterly Report on Form 10-Q forthe fiscal quarter ended September 30, 2003) 

 

 

3(I).3*

Articles of Correction filed June 23, 2000 to Articles of Amendment, filed March 2, 2000(incorporated by reference to Exhibit 3.3 to our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30,2003) 

 

 

3(I).4*

Amendment to Amended and Restated Articles of Incorporation, filed February 27, 2002,changing our name to Summus, Inc. (USA) (incorporated by reference to Exhibit 3.4 to our Quarterly Report on Form 10-Q for thefiscal quarter ended September 30, 2003) 

 

 

3(I).5*

Amendment to Amended and Restated Articles of Incorporation, filed February 27, 2002,increasing our authorized common stock, par value $.001, from 50,000,000 shares to 100,000,000 shares (incorporated by reference toExhibit 3.5 to our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2003)

3(I).6*

Articles of Amendment and Statement of Rights and Preferences of the Series C ConvertiblePreferred Stock (incorporated by reference to Exhibit 3.6 to our Quarterly Report on Form 10-Q for the fiscal quarter endedSeptember 30, 2003) 

 

 

3(I).7*

Articles of Amendment and Statement of Rights and Preferences of the Series D ConvertiblePreferred Stock dated September 25, 2003 (incorporated by reference to Exhibit 3.7 to our Quarterly Report on Form 10-Q for thefiscal quarter ended September 30, 2003) 

 

 

3(I)8*

Articles of Amendment and Statement of Rights and Preferences of the Series E ConvertiblePreferred Stock dated October 17, 2003 (incorporated by reference to Exhibit 3.8 to our Quarterly Report on Form 10-Q for thefiscal quarter ended September 30, 2003)

 

 

3(I)9

Amendment to Amended and Restated Articles of Incorporation, filed December 3, 2003,increasing our authorized common stock, par value $.001, from 100,000,000 shares to 185,000,000 shares 

 

 

3(II).1*

Second Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to our Form10 filed on July 5, 2001) 

 

 

4.1*

Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to our AnnualReport on Form 10-K for the fiscal year ended December 31, 2001) 

** **

 

4.2*

Form of Subscription Agreement for private placement sales of our common stock(incorporated by reference to Exhibit 4.2 to our Annual Report on Form 10-K for the fiscal year ended December 31,2001) 

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4.3*

Form of Selling Shareholders Agreementin connection with private placement sales of our common stock (incorporated byreference to Exhibit 4.3 to our Annual Report on Form 10-K for the fiscal yearended December 31, 2001) 

 

 

4.4*

Form of Warrant Agreement for warrantsissued in connection with private placement sales of our common stock(incorporated by reference to Exhibit 4.4 to our Annual Report on Form 10-K forthe fiscal year ended December 31, 2001) 

 

 

4.5*

Form of Series C Convertible PreferredStock Subscription Agreement (incorporated by reference to Exhibit 4.1 to ourQuarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2003

 

 

4.6*

Form of Series C Convertible Preferred Stock Registration Rights Agreement (incorporatedby reference to Exhibit 4.2 to our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2003) 

 

 

4.7*

Form of Series D Convertible Preferred Stock Subscription Agreement (incorporated byreference to Exhibit 4.3 to our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30,2003)   

 

 

4.8*

Form of Series D Convertible Preferred Stock Registration Rights Agreement (incorporatedby reference to Exhibit 4.4 to our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2003) 

 

 

4.9*

Form of Series E Convertible PreferredStock Subscription Agreement (incorporated by reference to Exhibit 4.5 to ourQuarterly Report on Form 10-Q for the fiscal quarter ended September 30,2003)   

 

 

4.10*

Form of Series E Convertible Preferred Stock Registration Rights Agreement (incorporatedby reference to Exhibit 4.6 to our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2003) 

 

4.11*

Form of Warrant issued in connection with the Company’s Series E ConvertiblePreferred Stock (incorporated by reference to Exhibit 4.7 to our Quarterly Report on Form 10-Q for the fiscal quarter endedSeptember 30, 2003)

 

 

10.1*

Asset Purchase Agreement, dated October 30, 2000, among Summus, Inc., Summus, Ltd., andthe stockholders named therein (incorporated by reference to Exhibit 10.01 to our Current Report on Form 8-K dated February 16,2001)

 

 

10.2*

Amendment Number 1 to Asset Purchase Agreement, dated as of December 30, 2000, amongSummus, Inc., Summus, Ltd. and the stockholders named therein (incorporated by reference to Exhibit 10.02 to our Current Report onForm 8-K dated February 16, 2001)

10.3*

Amendment to Asset Purchase Agreement, dated as of January 30, 2001, among Summus, Inc.,Summus, Ltd. and the stockholders named therein (incorporated by reference to Exhibit 10.03 to our Current Report on Form 8-K datedFebruary 16, 2001)

 

 

10.4*

Agreement for Transfer of All Rights and Reservation of License in Software, datedSeptember 4, 2000, between PlusStation, LLC, Niksa Radovic and Summus, Ltd. (incorporated by reference to Exhibit 10.9 to our Form10 filed on July 5, 2001)

 

 

10.5*

Equity Compensation Plan, effective January 31, 2000 (incorporated by reference to Exhibit10.05 to our Quarterly Report on Form 10-Q filed for the quarter ended March 31. 2000)

 

 

10.6*

Amendment to Equity Compensation Plan, effective May 1, 2000 (incorporated by reference toExhibit 10.26 to our Form 10 filed on July 5, 2001)

 

 

10.7*

Amendment to Summus, Inc. Equity Compensation Plan, effective February 16, 2001(incorporated by reference to Exhibit 10.09 to our Current Report on Form 8-K dated February 16, 2001)

 

 

10.8

Amendment to Summus Equity Compensation Plan, effective May 23, 2002 (incorporated byreference to Exhibit 10.08 to our Annual Report on Form 10-K filed for the fiscal year ended December 31, 2002)

 

 

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10.9*

Executive Employment Agreement, dated as of February 16, 2001, betweenSummus, Inc. and Bjorn Jawerth (incorporated by reference to Exhibit 10.06 to our Current Report on Form 8-K dated February 16,2001)

 

 

10.10*

Amendment to Executive Employment Agreement of Bjorn D. Jawerth, dated as ofFebruary 28, 2001 (incorporated by reference to Exhibit 10.11 to our Annual Report on Form 10-K for the fiscal year ended December31, 2001)

 

 

10.11*

Executive Employment Agreement, dated as of February 16, 2001, betweenSummus, Inc. and Gary E. Ban (incorporated by reference to Exhibit 10.12 to our Annual Report on Form 10-K for the fiscal yearended December 31, 2001)

 

 

10.12*

Executive Employment Agreement, dated as of February 16, 2001, betweenSummus, Inc. and Robert S. Lowrey (incorporated by reference to Exhibit 10.15 to our Annual Report on Form 10-K for the fiscal yearended December 31, 2001)

 

 

10.13*

Lease Agreement, dated as of October 15, 1999, as modified on March 23, 2000 and June 9,2000, between Phoenix Limited Partnership of Raleigh and Summus, Inc. (incorporated by reference to Exhibit 10.31 to our Form 10filed on July 5, 2001)

 

 

10.14*

Lease Agreement, dated as of August 12, 1999, between Phoenix Limited Partnership ofRaleigh and Summus, Ltd. (incorporated by reference to Exhibit 32 to our Form 10 filed on July 5, 2001) 
 
10.15*

Lease Modification Agreement Number 1, dated as of December 22, 1999, between PhoenixLimited Partnership of Raleigh and Summus, Ltd. . (incorporated by reference to Exhibit 33 to our Form 10 filed on July 5,2001) 
 
10.16*

Summus, Inc. Invention Awards Plan, effective October 30, 2000 (incorporated by referenceto Exhibit 10.40 to Amendment No. 1 to our Form 10 filed on September 28, 2001)
 
10.17*

Master Porting Agreement, dated July 27, 2001, between Summus, Inc. and SamsungElectronics America (incorporated by reference to Exhibit 10.41 to Amendment No. 2 to our Form 10 filed on October 31,2001)
 
10.18*

Alternative Compensation Plan, adopted as of August 1, 2002 (incorporated by reference toExhibit 10.19 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2002)   .

 

 

14.1

Code of Ethics

 

 

21.1

Subsidiaries of Summus – None

 

 

23.1

Consent of Ernst & Young LLP
 
31.1

Rule 13a-14(a)/15(d)-14(a) Certificate of Gary E. Ban, Chief Executive Officer

 

 

31.2

Rule 13a-14(a)/15(d)-14(a) Certificate of Donald T. Locke, Chief FinancialOfficer

 

 

32.1

Section 1350 Certificate of Gary E. Ban, Chief Executive Officer
 
32.2

Section 1350 Certificate of Donald T. Locke, Chief Financial Officer

 

 

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**INDEX TO FINANCIAL STATEMENTS**

 

***Page***

**Consolidated Financial Statements of Summus, Inc.(USA)**

Report of Independent Auditors

 F-2

Consolidated Balance Sheets at December 31, 2003 and 2002

 F-3

Consolidated Statements of Operations for the Years Ended December 31, 2003, 2002 and 2001  

 F-5

ConsolidatedStatements of Shareholders’ Equity (Deficit) for the Years Ended December 31, 2003, 2002 and 2001 

 F-6

Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001

 F-12

Notes to Consolidated Financial Statements 

 F-13

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, 2003 and 2002, and the related consolidated statements of operations, shareholders’ equity (deficit) and cashflows for each of the three years in the period ended December 31, 2003. 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, 2003 and 2002 and the consolidated results ofits operations and its cash flows for each of the three years in the period ended December 31, 2003, 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. These conditions raise substantial doubt about Summus, Inc. (USA)’s ability to continue as a going concern.Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include anyadjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts andclassification of liabilities that may result from the outcome of this uncertainty.

 

/s/ Ernst & Young LLP

Ernst & Young LLPMarch 29, 2004Raleigh, North Carolina

F-2
**Summus, Inc. (USA)**

**Consolidated Balance Sheets**

 

**December 31**
**2003**

**2002**
**Assets**
Current assets:

     Cash

$

2,188,645

$

25,990

     Accounts receivable

480,494

74,261

     Prepaids and other current assets

15,800

70,000

Total current assets

2,684,939

170,251
 
Equipment, software and furniture, net

195,999

496,733

Other assets

–

34,190

Total assets

$

2,880,938

$

701,174

 

F-3
 

**December 31**
**2003**

**2002**
   
Liabilities and shareholders’ equity (deficit)

Current liabilities:

     Accounts payable

$

1,350,940 

$

4,186,610 

     Accrued salaries and related costs

439,595 

564,260 

     Accrued interest

82,812 

– 

     Current portion of notes payable

270,195 

269,588 

     Capital lease obligations, current portion

17,296 

77,690 

     Preferred stock dividends payable

218,143 

46,878 

     Deferred revenue

– 

7,285 

Total current liabilities

2,378,981 

5,152,311 
 
Notes payable, less current portion

215,932 

12,917 
 
Shareholders’ equity (deficit):

Series A convertible preferred stock, $0.001 par value;     10,000 shares designated, 2,078 and 2,328 shares     issued and outstanding at December 31, 2003 and 2002,     respectively (liquidation preference of $2,296,143 as of     December 31, 2003)

2,078,312 

2,328,312 

Series C convertible preferred stock, $0.001 par value;     3,000 shares designated, 1,310 shares issued and outstanding     at December 31, 2003 (liquidation preference     of $1,310,000 as of December 31, 2003) 

365,566 

– 

Series D convertible preferred stock, $0.001 par value;     4,000 shares designated, 2,900 shares issued and     outstanding at December 31, 2003 (liquidation preference     of $2,900,000 as of December 31, 2003)

2,015,604 

– 

Series E convertible preferred stock, $0.001 par value;     200 shares designated, 170 shares issued and     outstanding at December 31, 2003 (liquidation preference     of $170,000 as of December 31, 2003)

119,460 

– 

Common stock, $.001 par value, 185,000,000 shares authorized;     69,408,639 and 54,957,776 issued and 69,370,139 and     54,919,276 outstanding at December 31, 2003 and 2002, respectively

69,370 

54,919 

Additional paid-in capital

46,315,321 

36,669,211 

Deferred compensation

(53,427)

(227,132)

Accumulated deficit

(50,396,562)

(43,061,745)

Treasury stock, at cost (38,500 shares)

(227,619)

(227,619)

Total shareholders’ equity (deficit)

286,025 

(4,464,054)

Total liabilities and shareholders’ equity (deficit )

$

2,880,938 

$

701,174 

*See accompanying notes.*

F-4
Summus, Inc. (USA)

Consolidated Statements of Operations

**Year ended December 31**

**2003**

**2002**

**2001**

Revenues:
        
     Wireless applications and contracts

$

1,395,296 

$

204,133 

$

– 

     Wireless license fees

249,951 

– 

– 

     Contracts and license fees

54,027 

 

202,819 

 

749,758 

          Total revenues

1,699,274 

406,952 

749,758 

Cost of revenues:

     Wireless applications and contracts

1,064,643 

118,263 

– 

     Wireless license fees

– 

– 

– 

     Contracts and license fees

9,596 

63,846 

299,554 

          Total cost of revenues

1,074,239 
182,109 

299,554 

Gross profit

625,035 

224,843 

450,204 

     Selling, general and administrative expenses

4,597,036 

6,155,416 

7,740,867 

     Non-cash compensation

185,255 

364,000 

956,321 

     Research and development

1,056,770 

918,948 

952,605 

     Non-cash consulting

119,630 

887,992 

– 

     Non-cash settlements

(1,525,698)

– 

1,132,352 

          Loss before interest expense, net

(3,807,958)

(8,101,513)

(10,331,941)

Interest expense, net

(69,343)

(469,571)

(56,570)

          Loss from continuing operations

(3,877,301)

(8,571,084)

(10,388,511)

          Loss from operations of discontinued Rich            Media Direct business

– 

– 

(135,798)

     Loss on disposal of Rich Media Direct business

– 

– 

(215,500)

Net loss

$

(3,877,301)

$

(8,571,084) 

$

(10,739,809)

Net loss applicable to common shareholders:

     Net loss

$

(3,877,301)

 $

(8,571,084)

 $

(10,739,809) 

     Accretion of beneficial conversion feature           on preferred stock

(3,286,251)

– 

– 

     Preferred stock dividends

(171,265)

(183,039)

(153,700)

            Net loss applicable to common shareholders

$

(7,334,817)

$

(8,754,123)

$

(10,893,509)

Per share amounts (basic and diluted):

     Loss applicable to common shareholders from          continuing operations

$

(0.12)

$

(0.19)

$

(0.30)

     Loss applicable to common shareholders from          discontinued operations

$

   – 

$

   – 

$

(0.01)

Net loss per share applicable to common shareholders     (basic and diluted)

$

(0.12)

$

  (0.19)

$

(0.31)
 
Weighted average common shares outstanding

61,491,196 

47,149,301 

31,806,333 

    Recapitalization resulting from the Summus, Ltd.         asset acquisition

–

– 

2,924,004 

Weighted average shares of common stock     outstanding giving effect to the recapitalization

61,491,196 

47,149,301 

34,730,337 

*  Selling, general and administrative expenses in 2003, 2002 and 2001 exclude $0.3million, $1.3 million and $1.0 million, respectively, of non-cash compensation and consulting charges.

*See accompanying notes.*

F-5
Summus, Inc. (USA)

Consolidated Statements of Shareholders’ Equity (Deficit)

**Preferred Stock**
 
**Series A**
**Series B**
**Series C**
**Series D**
**Shares**

**Amount**

**Shares **

**Amount**

**Shares **

**Amount**

**Shares **

**Amount**
 
**Balance at December 31, 2000**

–

$              –  

4,000

$4     

–

$    –     

–

$    –     

Recapitalization resulting from the    Summus, Ltd. asset acquisition

2,000

2,000,000  

2,000

2     

–

–     

–

–     

Elimination of deferred revenue    resulting from recapitalization

–

–  

–

–     

–

–     

–

–     

Common stock options granted for    services

–

–  

–

–     

–

–     

–

–     

Common stock and warrants sold for    cash

–

–  

–

–     

–

–     

–

–     

Preferred stock dividends

–

–  

–

–     

–

–     

–

–     

Common stock issued in partial    settlement of loss contingency

–

–  

–

–     

–

–     

–

–     

Deferred compensation recognized in    connection with the issuance of    stock options

–

–  

–

–     

–

–     

–

–     

Reversal of deferred compensation of    forfeited stock options

–

–  

–

–     

–

–     

–

–     

Amortization of deferred compensation

–

–  

–

–     

–

–     

–

–     

Common stock issued in settlement of    amounts due to related parties

–

–  

–

–     

–

–     

–

–     

Common stock and warrants issued in    partial settlement of vendor    liabilities

–

–  

–

–     

–

–     

–

–     

Stock option exercises

–

–  

–

–     

–

–     

–

–     

Cash collection on stock purchase    receivable

–

–  

–

–     

–

–     

–

–     

Net loss for the period

–

–  

–

–     

–

–     

–

–     
 
**Balance at December 31, 2001**

2,000

$2,000,000  

6,000

 $6     

–

$    –     

–

$    –     

F-6
  Summus, Inc. (USA)

Consolidated Statements of Shareholders’ Equity (Deficit)(continued)

**Additional**

**Stock**

**Series E**

**Common Stock**

**Paid-In**

**Purchase**

**Shares **

**Amount**

**Shares**
**Amount**
**Capital**
**Receivable** 
**Balance at December 31, 2000**

–

$    –     

9,584,938 

$ 9,585 

$19,729,222 

$       –     

Recapitalization resulting from the     Summus, Ltd. asset acquisition

–

–     

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 

(100,000)
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

–

–     

– 

– 

– 

25,000 
Net loss for the period

–

–     

– 

– 

– 

–    
   
**Balance at December 31, 2001**

–

$    –     

37,151,478 

$37,151 

$27,399,045 

$(75,000)
 

*See accompanying notes.*

F-7
Summus, Inc. (USA)

Consolidated Statements of Shareholders’ Equity (Deficit)(continued)

**Total**

**Deferred**

**Accumulated**

**Treasury**

**Shareholders’**

**Compensation**

**Deficit**

**Stock**

**Equity (Deficit)**
 
**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

– 

– 

– 

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 

Net loss for the period

 
(10,739,809)

– 

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

  $   (534,456)

$(34,307,622)

$(227,619)

$(5,708,495)

 
 
F-8
Summus, Inc. (USA)

Consolidated Statements of Shareholders’ Equity (Deficit)(continued)

**Preferred Stock**
**Series A**

**Series B**

**Series C**

**Series D**

**Shares**

**Amount**

**Shares**

**Amount**

**Shares**

**Amount**

**Shares**

**Amount**
 
**Balance at December 31, 2001**

2,000 

$ 2,000,000 

6,000 

$        6     

– 

 $      –     

– 

 $      –     

Common stock and warrants sold for  cash

– 

– 

– 

–     

– 

–     

– 

–     

Common stock, options and warrants  issued for services

– 

– 

– 

–     

– 

–     

– 

–     

Conversion of Series B preferred  stock

– 

– 

(6,000)

(6)    

– 

–     

– 

–     

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)

– 

–     

– 

–     

– 

–     

Common stock and warrants issued  as payment of unpaid salary  amounts

– 

– 

– 

–      

– 

–     

– 

–     

Common stock and warrants issued   in  partial settlement of   vendor  liabilities

– 

– 

– 

–     

– 

–     

– 

–     

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

– 

– 

– 

–     

– 

–     

– 

–     

Write off of the stock purchase   receivable

– 

– 

– 

–     

– 

–     

– 

–     

Deferred compensation recognized in  connection with the issuance of  stock options

– 

– 

– 

–     

– 

–     

– 

–     

Reversal of deferred compensation of  forfeited stock options

– 

– 

– 

–     

– 

–     

– 

–     

Amortization of deferred  compensation

– 

– 

– 

–     

– 

–     

– 

–     

Stock option exercises

– 

– 

– 

–     

– 

–     

– 

–     

Warrant exercises

– 

– 

– 

–     

– 

–     

– 

–     

Elimination of deferred redemption  feature

– 

– 

– 

–     

– 

–     

– 

–     

Net loss for the period

– 

– 

– 

–     

– 

–     

– 

–     
  
**Balance at December 31, 2002**

2,328 

2,328,312 

– 

       –     

– 

       –     

– 

       –     

Common stock and warrants sold   for cash

– 

– 

– 

–      

– 

–     

– 

–     

Series C, D and E preferred stock   sold for cash

– 

– 

– 

–      

1,310 

1,310,000 

4,000 

4,000,000 

Stock issuance costs

– 

– 

– 

–      

– 

–     

– 

–     

Recognition of beneficial conversion   feature of  Series C, D and E   preferredstock

– 

– 

– 

–      

– 

(659,010)

– 

(2,780,144)

Accretion of beneficial conversion  feature of  Series C, D and E  preferred stock

– 

– 

– 

–     

– 

365,566 

– 

2,780,144 

Value of Series C, D and E warrants

– 

– 

– 

–      

– 

(650,990)

– 

(1,219,856)

Common stock,options and warrants   issued   for services

– 

– 

– 

–      

– 

–      

– 

–     

Preferred stock dividends

– 

– 

– 

–      

– 

–      

– 

–     

Common stock and warrants  issued in settlement of vendor   liabilities

– 

– 

– 

–      

– 

–      

– 

–     

Common stock issued in non-cash  settlements

– 

– 

– 

–      

– 

–      

– 

–     

Deferred compensation recognized in   connection with the issuance of   stock   options

– 

– 

– 

–     

– 

–     

– 

–     

Amortization of deferred compensation

– 

– 

– 

–      

– 

–      

– 

–     

Conversion of Series A, D and E  preferred  stock

(250)

(250,000)

– 

–      

– 

–      

(1,100)

(764,540)

Warrant exercises

– 

– 

– 

–      

– 

–      

– 

–     

Net loss for the period

– 

– 

– 

–      

– 

–      

– 

–     
  
**Balance at December 31, 2003**

2,078 

$2,078,312 

– 

$  –      

1,310 

$ 365,566

2,900

$ 2,015,604 

F-9
Summus, Inc. (USA)

Consolidated Statements of Shareholders’ Equity (Deficit)(continued)
      
**Additional**

**Stock**
  
**Series E**

**Common Stock**

**Paid-In**

**Purchase**

 

**Shares**

**Amount**

**Shares**

**Amount**

**Capital**

**Receivable**

 

 

**Balance at December 31, 2001**

– 

 $      –     

37,151,478 

$37,151 

$27,399,045 

$  (75,000) 

 

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

– 

–     

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

– 

–     

– 

– 

– 

– 

 

Conversion of Series A preferred stock  into common stock

– 

–     

8,287

8 

117,992 

– 

 

Common stock and warrants issued as payment  of unpaid salary amounts

– 

–     

177,885 

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

– 

–     

– 

– 

– 

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

– 

–     

1,728,568 

 

1,729 

499,556 

– 

 

Write off of the stock purchase receivable

– 

–     

– 

(65,000)

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

– 

–     

290,300 

290 

12,460 

– 

 

Warrant exercises

– 

–     

189,624 

190 

79,623 

– 

 

Elimination of deferred redemption  feature

– 

–     

– 

– 

576,000 

– 

 

Net loss for the period

– 

       –     

– 

– 

– 

– 

 
 
 

**Balance at December 31, 2002**

– 

       –     

54,919,276 

54,919 

36,669,211 

        – 

 

Common stock and warrants sold for cash

– 

–     

2,704,153 

2,704 

1,334,878 

– 

 

Series C, D and E preferred stock sold for cash

200 

200,000 

– 

– 

– 

– 

 

Stock issuance costs

– 

–     

– 

– 

(184,515)

– 

 

Recognition of beneficial conversion feature of   Series C, D and E preferredstock

– 

(140,541)

– 

– 

3,579,695 

– 

 

Accretion of beneficial conversion feature of  Series C, D and E preferred stock

– 

140,541 

– 

– 

– 

– 

 

Value of Series C, D and E warrants

– 

(59,459)

– 

– 

1,930,305 

– 

 

Common stock, options and warrants issued for   services

– 

–     

219,257 

219 

112,237 

– 

 

Preferred stock dividends

– 

–     

– 

– 

– 

– 

 

Common stock and warrants issued in  settlement of vendor liabilities

– 

–     

906,936 

907 

390,781 

– 

 

Common stock issued in non-cash settlements

– 

–     

1,461,717 

1,462 

516,042 

– 

 

Deferred compensation recognized in connection   with the issuance of stockoptions

– 

–     

– 

– 

11,550 

– 

 

Amortization of deferred compensation

– 

–     

– 

– 

– 

– 

 

Conversion of Series A, D and E preferred stock

(30)

(21,081)

5,667,557 

5,668 

1,029,953 

– 

 

Warrant exercises

– 

–     

3,491,243 

3,491 

925,184 

– 

 

Net loss for the period

– 

–     

– 

– 

– 

– 

 
 
 

**Balance at December 31, 2003**

170 

$ 119,460

69,370,139 

$ 69,370 

$ 46,315,321 

 $          – 

*See accompanying notes.*

F-10
Summus, Inc. (USA)

Consolidated Statements of Shareholders’ Equity (Deficit)(continued)

**Total**

**Deferred**

**Accumulated**

**Treasury**

**Shareholders’**

**Compensation**

**Deficit**

**Stock**

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

$ (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 

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

– 

– 

– 

– 

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 the period

– 

(8,571,084)

– 

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

   (227,132)

(43,061,745)

(227,619)

(4,464,054)

Common stock and warrants sold for cash

– 

– 

– 

1,337,582 

Series C, D and E preferred stock sold for cash

– 

– 

– 

5,510,000 

Stock issuance costs

– 

– 

– 

(184,515)

Recognition of beneficial conversion feature of  Series C, D and E preferred stock

– 

– 

– 

– 

Accretion of beneficial conversion feature of  Series C, D and E preferred stock

– 

(3,286,251)

– 

– 

Value of Series C, D and E warrants

– 

– 

– 

– 

Common stock,options and warrants issued for   services

– 

– 

– 

112,456 

Preferred stock dividends

– 

(171,265)

– 

(171,265)

Common stock and warrants issued in  settlement of vendor liabilities

– 

– 

– 

391,688 

Common stock issued in non-cash settlements

– 

– 

– 

517,504 

Deferred compensation recognized in connection  with the issuance of stock options

(11,550)

– 

– 

– 

Amortization of deferred compensation

185,255 

– 

– 

185,255 

Conversion of Series A, D and E preferred stock

– 

– 

– 

– 

Warrant exercises

– 

– 

– 

928,675 

Net loss for the period

– 

(3,877,301)

– 

(3,877,301)
   
**Balance at December 31, 2003**

$ (53,427)

$ (50,396,562)

$ (227,619)

$   286,025 

F-11
  

Summus, Inc. (USA)

Consolidated Statements of Cash Flows

 

**Year ended December 31**

 

**2003**

**2002**

**2001**

 

**Operating activities**

 

Net loss from continuing operations

$

(3,877,301)

$

(8,571,084) 

$

(10,388,511)

 
 
 

Adjustments to reconcile net loss from continuing operations     to net cash used in operating activities:

 

 

 

Depreciation and amortization

259,025 

371,457 

439,027 

 

Non cash compensation

185,255 

364,000 

956,321 

 

Common stock options and warrants issued for services

112,456 

887,992 

61,425 

 

Convertible debt non-cash interest

– 

390,250 

– 

 

Non-cash settlements

(1,525,698)

– 

1,132,352 

 

Loss on sale of equipment and furniture

40,760

– 

– 

 

Changes in operating assets and liabilities, net of Summus, Ltd.  asset acquisition:

 

Accounts receivable

(406,233)

(9,172)

(66,607)

 

Prepaid and other assets

88,390

(38,704)

(66,657)

 

Accounts payable and other accrued expenses

33,696

(432,853)

1,292,461 

 

Accrued salaries and related costs

(124,665)

236,007 

(119,837)

 

Deferred revenue

(7,285)

7,285 

– 

 

Net cash used in operating activities from continuing operations

(5,221,600)

(6,794,822)

(6,760,026)

 

Net cash used in discontinued operations

– 

– 

(30,455)

 

Net cash used in operating activities

(5,221,600)

(6,794,822)

(6,790,481)

 

 

**Investing activities**

 

Purchases of equipment and furniture

(11,721)

(91,212)

(7,480)

 

Proceeds from sale of equipment and furniture

12,670

– 

– 

 

Cash acquired from the acquisition of assets from Summus, Ltd.

– 

– 

43,918 

 

Net cash provided by (used in) investing activities

949

(91,212)

36,438 

 

 

**Financing activities**

 

Proceeds from exercise of stock options and warrants

928,675

92,563 

2,521 

 

Net proceeds from sale of common stock

1,337,582

6,449,307 

6,396,912 

 

Proceeds from issuance of preferred stock

5,510,000

– 

– 

 

Stock issuance costs

(184,515)

– 

– 

 

Proceeds from issuance of convertible debt

– 

500,000 

– 

 

Principal payments on capital lease obligations

(60,394)

(210,818)

(202,913)

 

Principal payments on notes payable and short-term borrowings

(148,042)

(35,000)

– 

 

Cash payment on loss contingency

– 

– 

(75,000)

 

Proceeds from loans payable to related party

– 

– 

540,000 

 

Net cash provided by financing activities

7,383,306

6,796,052 

6,661,520 

 

Net increase (decrease) in cash

2,162,655

(89,982)

(92,523)

 

Cash at beginning of year

25,990

115,972 

208,495 

 

Cash at end of year

$

2,188,645

   $

25,990 

$

115,972 
      **Supplemental disclosures of cash flow information**    Cash paid for interest
$

34,535

   $

16,505 

$

31,101 
 
*See accompanying notes.*

F-12
Summus, Inc. (USA)

Notes to ConsolidatedFinancial Statements

December 31, 2003

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

*Business*

Summus, Inc. (USA) ("Summus” or the "Company"), formerly known as High Speed NetSolutions, Inc., is engaged primarily in the development of efficient information processing solutions for the mobile and wirelessmarkets.  Prior to the second quarter of 2002, Summus’ primary business activities included providing services underresearch and development contracts for governmental agencies in the areas of complex imaging and object recognition as well as thelicensing to third parties its Photo ID and WI compression and decompression technology.  Although the Company’s corebusiness activities are now focused on the mobile and wireless market, Summus continues to evaluate business opportunities relatedto services and products that it had formerly provided as they become available, particularly opportunities that offer growthpotential with the business objectives and mission of the Company’s BlueFuel platform.  The core of the Company'sbusiness plan is to focus on the emerging wireless and mobile market.  Summus has developed software, technology andapplications to enable information processing and resource management 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 thefoundation for its current and future products and services, is designed to address the bandwidth, power, memory, and usabilityconstraints of existing wireless network infrastructure.  This platform will enable more efficient use of existing and futurebandwidth allocations, resulting in a perceived bandwidth increase by the mobile end-user.  The platform’s objective isto create a superior mobile end-user experience, which will impact devices, wireless carrier infrastructure and mobileapplications. 

The Company has completed development of and has launched twenty-five (25) wirelessapplications. Eleven (11) wireless carriers in the United States and eight (8) international wireless carriers currently deploy atleast one or a combination of the twenty-five (25) wireless applications that have been completed by the Company.  It launchedits first wireless application during the second quarter of 2002. These applications can be purchased by the end-user as a one-timepurchase, or a monthly subscription, depending on content, product function, and/or carrier preferences.

The majority of the applications completed and deployed by the Company, as well as plannedfuture applications, have been developed by the Company through a process that involves securing agreements with content providersand carriers, and developing and launching the applications. The Company outsources the infrastructure needed to host and deliverthe transactions for its application end-users.

*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.

F-13
Summus, Inc. (USA)

Notes to Consolidated Financial Statements (continued)

 

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

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 financialstatements of Summus, Inc. (USA) represent the historical financial statements of Summus, Ltd., now renamed Summus, Inc. (USA) andalso referred to herein as “the Company.”  References herein to “High Speed” refer to High Speed NetSolutions prior 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, 2003, the Company incurred a net loss of $3,877,301 and experienced negativecash flows from operations.  The Company’s continuation as a going concern is dependent on its ability to generatesufficient cash flow to meet its obligations on a timely basis, to obtain additional financing, and ultimately to attainprofitability.  The Company is actively promoting and expanding its product line and pursuing additional equity financing fromexisting shareholders and other institutional investors.  Management expects to be able to attract additional capital tocontinue to fund and expand operations and also expects that increased revenues will reduce its operating losses in future periods.However, there can be no assurance that management’s plan will be executed as anticipated.

The financial statements presented herein do not include any adjustments relating to 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 amerger transaction. The transaction was accounted for as a Summus, Ltd. capital transaction, accompanied by arecapitalization. 

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 the transaction hasbeen restated for the equivalent number of shares of High Speed common and Series B preferred stock, and other equity interests,received in the transaction after giving effect to any difference in par value of High Speed’s and Summus, Ltd.’scommon stock, with an offset to additional paid-in capital;the accumulated deficit of Summus, Ltd. has been carried forward after thetransaction;the loss per share for periods prior to the transaction have been restated to reflect thenumber of equivalent shares received by Summus, Ltd. in the transaction; andthe transaction resulted in the net issuance of 23.4 million shares of common stock,2,000 shares each of Series A and Series B preferred stock and warrants to purchase 500 shares of Series B preferredstock.
F-14
Summus, Inc. (USA)

Notes to Consolidated Financial Statements (continued)

**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.

*Revenue Recognition and Related Costs*

Change in Revenue Recognition Policy

After a careful review of the Company’s revenue recognition policies and givingconsideration to guidance provided for in Emerging Issues Task Force No. 99-19 *Reporting Revenue Gross as a Principal versus Netas an Agent* (“EITF 99-19”), the Company has changed certain revenue recognition policies affecting revenues earnedby wireless applications and contracts.  Prior to 4th quarter 2003, the Company reported revenues earned bywireless applications and contracts and cost of revenues for wireless applications and contracts  netof certain third-party costs in the statement ofoperations.  These transactions have been reclassified to reflect a grossrevenue presentation with no effect on gross profit or netloss.  The amount by which revenues and costs of revenues have been reclassified for the year ended December 31, 2003 is$635,989.  Revenues and costs of revenues for 2002 have not been reclassified due to immateriality.

Wireless applications and contracts

Commencing during the second quarter of 2002, our resources were dedicated to thedevelopment of solutions for the mobile and wireless markets.  Revenues earned from wireless applications are recognized upondelivery and acceptance by the end-user either as a one-time purchase or a monthly subscription.  For content delivery partnerarrangements, whereby the Company remits a portion of the revenues earned through the sale of the Company’s applications,revenue is recorded on a gross basis in accordance with EITF 99-19.  The Company recognizes the cost of payments to thecontent providers as a cost of revenues.  Wireless applications and contracts cost of revenues includes all third-partyhosting, testing and/or carrier distribution fees.  These costs are incurred on a monthly basis and are primarily fixed innature regardless of the revenue generated by the related applications. 

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

F-15
Summus, Inc. (USA)

Notes to Consolidated Financial Statements (continued)

 

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

Periodically, we enter into non-recurring engineering arrangements with our contentpartners.  Generally, under the terms of these agreements, we receive funding upfront to complete projects. The funding wereceive 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.

               Wireless License Fees 

We recognize revenue from licensee fees for wireless software applications in accordancewith the provisions of AICPA Statement of Position 97-2, “Software Revenue Recognition”, as amended by AICPA Statementof 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 feeis fixed or determinable, no significant vendor obligations or uncertainties surroundingcustomer acceptance remain, and collection of the resulting receivable is deemed probable.

There were no costs related to the wireless license fee revenue generated during the yearended December 31, 2003 as the license fee revenue related to technology that had been previously developed by the Company, andthere were no costs for installation, delivery or customization, or other related costs.

Contracts and license fees 

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

*Segments*

Management has structured the Company’s internal organization as one businesssegment for which 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.

*Financial Instruments*

The Company’s financial instruments that are exposed to a concentration of creditrisk consist primarily of its trade accounts receivable, which are unsecured.  Collateral is generally not required.Management provides an estimated

F-16
 

Summus, Inc. (USA)

Notes to Consolidated Financial Statements (continued)

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

allowance for doubtful accounts based on its assessment of the likelihood of futurecollections.  No allowance has been recorded as of December 31, 2003 or 2002, as all amounts are deemed to be fullycollectible.  The carrying amount of cash, accounts receivable, accounts payable and debt approximate fair value for thesefinancial instruments because of the short maturities of the instruments.

*Significant Concentrations*

For the year ended December 31, 2003, one customer accounted for 45% and 59% of theCompany’s consolidated revenues and accounts receivable, respectively.  This same customer accounted for 100% of theCompany’s wireless revenues and accounts receivable for the year ended December 31, 2002.  There were no other customerswith revenues or accounts receivable in excess of 10 percent of the respective balances. Should this wireless carrier discontinuethe deployment of the Company’s applications, the Company’s business would be adversely affected.

During 2003, 2002 and 2001, revenue from the U.S. Government and related entitiesrepresented 3%, 29% and 67%, of total revenue, respectively.  Revenue from sources other than the U.S. Government and relatedentities 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 establishing technological feasibility of a software product are chargedto research and development 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 2003 or 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 or liabilities are computed based upon the difference between the financial statement and income tax basis ofassets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to berealized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability from period toperiod. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will notbe realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to berealized. Future changes in such valuation allowance would be included in the provision for deferred income taxes in the period ofchange.

F-17
Summus, Inc. (USA)

Notes to Consolidated Financial Statements (continued)

 

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

*Stock-Based Compensation*

The Company has stock-based compensation plans for employees, consultants and directors,which are described more fully in Note 13.  The Company accounts for those plans under the intrinsic value method prescribedby APB Opinion No. 25, *Accounting for Stock Issued to Employees* and related interpretations.  For options granted underthose plans with an exercise price equal to the market value of the stock on the date of grant, no compensation cost is recognizedin net operations as reported in the consolidated statement of operations.  Compensation cost is recognized in netearnings/loss for awards granted under those plans with an exercise price less than the market value of the underlying common stockon the date of grant.  Such costs are recognized ratably over the vesting period.  The Company recorded non-cashcompensation related to the issuance of fully-vested stock options with exercise prices below the fair market value of theunderlying stock plus the amortization of deferred compensation arising from stock option issuances subject to vesting totaling$185,255, $364,000 and $956,321 in 2003, 2002 and 2001, 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. * In accordance with SFAS 123, the fair value of each option grant was determined by using theBlack-Scholes option pricing model with the following weighted average assumptions for the years ended December 31, 2003, 2002 and2001: dividend yield of 0%; volatility ranging from 1.218 to 1.789; risk-free interest rate ranging from 2.75% to 5.34%, andexpected option lives of 5 years for employees and 10 years for Board members.  The weighted average grant-date fair value ofoptions granted during 2003, 2002 and 2001 was $0.30, $0.62 and $2.90 per option, respectively.

 

**Year ended December 31**

**2003**

**2002**

**2001**
 
Net loss applicable to common shareholders

$ (7,334,817)

$ (8,754,123)

$ (10,893,509)

Non-cash compensation charges included in     net loss applicable to common shareholders

185,255 

364,000 

956,321 

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

(2,310,252)

(2,367,851)

(5,152,714)

 

Adjusted net loss applicable to common     shareholders

 $ (9,459,814)

$(10,757,974)

$(15,089,902)

 

Basic and diluted loss per share:

  Reported net loss applicable to common       shareholders

$          (0.12)

$          (0.19)

$           (0.31)

  Non-cash compensation charges included in net       loss applicable to commonshareholders

0.00 

0.01 

0.03 

  Stock-based employee compensation cost that      would have been included in net lossapplicable      to common shareholders under the fair valuemethod

(0.03)

(0.05)

(0.15)

  Adjusted net loss applicable to common       shareholders

$         (0.15)

$          (0.23)

$          (0.43)

 
F-18
Summus, Inc. (USA)

Notes to 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 years ended December 31, 2003 and 2002 was$119,630 and $887,992, respectively.  There was no non-cash consulting expense related to stock based compensation for theyear ended December 31, 2001.

*Net Loss Per Share*

Loss per share has been calculated in accordance with SFAS No. 128, *“Earnings PerShare.” * Basic loss per share was computed by dividing the net loss for each period presented by the weightedaverage number of shares of common stock outstanding for such period, as adjusted for the recapitalization. Although the Companyhas potential common stock equivalents related to its outstanding stock options, warrants and preferred stock, these potentialcommon stock equivalents were not included in diluted loss per share for each period presented because the effect would have beenantidilutive.

Common stock equivalents not included in diluted loss per share in 2003 consist of7,709,629 outstanding stock options, 44,543,728 outstanding warrants, 161,246 Series A preferred shares and related accrueddividends, as converted, 5,240,000 Series C preferred shares, as converted, 14,500,000 Series D preferred shares, as converted, and850,000 Series E shares, as converted.

*New Accounting Pronouncements*

In January 2003, the EITF published EITF Issue 00-21, "*Revenue Arrangements withMultiple Deliverables*," which requires companies to determine whether an arrangement involving multiple deliverables containsmore than one unit of accounting.  In applying EITF Issue 00-21, revenue arrangements with multiple deliverables should bedivided into separate units of accounting if the deliverables in the arrangement meet certain criteria.  Arrangementconsideration should be allocated among the separate units of accounting based on their relative fair values.  EITF Issue00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003.  The adoption ofEITF Issue 00-21 is not expected to have a material impact on the Company's financial statements.

In January 2003, the FASB issued Interpretation No. 46, "*Consolidation of Variable Interest Entities*",which addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation.  TheInterpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and tovariable interests in variable interest entities obtained after January 31, 2003.  The adoption of this Interpretation did nothave an impact on the Company's financial statements.  The Interpretation becomes effective for entities created beforeFebruary 1, 2003 as of the beginning of the first period after December 15, 2003.  We do not anticipate the application ofthis provision of the Interpretation to have a material impact on the Company's financial statements.

In May 2003, the FASB issued SFAS No. 150, "*Accounting for Certain FinancialInstruments with Characteristics of Both Liabilities and Equity*."  SFAS No. 150 establishes standards for how an issuer offinancial statements classifies and measures certain financial instruments that have characteristics of both liabilities andequity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effectiveat the beginning of the first interim period beginning after June 15, 2003.  The adoption of SFAS No. 150 did not have amaterial impact on the Company's financial statements.

F-19
 

Summus, Inc. (USA)

Notes to Consolidated Financial Statements (continued)

**4.  Equipment and Furniture**

Equipment, software and furniture consists of the following at December 31:
 
**2003**

** **

**2002**
    
Computer equipment financed by capital leases

 $
 657,419  
   $
 657,419 
Computer software and equipment
691,833  
680,086 

Furniture and fixtures
167,498  
269,497 
 1,516,750  
1,607,002 

Less accumulated depreciation

(1,320,751)
 
(1,110,269)
 
 $ 
195,999  
   $
 496,733 
Depreciation expense totaled $259,025, $371,457 and $439,027 for the years ended December31, 2003, 2002 and 2001, respectively.

**5.  Leases**

The Company leases equipment and office space under long-term capital and operating leaseagreements. Rental expense amounted to approximately $259,000, $347,000 and $498,000 for the years ended December 31, 2003, 2002and 2001, respectively.

Minimum future lease payments under noncancellable leases at December 31, 2003 are asfollows:
  **Capital      Leases**** ** **Operating      Leases**2004
$17,296 $252,5652005 -  252,8512006 - $200,682     Total minimum lease payments 17,296 $706,098Less amounts representing interest 
-        Present value of minimum lease      payments
$
17,296         
**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:

F-20
Summus, Inc. (USA)

Notes to ConsolidatedFinancial Statements (continued)

**6.  Income Taxes (continued)**

**December 31**

**2003**

**2002**

Accrued expenses and other revenue

$

100,000 

$

100,000 

Net operating losses

10,790,000 

8,700,000 

Start-up costs

2,420,000 

3,100,000 

Stock based compensation

90,000 

– 

Total deferred tax assets

13,400,000 

11,900,000 

Valuation allowance

(13,400,000)

(11,900,000)

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 these assets.

The reasons for the difference betweenactual income tax benefit for the years ended December 31, 2003 and 2001 and theamount computed by applying the statutory federal income tax rate to lossesbefore incomes taxes are as follows:
 
**December 31** 
**2003** 
**2002**      Income tax benefit at statutory rate
$
(1,350,000)
     
(35.0)%$
(3,000,000)
     (35.0)%      State income taxes, net of federal benefit 
(170,000)
 
(4.5)        
(380,000)
 
(4.5)    
       Non-deductible expenses 
1,000 
 
0.1   
6,000 
 
0.1     
       Change in valuation allowance 
1,500,000 
 
38.8   
3,400,000 
 
39.3     
       Other 
19,000 
 
0.6   
(26,000)
 
0.3     
            Income tax benefit
$
-      
-     %$
-      
 
-      
%
At December 31, 2003, the Company hadfederal and state net operating loss carryforwards of approximately $27 millionfor income tax purposes. The tax benefit of these carryforwards is reflected inthe above table of deferred tax assets. If not used, these carryforwards beginto expire in 2020 for federal tax purposes and in 2015 for state tax purposes.U. S. tax rules impose limitations on the use of net operating losses followingcertain changes in ownership. If such a change occurs, the limitation wouldreduce the amount of these benefits that would be available to offset futuretaxable income each year, starting with the year of ownership change.

**7.  Related Party Transactions**

During 2003, the Company paidcommissions to a director of the Company in connection with the Series D and Econvertible preferred stock offerings.  The Company paid cash commissionsof $117,000 and issued warrants to purchase 975,000 shares of unregisteredcommon stock with an exercise price of $.35 per share and a contractual life ofthree years.  The warrants were valued at $299,750, using the Black-Scholesoption-pricing model.  The value of the consideration paid to the directorwas recorded as a stock issuance cost.

F-21
Summus, Inc. (USA)

Notes to ConsolidatedFinancial Statements (continued)

 

**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 of $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 into 1,728,568 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. 

Interest expense relating to the convertible debenture transaction totaled $420,250 forthe year ended December 31, 2002 and consisted of the following:
-  $190,000, relating to the value, as determined by the Black-Scholes pricing model, of the 1,724,138 warrantsissued to the debentures holders; 
-  $189,655, relating to the value of the beneficial conversion feature associated with the convertibledebentures; 
-  $39,310, relating to placement agent fees, consisting of a cash commission of $30,000 and a warrant to purchase51,724 shares of common stock that was valued at $9,310 using the Black-Scholes pricing model and; 
-  $1,285, relating to interest expense incurred while the debentures remained outstanding based on the stated rateof 6% per annum.  At the Company’s election, these interest costs were paid through the issuance of shares of commonstock based on the conversion rate of $0.29, resulting in the issuance of 4,430 shares of common stock. 

**9.  Notes Payable**

** **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 was scheduled to be repaid in 6 equalinstallments commencing July 19, 2003; however, no payments have been made on this balance subsequent to July 19, 2003, andtherefore the agreement is in default.  The outstanding principal balance of this note as of December 31, 2003 and 2002 is$77,500.

On May 23, 2003, the Company executed a settlement agreement with Holland & Knight LLP(“H&K”).  The terms of the H&K agreement are more fully described in Note 15 below.  Under the termsof the H&K agreement, the Company entered into a note payable agreement whereby it agreed to make payments totaling $325,000,consisting of monthly payments of $9,028 over a three year period commencing on June 1, 2003.  Since the H&K agreement didnot provide for an interest 

F-22
Summus, Inc. (USA)

Notes to Consolidated Financial Statements (continued)

**9.  Notes Payable (continued)**

rate component pertaining to this payment plan, a rate of 20% per annum was used topresent value the note, resulting in a net present value of $242,926.  As of December 31, 2003, the current portion of thisnote totaled $67,994 and the non-current portion totaled $132,695.

On September 3, 2003, the Company negotiated a revised settlement agreement with AnalystsInternational Corporation (“AIC”), a former service provider.  The terms of the revised AIC settlement agreementare more fully described in Note 15 below.  Under the terms of the revised AIC settlement agreement, the Company agreed to paya monthly payment of $7,500 until the total indebtedness, including interest at 8%, is paid in full.  As of December 31, 2003,the current portion of this note totaled $90,000 and the non-current portion totaled $59,437.  Prior to the revised AICsettlement agreement on September 3, 2003, the amount due to AIC was recorded as a currently liability, included in AccountsPayable and Accrued Expenses, since the Company was in default under the terms of the initial settlement agreement.

On September 30, 2003, the Company executed a settlement agreement with Raytheon Company(“Raytheon”), regarding a note payable agreement that had previously been in default and had accrued interest at a rateof 18% per annum.  The terms of the Raytheon agreement are more fully described in Note 15 below.  Under the terms of theRaytheon agreement, the Company entered into a note payable agreement whereby it agreed to make payments totaling $87,516,consisting of an initial payment of $10,000; six (6) equal monthly installments of $3,000; fourteen (14) monthly installments of$4,000; and one final installment of $3,516.  Since the Raytheon agreement did not provide for an interest rate componentpertaining to this payment plan, a rate of 20% per annum was used to present value the note, resulting in a net present value of$74,305.  As of December 31, 2003, the current portion of this note totaled $34,701 and the non-current portion totaled$23,800. 

**10.  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, 2003, 2002 and 2001, the Company contributed $28,706, $26,166 and $37,176 to the plan,respectively.

**11.  Common Stock and Warrants**

During 2003, the Company sold to private accredited investors in negotiated transactions2,704,153 shares of its unregistered common stock, warrants to purchase an additional 316,000 shares of common stock, and re-priced6,609,645 previously issued warrants.  These transactions were in two forms.  The first form involved purchases of commonstock at prices which were above the trading value of the Company’s freely-tradable shares and allowed these investors toreduce the exercise price of a certain number of their previously purchased warrants, typically allowing them to reprice 2 warrantsfor every share purchased. The other form allowed warrant holders to reduce the exercise price of previously issued warrants if theholder exercised those repriced warrants immediately. The original exercise prices of the repriced warrants ranged between $0.60 and $5.25, per share.  The repriced exercise prices rangedbetween $0.20 and $1.69, per share.  Total cash proceeds from the sale of the shares and issuance of the new warrants was$1,337,582. 

During 2003, the Company issued 3,491,243 shares of unregistered common stock upon theexercise of warrants with exercise prices ranging from $0.20 to $0.50 per share.  Of the 3,491,243 exercised warrants,2,881,343 were exercised in connection with the repricing of the exercise price of the warrants as described in the previousparagraph.  The initial exercise prices of the warrants ranged between $0.60 and $5.25. The repriced exercise prices rangedbetween $0.20 and $1.69.  The exercise of these warrants generated gross proceeds of $928,675.

 
F-23
Summus, Inc. (USA)

Notes to Consolidated Financial Statements (continued)

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

During 2003, the Company issued toconsultants 219,257 shares of unregistered common stock, 103,400 stock options,and 17,935 warrants for services provided to the Company for an aggregate valueof $112,456.  The shares of unregistered common stock were valued at$78,629 based on the negotiated terms of each contract and the options andwarrants were valued at $29,888 and $3,939, respectively, using the Black-Scholesoption-pricing model.  Also during 2003, the Company granted 33,000 optionsto the sole member of its Advisory Board.  These options vest quarterlyover a one year period and have an exercise price equal to the traded per sharevalue of the underlying common stock on the date of grant. The value of thevested portion of the option of $8,663 was determined using the Black-Scholesoption-pricing model and was recorded as non-cash compensation expense for theyear ended December 31, 2003.

During 2003, the Company issued 906,936shares of its unregistered common stock valued at $308,355 to entities aspayment on outstanding vendor balances. 

During 2003, the Company issued1,461,717 shares of its unregistered common stock valued at $517,504 to entitiesas settlement of outstanding obligations.  During 2003, Summus issued333,333 warrants to Donald T. Locke, a consultant who acts in the capacity ofthe general counsel to Summus, as payment for $200,000 of fees owed to Mr.Locke.  The warrants have an exercise price of $0.60 per share and acontractual life of 5 years.  The warrants were valued at $83,333 using theBlack-Scholes option-pricing model.   The settlement gain resultingfrom this transaction was $116,667 and was recorded in non-cash settlements forthe year ended December 31, 2003.  The settlements are more fully describedin Note 15 below.

During 2002, the Company sold toinvestors 9,053,167 shares of its unregistered common stock (including 21,666shares of unregistered common stock in the form of commissions) and warrants topurchase an additional 17,779,104 shares of unregistered common stock for netcash proceeds of $6,439,307.  The warrants have exercise prices rangingfrom $0.48 to $4.00 per share, a term of five years and cannot be exercisedwithin the first six months of the date of issuance.  The estimated fairvalue of the unregistered shares issued as commissions for capital raising of$12,287 was deducted from the gross proceeds raised.  During the year endedDecember 31, 2002, the Company paid one of its outside directors cashcommissions of $110,139 relating to the sale of the Company’s unregisteredcommon stock and warrants.

During 2002, the Company issued 177,885shares of its unregistered common stock and warrants to purchase 150,000 sharesof unregistered common stock to certain members of management in lieu of cashpayment for unpaid salary amounts earned in 2001.  These shares andwarrants were valued at $177,895, based on the recorded value of the unpaidsalary amounts as of December 31, 2001.

During 2002, the Company issued 234,254shares of its unregistered common stock and 40,000 warrants to purchaseunregistered common stock with an exercise price of $2.35 to consultants forservices provided to the Company and 20,313 shares of its unregistered commonstock in connection with the termination of a former employee as a severancepayment.  The unregistered common shares were valued at $85,958, based onthe negotiated terms of each contract and the warrants were valued at $44,800using 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 Companyentered into two separate agreements whereby it issued 115,000 shares of itsunregistered common stock and 230,000 warrants to purchase the Company’sunregistered common stock with an exercise price of $2.50 per share to ashareholder as consideration for the conveyance by him of 115,000 shares of theCompany’s  common stock to: (1) an investment banking company forinvestment banking services and (2) an independent consultant for financialadvisory services.  The 115,000 shares were recorded at their estimatedfair value of $157,376 by applying a discount to the traded value of theCompany’s freely trading common stock on the date of each agreement.  The230,000 warrants were valued at approximately $297,600 using the Black-Scholesoption-pricing model.  The costs of these services were included innon-cash consulting expense for the year ended December 31, 2002.

F-24
Summus, Inc. (USA)

Notes to ConsolidatedFinancial Statements (continued)

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

During February 2002, the Companyissued 25,000 shares of its unregistered common stock and 12,500 warrants topurchase the Company’s unregistered common stock with an exercise price of $2.50per share to an independent firm providing investor relation services.  The25,000 shares were recorded at their estimated fair value of $37,280 by applyinga discount to the traded value of the Company’s freely trading Common Stock onthe date of the agreement.  The 12,500 warrants were recorded at theirestimated fair value of $17,625 using the Black-Scholes option-pricing model. On June 19, 2002, the Company terminated this agreement and issued 10,000warrants to purchase the Company’s unregistered common stock with an exerciseprice of $2.50 per share as a termination fee.  These warrants were valuedat $4,200 using the Black-Scholes option-pricing model. Additionally, prior tothe termination of this agreement, the Company was committed to issue to theinvestor relations firm warrants to purchase shares of the Company’sunregistered common stock, if and when the traded value of the Company’s stockprice achieved certain levels over a certain time period.  These contingentwarrants were valued at $30,000 and since this agreement was terminated beforethe any of the warrants could be earned, the $30,000 was charged to non-cashexpense.

During 2002, the Company issued 235,000shares of its unregistered common stock as a partial payment of $87,500 on anote payable, see Note 9.  Also during 2002, the Company issued 20,000shares of its unregistered common stock as a partial payment of $10,216 on anoutstanding balance due to a former service provider to the Company. In eachinstance, the value of these shares was determined based on negotiations betweenthe parties.

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

During 2002, the Company deemed the$65,000 stock purchase receivable not collectible and wrote off the receivableagainst additional paid in capital.

Subsequent to the Company’srecapitalization (see Note 2), Summus, Inc. sold to investors during 2001,2,978,390 shares of its unregistered common stock and warrants to purchase anadditional 6,175,658 shares of unregistered common stock for gross cash proceedsof $6,371,912. During 2000 and through the closing of the Summus, Ltd.recapitalization transaction on February 16, 2001, the Company issued 1,997,564and 428,234 warrants, respectively, to purchase shares of its unregisteredcommon stock in connection with sales of its unregistered common stock for cash.The warrants have exercise prices ranging from $2.40 to $5.25 per share, a termof five years and cannot be exercised within five months of the date ofissuance.

Also in connection with the Summus,Ltd. recapitalization transaction, the former Summus, Ltd. shareholders wereissued warrants to purchase 500 shares of Series B preferred stock at anexercise price of $5,500 share.  On February 27, 2002, these warrants wereconverted into 500,000 warrants exercisable over five years to purchase sharesof unregistered common stock, with an exercise price of $5.50 per share. The warrants to purchase Series B preferred stock were issued as partialconsideration in the Summus, Ltd. recapitalization transaction in order topreserve the Company’s common stock for other uses.

F-25
Summus, Inc. (USA)

Notes to ConsolidatedFinancial Statements (continued)

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

The Company has reserved shares of its authorized 185,000,000 shares of common stock forfuture issuance as follows:

Series A convertible preferred stock and related dividends

161,246

Series C convertible preferred stock

5,240,000

Series D convertible preferred stock

14,500,000

Series E convertible preferred stock

850,000

Outstanding common stock warrants

44,543,728

Outstanding stock options

7,709,629

Possible future issuance under stock option plans

425,527

Total

73,430,130

A summary of the Company’s outstanding warrants as of December 31, 2003 is asfollows:

Range ofExercise Prices

WarrantsOutstanding

$0.01 – 0.50

13,931,969    

0.51 – 1.00

10,705,021    

1.01 – 2.00

8,556,988    

2.01 – 3.00

6,376,766    

3.01 – 4.00

2,587,756    

Over 4.00

2,385,228    

44,543,728    

The warrants can be exercised at any time until their expiration dates, which are betweenJuly 25, 2005 and December 31, 2008.

**12.  Preferred Stock**

***Series A Convertible Preferred Stock***

The Company has 2,078 and 2,328 shares of Series A convertible preferred stock(“Series A preferred stock”) outstanding as of December 31, 2003 and 2002, respectively.  These shares are valuedbased upon the liquidation preference (the “Liquidation Preference”) of Series A preferred stock of $1,000 pershare.

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.  These dividends are accruedmonthly.  The Company, at its election, can provide for the payment of dividends on the Series A preferred stock through theissuance of additional shares of Series A preferred stock having an aggregate initial liquidation preference equal to the amount ofcash 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 is restricted from payingdividends on common stock until dividends are paid on Series A preferred in full.  The Company recorded preferred stockdividends of $171,265 and $183,039 in 2003 and 2002, respectively.  No dividends were paid in 2003.

F-26

Summus, Inc. (USA)

Notes to Consolidated Financial Statements (continued)

 

**12.  Preferred Stock (continued)**

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 2003, a holder of the Series A preferred stock converted 250 shares of Series A preferredstock into 17,557 shares of the Company’s unregistered common stock.  During 2002, a holder of Series A preferred stockconverted 118 shares of Series A preferred stock into 8,287 shares of the Company’s unregistered common stock.  Asof December 31, 2003, the Company had recorded $218,143 in accrued dividends, which isreflected in current liabilities in the accompanying consolidated balance sheet.

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 outstandingshares of Series A preferred stock is required prior to the issuance of a new series of preferred stock that ranks senior to theSeries A preferred stock. Each share of the Series A preferred stock is convertible at the option of the holder, at any time afterthe date of issuance, into shares of common stock equal to the Liquidation Preference divided by the initial conversion price of$14.24. The conversion price is subject to adjustment in accordance with the Company’s articles of incorporation.  Atthe Company’s election, it has the right to redeem any outstanding shares of the Series A preferred stock at the LiquidationPreference of $1,000 per share.

***Series B Convertible Preferred Stock***

During February 2001, the Company amended its bylaws to provide for the authorization of6,500 shares of Series B convertible preferred stock (“Series B preferred stock”). The Company issued 6,000 shares ofSeries B preferred stock (2,000 of which were placed in escrow) in connection with the Summus, Ltd. recapitalization.  Ofthese 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-27

 

Summus, Inc. (USA)

Notes to Consolidated Financial Statements (continued)

**12.  Preferred Stock (continued)**

***Series C Convertible Preferred Stock***

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

During 2003, the Company sold 1,310 shares of its Series C preferred stock and issuedwarrants in connection with such sale to purchase 5,240,000 shares of unregistered common stock with an exercise price of $0.75 pershare for gross proceeds of $1,310,000.  The value of the warrants issued in this offering, totaling $650,990, was determinedutilizing the Black Scholes pricing model, limited to the pro-rata fair value of the Series C offering proceeds allocable to thewarrants.  Cash commissions of $35,263 were paid in connection with the Series C offering.

***Series D Convertible Preferred Stock***

In September 2003, the Company amended its articles of incorporation to establish itsSeries D convertible preferred stock (“Series D preferred stock”).  The newly established Series D preferred stockhas an issued price of $1,000 per share and has the following rights and privileges:
-  no voting rights except with respect to (i) the amendment or alteration of the statementof rights and preferences applicable to the Series D preferred stock, and (ii) any matters for which voting rights are providedunder Florida law;shares of the Series D preferred stock shall rank on a parity with Summus’ SeriesA, Series C and Series E preferred stock as to liquidation preference upon dissolution, liquidation or the winding up ofSummus;a liquidation preference, subject to adjustment for any combinations, consolidations,stock distributions or stock dividends with respect to the Series D preferred stock, of $1,000 per share payable in the event ofany liquidation, dissolution or winding up of Summus, Inc.; andthe right to convert each share of Series D preferred stock into shares of our commonstock at any time, at the option of the Series D preferred stockholder. Each share of Series D preferred stock shall be convertibleinto 5,000  fully paid and nonassessable shares of the Company’s common stock.
F-28

Summus, Inc. (USA)

Notes to Consolidated Financial Statements (continued)

 

**12.  Preferred Stock (continued)**

During 2003, the Company sold 4,000 shares of its Series D preferred stock and issuedwarrants in connection with such sale to purchase 10,000,000 shares of unregistered common stock with an exercise price of $0.35per share for gross proceeds of $4,000,000.  The value of the warrants issued in this offering, totaling $1,219,856, wasdetermined utilizing the Black Scholes pricing model, limited to the pro-rata fair value of the Series D offering proceedsallocable to the warrants.  Cash commissions of $111,000 were paid in connection with the Series D offering.

During 2003, holders of the Series D preferred stock converted 1,100 shares of Series Dpreferred stock into 5,500,000 shares of the Company’s unregistered common stock.

***Series E Convertible Preferred Stock***

In November 2003, the Company amended its articles of incorporation to establish itsSeries E convertible preferred stock (“Series E preferred stock”).  The Series E preferred stock has an issuedprice of $1,000 per share and has the following rights and privileges:
-  no voting rights except with respect to (i) the amendment or alteration of the statement of rights and preferences applicable tothe Series E preferred stock, and (ii) any matters for which voting rights are provided under Florida law; 
-  shares of the Series E preferred stock shall rank on a parity with Summus’ Series A, Series C and Series D preferred stockas to liquidation preference upon dissolution, liquidation or the winding up of Summus; 
-  a liquidation preference, subject to adjustment for any combinations, consolidations, stock distributions or stock dividendswith respect to the Series E preferred stock, of $1,000 per share payable in the event of any liquidation, dissolution or windingup of Summus, Inc.; and 
-  the right to convert each share of Series E preferred stock into shares of our common stock at any time, at the option of theSeries E preferred stockholder.  Each share of Series E preferred stock shall be convertible into 5,000 fully paid andnonassessable shares of the Company’s common stock. 

During November 2003, the Company sold 200 shares of its Series E preferred stock andissued warrants in connection with such sale to purchase 500,000 shares of unregistered common stock with an exercise price of$0.35 per share for gross proceeds of $200,000.  The value of the warrants issued in this offering, totaling $59,459, wasdetermined utilizing the Black Scholes pricing model, limited to the pro-rata fair value of the Series E offering proceedsallocable to the warrants.  Cash commissions of $6,000 were paid in connection with the Series E offering.

During 2003, a holder of Series E preferred stock converted 30 shares of Series Epreferred stock into 150,000 shares of the Company’s unregistered common stock.

F-29

 Summus, Inc. (USA)

Notes to Consolidated Financial Statements (continued)

 

**12.  Preferred Stock (continued)**

The accounting treatment for the Series C, D and E preferred stock (the “PreferredStock”) involved allocating the value of the principal amount received from the Preferred Stock offerings between thePreferred Stock, the associated warrants and a beneficial conversion feature (“BCF”) associated with the PreferredStock.  A BCF existed because the effective conversion rate of the Preferred Stock was below the traded value of theCompany’s common stock on the date the Preferred Stock was issued.  The BCF for the Preferred Stock totaling $3,579,695was recorded as a discount to the Preferred Stock and additional paid-in capital on the date the Preferred Stock was issued. Since the Series C preferred stock becomes convertible at any time after nine months from its issuance, the value of its BCFtotaling $659,010 will be amortized to retained deficit over a nine month period commencing with its issuance. Amortization of theSeries C preferred stock BCF for the year ended December 31, 2003 was $365,566.  Since the Series D and E preferred stock wasconvertible immediately, the value of its beneficial conversion feature totaling $2,920,685 was fully amortized to retained deficiton the date of issuance.

**13.  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 fair value of the Company’s underlying common stock. Deferred compensation has beenrecorded for the difference in value between exercise price and the fair value of the underlying common stock and is beingrecognized over the vesting period of the stock options. Non-cash compensation expense relating to these grants was $176,592,$202,642 and $202,157 in 2003, 2002 and 2001, respectively.  Additionally, during 2001, stock options exercisable for 615,879shares of common stock were granted with exercise prices below the fair value of the underlying common stock, resulting in totalcompensation expense of $864,164, of which $110,000 was deferred at December 31, 2001 and is being amortized to non-cashcompensation through 2004. Of the $864,164 compensation expense attributable to 2001 option grants, $541,688 related to optionsissued 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 value of the underlying common stock resulting innon-cash compensation expense of $161,358 during the year ended December 31, 2002.

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 theBlack-Scholes option pricing 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 Board of Advisors for consultingservices. Under the terms of this agreement, 200,000 options with an exercise price of $0.35 were granted to this advisor. The vesting schedule of these options provided for 75,000 of these options to be fully vested on the date of grant, 50,000 to vestover the next three month period, and 15,000 to vest each quarterly period thereafter.  The value of the vested options, asdetermined by the Black-Scholes option pricing model under the fair value method of accounting, was recorded as non-cash consultingexpense of $25,000 during 2002.  This agreement was terminated during the fourth quarter of 2002, upon which 75,000 optionswere forfeited.

During 2003, the Company granted 33,000 stock options to a member of its Board ofAdvisors. This option vests quarterly over a one year period and has an exercise price equal to thetraded per share value of the underlying common stock on the date of grant. The value of the vested portion of the option of $8,663was determined using the Black-Scholes option-pricing model and was recorded as non-cash compensation expense for the year endedDecember 31, 2003.

F-30

 Summus, Inc. (USA)

Notes to Consolidated Financial Statements (continued)

 

**13.  Stock Options (continued)**

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 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 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 their respective annual compensation.  During the years ended December 31, 2003 and 2002, theCompany issued 490,292 and 241,431, respectively, fully vested stock options with exercise prices ranging between $0.23 and $0.51per share under this plan.

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 services areperformed.  These options vest on a monthly basis as they are earned and have exercise prices that equal the traded per sharevalue of the underlying common stock on the date of grant.  For the years ended December 31, 2003 and 2002, the Company issued103,400 and 146,032 options, respectively, under these consulting agreements.  These options were valued at $29,888 and$81,788, respectively, using the Black-Scholes option-pricing model under the fair value method of accounting.  The term ofthese agreements is generally twelve months, however the Company can immediately terminate them.  

The Company’s Board of Directors authorized an amendment to Summus, Inc.’sEquity Compensation 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 overthree years from the date of grant.  Certain of the stock options granted under the Plan have been granted pursuant to variousstock option agreements. Each stock option agreement contains specific terms. On May 23, 2002, the Company’s Board ofDirectors adopted resolutions to amend the Company’s Plan to increase the shares available under the Plan from 6,500,000 to8,500,000.

 

 

F-31

Summus, Inc. (USA)

Notes to Consolidated Financial Statements (continued)

**13.  Stock Options (continued)**

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

**Shares**

**WeightedAverageExercisePrice**

Outstanding – December 31, 2000

1,166,633 

    $

0.19 

Issuance of options in accordance with terms of the  recapitalization transaction

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 

Granted

1,315,529 

0.34 

Exercised

— 

— 

Forfeited

(1,162,075)

(1.50)

Outstanding – December 31, 2003

7,709,629 

    $

1.80

The following table summarizes information about stock options outstanding at December 31,2003:

**Options Outstanding**

**Range ofExercise Prices**

**NumberOutstanding**

**Weighted AverageContractual Life**

**Weighted AverageExercise Price**

$      0.01- 0.50

2,756,314

4.25

$0.40

        0.51- 1.00

226,108

3.36

0.67

        1.01- 2.00

1,936,841

4.33

1.43

        2.01- 3.00

1,104,900

5.78

2.29

        3.01- 4.00

1,219,133

4.05

3.59

        Over 4.00

466,333

4.05

6.35

7,709,629

4.42

1.80

 

**Options Exercisable**

**Range ofExercise Prices**

**Number Exercisable**

**Weighted AverageExercise Price**

$      0.01- 0.50

2,139,687

$0.42

        0.51- 1.00

226,108

0.67

        1.01- 2.00

1,833,941

1.43

        2.01- 3.00

967,400

2.31

        3.01- 4.00

1,055,596

3.61

        Over 4.00

466,333

6.35

6,689,065

1.90

F-32

Summus, Inc. (USA)

Notes to Consolidated Financial Statements (continued)

 

**13.  Stock Options (continued)**

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.  Therewere no exercises of stock options in 2003.

**14.  Commitments and Contingencies**

***Dr. Bjorn Jawerth’s Employment Agreement***

In connection with the recapitalization transaction on February 16, 2001 (see Note 1), theCompany entered into a three-year employment agreement with Dr. Bjorn Jawerth.  Dr. Jawerth’s employment agreementexpired on February 16, 2004, and was not renewed by the Board of Directors.  The employment agreement provided for an initialbase salary of $350,000, which was to be increased on an annual basis by at least 10%; however, Dr. Jawerth elected to defer anyincrease in cash compensation to this initial base salary.  As of February 16, 2003 and February 16, 2002, Dr. Jawerth was toreceive an annual salary of $423,500 and $385,000, respectively, pursuant to his agreement; however, Dr. Jawerth elected on July31, 2002, to reduce his cash compensation temporarily to $262,500 on an annual basis to help lower the Company’s cashconsumption.  The difference between the original contract amount of $350,000 and the current cash salary amount was paid toDr. Jawerth on a bi-monthly basis in the form of options to buy common stock under the Company’s Alternative CompensationPlan.  These options were priced at the closing market price of the Company’s common stock at the end of each bi-monthlypay period.  The difference between the increased salary amounts of $423,500 and $385,000, respectively, owed to Dr. Jawerthand the original base salary of $350,000 in his employment agreement was deferred and accrued by the Company until the Board ofDirectors and Dr. Jawerth determine when and how these deferred and accrued amounts may be paid.  The 10% annual increasesprovided for in Dr. Jawerth’s employment contract have been recorded as accrued salaries in the Company’s balance sheetas of December 31, 2003.

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 of Summus, 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).  Under the terms of Dr.Jawerth's employment agreement, the Company was obligated to issue to Dr. Jawerth options, with an exercise price of $1.50 pershare, exercisable for three times the number of shares of common stock sold in the private sale as describe above.  No sharessubject to this agreement have been sold.  The Company believes it has no further obligations regarding this sale ofshares.

Pursuant to the terms of his employment agreement and in accordance with corporate policy,all intellectual property developed by Dr. Jawerth in connection with his employment by the Company is the exclusive property ofthe Company.  Without any impact on the Company’s ownership of the intellectual property, the employment agreementgranted Dr. Jawerth, personally, a non-exclusive, non-transferable, world-wide license, without right to sublicense, to make anduse New Technology (as defined in the Inventions Award Plan) that was developedduring the twelve months following theclosing of the recapitalization transaction.  This license was to terminate on the later of the date twelve months from theclosing of the recapitalization transaction or such later date as may be set by the Board, excluding Dr. Jawerth.  Pursuant tothe terms of Dr. Jawerth’s employment agreement, the Company terminated Dr. Jawerth’s license on February 4,2004. 

 
F-33

Summus, Inc. (USA)

Notes to Consolidated Financial Statements (continued)

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

***Cancellation of warrants***

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 (“SEC”) on July 31, 2002 relating to this common stock equity lineagreement.  Based on comments received from the Securities and Exchange Commission and related communications with the SEC,the Company understood that the terms of the equity line financing arrangement were such that it would not be able to resolve thestaff’s comments in a timely manner and seek effectiveness of the registration statement in a timely manner.  Due tothese developments, the length of time involved in completing the transaction, and other factors, the Company determined that itwas in its best interest to withdraw the registration statement and not proceed with the equity line.  Accordingly, onSeptember 17, 2002, the Company submitted to the SEC a request to withdraw the registration statement and cancelled all agreementsassociated with the common stock equity line.  In connection with the cancellation of the agreements associated with thecommon stock equity line, Talisman, the intended purchaser under the equity line, indicated to the Company its intention to retainownership of the warrants to purchase 500,000 shares of the Company’s unregistered common stock at an exercise price of $0.47per share that were issued to Talisman upon the execution of the equity line agreements. It is management’s position, withthe advice of legal counsel, that the cancellation of these warrants became effective with the cancellation of the equity lineagreements and that no loss contingency exists.  Therefore, the Company has not recorded the issuance of these 500,000warrants in its consolidated financial statements nor disclosed them as part of outstanding warrants.  The Company has sentcorrespondence to Talisman stating its position that the warrants have been cancelled.  To date, the Company has not receivedcorrespondence back from Talisman indicating their concurrence.

***Inventions Awards Plan***

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 sells the rights to New Technology, eligible employees shall be entitled to an award of10% 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.

Dr. Jawerth sent correspondence to the Company on February 17, 2004, seeking payment forcertain inventions under the Plan.  Management and the Board of Directors of the Company have evaluated these assertions anddetermined that no amounts are due Dr. Jawerth or other employees under the provisions of the Plan.  If litigation is pursuedby Dr. Jawerth for any payments under the Plan and he is successful in such litigation, there may be a material adverse impact tothe Company.      

 

F-34

Summus, Inc. (USA)

Notes to Consolidated Financial Statements (continued)

**15.  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 registered common stock in full satisfaction of a $435,815 payable to entities affiliated with arelated party.

***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 unregistered 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 ofthe Company’s stock on the date of the revised settlement;Mr. Dunavant agreed to certain resale restrictions with respect to all but 350,000 sharesof common stock held by him (an aggregate of 2,275,000 shares), specifically, to limit his public resale of such shares to 30,000shares per calendar month until February 15, 2002;the Company agreed to prepare and proceed diligently to complete and file a registrationstatement with the SEC registering the resale of all of the shares held by Mr. Dunavant, his spouse and his counsel.  Theregistration statement on Form S-1 was declared effective by the SEC on July 22, 2002.Mr. Dunavant, his spouse and his counsel agreed, for a two-year period from the date ofthe agreements, to vote the shares held by them in favor of and for the election of Board nominees by the Company and to vote suchshares in a manner consistent with the recommendation of the Board with respect to certain extraordinary transactions (such as atender offer, an exchange offer, merger or other business combination); andthe Company, on the one hand, and Mr. Dunavant and his counsel, on the other, executedmutual general releases with respect to any and all claims against each other, except with respect to the obligations andliabilities under such agreements.
 

 

F-35

Summus, Inc. (USA)

Notes to Consolidated Financial Statements (continued)

 

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

***The AIC Litigation***

On March 30, 2001, Analysts International Corporation (“AIC”) filed a civilsummons and complaint in General Court of Justice, District Court Division, County of Wake, North Carolina, against High Speed NetSolutions, Inc. The complaint alleged that the Company breached certain contracts with AIC, dated December 9, 1999, February 11,2000, April 25, 2000, May 9, 2000, and May 23, 2000, under which AIC provided the Company with computer programmingservices.

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 settlementagreement, (ii) $5,000 per month for a period of nine months, commencing one month after execution of the settlement agreement, and(iii) $10,000 per month thereafter until the balance of the Indebtedness is paid in full.  We ceased making payments underthis settlement agreement on November 15, 2002 due to liquidity constraints, and therefore, we were in default under the terms ofthe initial agreement. The Company received notification of its default from AIC on July 9, 2003, and the 3-day cure period towhich the Company was entitled under the terms of the settlement agreement expired, which would allow AIC to file a consentjudgment against the Company.  While negotiating to amend the settlement agreement in August 2003, Summus learned that AIC hadfiled the consent judgment on February 13, 2002, which Summus believes was in breach of the original settlement agreement.  InSeptember 2003, the parties negotiated a revised settlement agreement pursuant to which (i) the consent judgment remains filed andof record, (ii) AIC will file with the court a credit to the judgment reflecting all payments made by the Company; (iii) thepayment terms have been revised to require payment by the Company of $60,000 by September 5, 2003, which has been made, and $7,500per month thereafter until the full amount of the indebtedness, including accrued interest is paid, and (iv) AIC agrees to refrainfrom executing on the consent judgment as long as the Company makes the payments required by the revised settlement terms asidentified in this paragraph.  In the event that the Company fails to make a scheduled payment as set forth in this revisedsettlement agreement, AIC may execute on the consent judgment and seek to satisfy the judgment from the assets of the Company inaccordance with the laws of the state of North Carolina. 

***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. PatentNumber 4,599,567 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 anunspecified amount of monetary damages. The Company has asserted counterclaims for a declaratory judgment of noninfringement,invalidity and unenforceability 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.

The Company expensed the aggregate estimated fair value of these securities, resulting ina non-cash charge in the statement of operations for the year ended December 31, 2001.

F-36

Summus, Inc. (USA)

Notes to Consolidated Financial Statements (continued)

 

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

***Settlement of Claims of Van Ernst Jakobs N.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 thatcertain amounts were due and payable by the Company to VEJ, in the form of cash and equity securities of the Company. TheCompany’s management was of the view that payment of any amounts to VEJ (beyond consideration previously paid in connectionwith its capital-raising efforts on behalf of the Company, consisting of a cash payment of $100,000 and the issuance of 32,501shares of the Company’s common stock) was conditioned on VEJ raising additional capital for the Company.

In October 2001, the Company and VEJ entered into a definitive settlement agreement andrelease, 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 unregistered common stock withan 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 common stock with anexercise 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 common stock with anexercise price of $4.50 per share, valued, using the Black-Scholes option pricing model, at $252,000.

The Company expensed the aggregate estimated fair value of these securities, resulting ina non-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 when he was terminated from Summus, Ltd. The Company has filed an answer to Mr. Kleinmaier’sclaims and has made several counterclaims against him. In May 2002, the Company and Mr. Kleinmaier mediated claims betweenthem.  Mr. Kleinmaier received 15,000 options to purchase shares of Summus, Inc.’s unregistered common stock at $0.50per share and executed a release against all parties.  These options were valued at $8,850 using the Black-Scholesoption-pricing model.

***The AT&T CORP. Litigation***

On June 7, 2002, AT&T filed a civil lawsuit in the United States District Court forthe Eastern District of North Carolina against Summus, Inc. (USA).  In this suit, AT&T claims that it is entitled topayment in the amount of $238,783 for telephone calls and services rendered to the Company.  In March 2003, the Company andAT&T settled the claim between them, whereby both parties agreed to reduce the total amount owed by the Company to AT&T to$120,000 and this reduced amount be repaid over an 18 month period commencing in March 2003.  The settlement gain resultingfrom this transaction was $118,783.  The balance as of December 31, 2003 was $53,456, which is included in accountspayable.

F-37

Summus, Inc. (USA)

Notes to Consolidated Financial Statements (continued)

 

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

***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.  These amounts were paid in full in 2003.

***Bowne Litigation***

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. The Company disputesthe total amount Bowne claims the Company owes. However, the Company has recorded a liability of $276,374 relating to this claim asof December 31, 2003 and 2002.  The Company is in the process of attempting to negotiate a settlement to thisclaim.

***The Holland and Knight LLP Litigation***

On February 27, 2003, Holland & Knight LLP (“H&K”) filed a civillawsuit in the Superior Court for the District of Columbia against Summus.  In this suit, H&K claims that it was entitledto $867,268, plus interest, for services rendered to Summus.  Summus and H&K entered into an agreement on May 23, 2003settling this litigation, whereby both parties agreed to the following terms:
-  $217,268 of the total balance due was forgiven by H&K, resulting in a portion of thesettlement gain of this transaction.$325,000 of the total balance due will be paid over a three-year period with monthly installments of $9,028, commencing on June1, 2003.   The settlement agreement did not provide for an interest rate component pertaining to the three-year paymentplan.  Therefore, an interest rate of 20% per annum was used to present value the note, resulting in a net present value of$242,926. The difference between the face value of $325,000 and the net present value of $242,926, totaling $82,074, was recordedas a portion of the settlement gain. The 20% rate of interest was considered appropriate to fair value the note based on theCompany’s financial condition, including its negative working capital and negative net worth position. In the event that theCompany fails to make a scheduled payment as set forth in this settlement agreement, H&K may execute on a consent judgment andseek to satisfy the judgment from the assets of the Company in accordance with the laws of the State of North Carolina. 
The remaining amount of the recorded liability due to H&K of $325,000 was satisfied through the issuance to H&K of738,636 shares of the Company’s unregistered common stock, with registration rights. The fair value of the 738,636 shares ofunregistered common stock was estimated at $273,295, based on the traded value of the Company’s common stock on the date thesettlement agreement became effective.  The difference between the estimated fair value of the 738,636 unregistered commonshares and the recorded value of the liability of $325,000, totaling $51,705, was recorded as a portion of the settlement gain. Theunregistered shares have since been registered, and H&K has contractually agreed to sell no more than 18,000 shares in any one(1) business day.
Therefore, the aggregate settlement gain resulting from this transaction totaled$351,047.- The settlement agreement also provided that if the Company raised $5.0 million or more incapital at one time, all remaining unpaid amounts owed under the $325,000 note agreement shall become immediately due andpayable.  This note is unsecured, and upon default of the terms of the agreement, the unpaid balance shall become

F-38

Summus, Inc. (USA)

Notes to Consolidated Financial Statements (continued)

 

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

immediately due and payable and such amount shall include pre-judgment interest in theamount of 6% accruing as of April 3, 2002 and post- judgment interest at a rate to be determined.

***The Raytheon Company Litigation***

During 1999, the Company entered into an agreement with Raytheon Company(“Raytheon”) to repurchase 1,533 shares of its common stock from Raytheon for an aggregate value of $268,373, of which$268,075 represented a termination fee for a development contract and $298 represented the fair value of the shares repurchased. Inconnection with this agreement, the Company entered into a promissory note with Raytheon whereby the Company agreed to payapproximately $10,000 per month over a 27-month period to fund this transaction. The Company did not make all required monthlyinstallments and thus defaulted on the promissory note. Consequently, the note began accruing interest at 18% perannum.   On September 30, 2003, the Company executed a settlement agreement with Raytheon whereby both parties agreed tothe following terms.
-  $ 49,128 of the total balance due was forgiven by Raytheon, resulting in a portion of the settlement gain of thistransaction. 
-  $87,516 of the total balance due will be paid over a 22 month period, with an initial payment of $10,000; six (6) equal monthlyinstallments of $3,000; fourteen (14) monthly installments of $4,000; and one final installment of $3,516.  The settlementagreement did not provide for an interest rate component pertaining to the 22-month payment plan.  Therefore, an interest rateof 20% per annum was used to present value the note, resulting in a net present value of $74,306. The difference between the facevalue of $87,516 and the net present value of $74,306, totaling $13,210 was recorded as a portion of the settlement gain. The 20%rate of interest was considered appropriate to fair value the note based on the Company’s financial condition, including itsnegative working capital and negative net worth position. In the event that the Company fails to make a scheduled payment as setforth in this  settlement agreement, Raytheon may execute on a consent judgment and seek to satisfy the judgment from theassets of the Company in accordance with the laws of the State of North Carolina.  
-  The remaining amount of the recorded liability due to Raytheon of $87,516 was satisfied through the issuance to Raytheon of295,662 shares of the Company’s unregistered common stock, with registration rights.  The fair value of the 295,662shares of unregistered common stock was estimated at $94,613, based on the traded value of the Company’s common stock on thedate the settlement agreement became effective.  The difference between the estimated fair value of the 295,662 unregisteredcommon shares and the recorded value of the liability of $87,516, totaling $7,097, was recorded as an offset to the settlementgain.  Raytheon has contractually agreed to sell no more than 15,000 shares in any one (1) business day. 
-  Therefore, the aggregate settlement gain resulting from this transaction totaled $55,241. 

***Other Settlements***

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 or enter into any other obligations inconnection with this release.  The settlement gain resulting from this transaction was $886,557.

F-39

Summus, Inc. (USA)

Notes to Consolidated Financial Statements (continued)

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

On June 5, 2003, the Company signed and executed an agreement pertaining to the payment ofamounts owed to a current service provider.  Under the terms of the agreement, the Company issued 427,419 shares of itsunregistered common stock, with registration rights, for full payment of $132,500 owed to the service provider.  The fairvalue of the 427,419 shares of unregistered common stock was estimated at $149,597, based on the traded value of theCompany’s common stock on the date the settlement agreement became effective.  The difference between the estimated fairvalue of the 427,419 unregistered common shares and the recorded value of the liability of $132,500 was recorded as a settlementloss of $17,097. The service provider has contractually agreed to sell no more than 5,000 shares in any one (1) businessday.

During 2003, the Company issued warrants to purchase 333,333 shares of common stock to aconsultant as payment for $200,000 of fees.  The warrants were valued at $83,333 using the Black-Scholes option-pricingmodel.  The non-cash settlement gain resulting from this transaction totaled $116,667.

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

The total aggregate settlement gains resulting from these transactions during the yearended December 31, 2003 were $1,525,698.

**16.  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 choseto focus primarily on Summus, Ltd.’s business plan because of its perception that this business plan had the potential tocreate greater shareholder value compared to the scope of Summus, Inc.’s business operations. In addition, the Company didnot expect to have the fund-raising capacity to continue to fund the business plans of both Summus, Ltd. and Summus, Inc., aspreviously envisioned. The Summus, Inc. business consisted primarily of the “rich media direct” business operated byDouglas May & Co., a wholly-owned subsidiary of Summus, Inc. Therefore, management undertook a review to determine theappropriate course of action for this portion of its business given the existing and anticipated funding constraints.

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. andrelated rich media direct assets. The date of the transaction represents the measurement date, as defined by Accounting PrinciplesBoard Opinion No. 30 (“APB 30”), for the disposition of the Company’s rich media direct business. The results ofoperations of Douglas May & Co. have been presented as discontinued operations in the Company’s statement of operationsfor the year ended December 31, 2001 in accordance with the guidance of APB 30. For the period February 16, 2001 through September19, 2001, the operations of Douglas May & Co. reflected approximately $319,000 in revenues and a net loss of $135,798. TheCompany has recorded 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 withrespect to two

F-40

Summus, Inc. (USA)

Notes to Consolidated Financial Statements (continued)

 

**16.  Discontinued Operations (continued)**

allotments of shares of the Company’s common stock issued to Mr. May under the termsof the September 2000 share acquisition agreement, specifically:
- the obligation to repurchase one allotment of 87,498 shares of the Company’s commonstock for $576,000; and
- the commitment to issue to Mr. May additional shares of the Company’s common stock,which when combined with an original 50,000 share allotment, would provide a value of $500,000 as of the first anniversary of thedate 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 reclassification of the par value ofthe shares within the shareholders’ deficit.

The release of the Company from 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 commonstock at an exercise price of $2.50 per share, such options being exercisable over a ten-year term.

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

The Company also entered into a technology license agreement (and a related source 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 agreementprovides for the licensee’s payment to the Company of royalties, payable on a quarterly basis, equal to the greater of: (1) apercentage of the “net revenues” derived from the sale or license of end user products using or incorporating thelicensed technology or (2) specified minimum amounts This royalty payment plan will remain in effect each year the agreementremains in effect. The agreement can be terminated by the licensee at any time following the first to occur: (1) payment of$400,000 in royalty payments to the Company or (2) ninety days prior to the second anniversary of the agreement, provided that$400,000 in royalty payments have been earned by the Company. The first specified minimum royalty payment of $100,000 was payableto the Company on December 31, 2001. The Company extended the payment of the $100,000 into various installments commencing on March31, 2002. As of June 30, 2002, the Company did not receive the scheduled installments under the extended payment plan, andaccordingly all agreements between the Company and Douglas May & Co., Inc. and it wholly owned subsidiary became null and void,except the obligations noted above which expired on September 19, 2002. All royalty payments received by the Company during 2002,totaling $30,000, were recorded as contracts and licensee fee revenue when the cash payments were collected due to the uncertaintyof collection.

F-41

Summus, Inc. (USA)

Notes to Consolidated Financial Statements (continued)

 

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

*Change in Revenue Recognition Policy*

After a careful review of the Company’s revenue recognition policies and givingconsideration to guidance provided for in Emerging Issues Task Force No. 99-19 *Reporting Revenue Gross as a Principal versus Netas an Agent* (“EITF 99-19”), the Company has changed certain revenue recognition policies affecting revenues earnedby wireless applications and contracts.  Prior to 4th quarter 2003, the Company reported revenues earned bywireless applications and contracts and cost of revenues for wireless applications and contracts  netof certain third-party costs in the statement ofoperations.  These transactions have been reclassified to reflect a grossrevenue presentation with no effect on gross profit or netloss.  The amount by which revenues and costs of revenues have been reclassified for the year ended December 31, 2003 is$635,989.  Revenues and costs of revenues for 2002 have not been reclassified due to immateriality.

Selected quarterly financial data for the years ended December 31, 2003 and 2002 is asfollows: 

**Three Months Ended**

**March 31**

**June 30**

**September 30**

**December 31**

*(in thousands, except per share data)*

**2003**

Revenues, as reported

$

130

$

465

$

183

$

285 

Revenues, as restated

229

581

332

557

Cost of revenues, as reported

115

113

109

101

Cost of revenues, as restated

214

229

258

373

Gross profit

15

352

74

184 

Net loss

(714)

(807)

(1,446)

(910)

Net loss per common share, basic and    diluted

(0.01)

(0.01)

(0.03)

(0.06)

**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)

**18.  Subsequent Events**

***Conversion of preferred stock***

Subsequent to December 31, 2003, holders of the Series D preferred stock converted 375shares of Series D preferred stock into 1,875,000 shares of the Company’s unregistered common stock.

Subsequent to December 31, 2003, a holder of Series E preferred stock converted 170 sharesof Series E preferred stock into 850,000 shares of the Company’s unregistered common stock.

***Payment of accrued salaries***

Subsequent to December 31, 2003, the Company made cash payments of approximately $180,000towards accrued salaries and related costs that were incurred as of December 31, 2003.  As a result of these payments, accruedunpaid salaries and related costs that were earned as of December 31, 2003 have been reduced from approximately $440,000 to$260,000.  Included in accrued salaries and related costs is approximately $61,000 of earned and unpaid vacation.

F-42

Summus, Inc. (USA)

Notes to Consolidated Financial Statements (continued)

 

**18.  Subsequent Events (continued)**

***Settlement Agreement***

Subsequent to December 31, 2003, the Company entered into a settlement agreement with astrategic partner regarding software development.  Under the settlement agreement, the other party has agreed to make paymentsof $420,000 over a twelve-month period beginning in March 2004.  As of March 29, 2004, the Company had received $35,000 underthis agreement.  The remaining payments will be recorded as revenues when and if received.

***Expiration of Employment Agreement***

On February 16, 2004, Dr. Jawerth’s employment agreement with the Company expiredand was not renewed by the Board of Directors.  Dr. Jawerth resigned from the Company’s Board of Directors on March 5,2004.

 

F-43

**SIGNATURES**

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

                                                                                 

Summus, Inc. (USA)

 

By:     /s/ Gary E.Ban                          Gary E. BanChief Executive Officer

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

Signature

Title
Date
 

/s/ Gary E. BanGary E. Ban

 

Chief Executive Officer(Principal Executive Officer)  

 

March 30, 2004

 

/s/ Donald T. LockeDonald T. Locke

 

General Counsel and Chief Financial Officer(Principal Financial and Principal Accounting Officer)

 

March 30, 2004

 

/s/ Jere A. AyersJere A. Ayers

 

Director

 

March 30, 2004

 

/s/ Stephen M. FinnStephen M. Finn

 

Director

 

March 30, 2004

 

/s/ Neil R. GuentherNeil R. Guenther

 

Director

 

March 30, 2004

 

/s/  J. Winder HughesJ. Winder Hughes

 

Director

 

March 30, 2004

 
Table of Contents

 

ExhibitNumber

ExhibitDescription

                 

3(I).1*

Amended and Restated Articles of Incorporation, filed February 28, 2000 (incorporated byreference to Exhibit 3.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30 , 2003) 

 

 

3(I).2*

Articles of Amendment and Statement of Rights and Preferences of the 8% Series AConvertible Preferred Stock, filed March 3, 2000 (incorporated by reference to Exhibit 3.2 to our Quarterly Report on Form 10-Q forthe fiscal quarter ended September 30, 2003) 

 

 

3(I).3*

Articles of Correction filed June 23, 2000 to Articles of Amendment, filed March 2, 2000(incorporated by reference to Exhibit 3.3 to our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30,2003) 

 

 

3(I).4*

Amendment to Amended and Restated Articles of Incorporation, filed February 27, 2002,changing our name to Summus, Inc. (USA) (incorporated by reference to Exhibit 3.4 to our Quarterly Report on Form 10-Q for thefiscal quarter ended September 30, 2003) 

 

 

3(I).5*

Amendment to Amended and Restated Articles of Incorporation, filed February 27, 2002,increasing our authorized common stock, par value $.001, from 50,000,000 shares to 100,000,000 shares (incorporated by reference toExhibit 3.5 to our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2003)

3(I).6*

Articles of Amendment and Statement of Rights and Preferences of the Series C ConvertiblePreferred Stock (incorporated by reference to Exhibit 3.6 to our Quarterly Report on Form 10-Q for the fiscal quarter endedSeptember 30, 2003) 

 

 

3(I).7*

Articles of Amendment and Statement of Rights and Preferences of the Series D ConvertiblePreferred Stock dated September 25, 2003 (incorporated by reference to Exhibit 3.7 to our Quarterly Report on Form 10-Q for thefiscal quarter ended September 30, 2003) 

 

 

3(I)8*

Articles of Amendment and Statement of Rights and Preferences of the Series E ConvertiblePreferred Stock dated October 17, 2003 (incorporated by reference to Exhibit 3.8 to our Quarterly Report on Form 10-Q for thefiscal quarter ended September 30, 2003)

 

 

3(I)9

Amendment to Amended and Restated Articles of Incorporation, filed December 3, 2003,increasing our authorized common stock, par value $.001, from 100,000,000 shares to 185,000,000 shares 

 

 

3(II).1*

Second Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to our Form10 filed on July 5, 2001) 

 

 

4.1*

Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to our AnnualReport on Form 10-K for the fiscal year ended December 31, 2001) 

** **

 

4.2*

Form of Subscription Agreement for private placement sales of our common stock(incorporated by reference to Exhibit 4.2 to our Annual Report on Form 10-K for the fiscal year ended December 31,2001) 

 
Table of Contents

 
 
4.3*

Form of Selling Shareholders Agreementin connection with private placement sales of our common stock (incorporated byreference to Exhibit 4.3 to our Annual Report on Form 10-K for the fiscal yearended December 31, 2001) 

 

 

4.4*

Form of Warrant Agreement for warrantsissued in connection with private placement sales of our common stock(incorporated by reference to Exhibit 4.4 to our Annual Report on Form 10-K forthe fiscal year ended December 31, 2001) 

 

 

4.5*

Form of Series C Convertible PreferredStock Subscription Agreement (incorporated by reference to Exhibit 4.1 to ourQuarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2003

 

 

4.6*

Form of Series C Convertible Preferred Stock Registration Rights Agreement (incorporatedby reference to Exhibit 4.2 to our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2003) 

 

 

4.7*

Form of Series D Convertible Preferred Stock Subscription Agreement (incorporated byreference to Exhibit 4.3 to our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30,2003)   

 

 

4.8*

Form of Series D Convertible Preferred Stock Registration Rights Agreement (incorporatedby reference to Exhibit 4.4 to our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2003) 

 

 

4.9*

Form of Series E Convertible PreferredStock Subscription Agreement (incorporated by reference to Exhibit 4.5 to ourQuarterly Report on Form 10-Q for the fiscal quarter ended September 30,2003)   

 

 

4.10*

Form of Series E Convertible Preferred Stock Registration Rights Agreement (incorporatedby reference to Exhibit 4.6 to our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2003) 

 

4.11*

Form of Warrant issued in connection with the Company’s Series E ConvertiblePreferred Stock (incorporated by reference to Exhibit 4.7 to our Quarterly Report on Form 10-Q for the fiscal quarter endedSeptember 30, 2003)

 

 

10.1*

Asset Purchase Agreement, dated October 30, 2000, among Summus, Inc., Summus, Ltd., andthe stockholders named therein (incorporated by reference to Exhibit 10.01 to our Current Report on Form 8-K dated February 16,2001)

 

 

10.2*

Amendment Number 1 to Asset Purchase Agreement, dated as of December 30, 2000, amongSummus, Inc., Summus, Ltd. and the stockholders named therein (incorporated by reference to Exhibit 10.02 to our Current Report onForm 8-K dated February 16, 2001)

10.3*

Amendment to Asset Purchase Agreement, dated as of January 30, 2001, among Summus, Inc.,Summus, Ltd. and the stockholders named therein (incorporated by reference to Exhibit 10.03 to our Current Report on Form 8-K datedFebruary 16, 2001)

 

 

10.4*

Agreement for Transfer of All Rights and Reservation of License in Software, datedSeptember 4, 2000, between PlusStation, LLC, Niksa Radovic and Summus, Ltd. (incorporated by reference to Exhibit 10.9 to our Form10 filed on July 5, 2001)

 

 

10.5*

Equity Compensation Plan, effective January 31, 2000 (incorporated by reference to Exhibit10.05 to our Quarterly Report on Form 10-Q filed for the quarter ended March 31. 2000)

 

 

10.6*

Amendment to Equity Compensation Plan, effective May 1, 2000 (incorporated by reference toExhibit 10.26 to our Form 10 filed on July 5, 2001)

 

 

10.7*

Amendment to Summus, Inc. Equity Compensation Plan, effective February 16, 2001(incorporated by reference to Exhibit 10.09 to our Current Report on Form 8-K dated February 16, 2001)

 

 

10.8

Amendment to Summus Equity Compensation Plan, effective May 23, 2002 (incorporated byreference to Exhibit 10.08 to our Annual Report on Form 10-K filed for the fiscal year ended December 31, 2002)

 

  

Table of Contents

 

10.9*

Executive Employment Agreement, dated as of February 16, 2001, betweenSummus, Inc. and Bjorn Jawerth (incorporated by reference to Exhibit 10.06 to our Current Report on Form 8-K dated February 16,2001)

 

 

10.10*

Amendment to Executive Employment Agreement of Bjorn D. Jawerth, dated as ofFebruary 28, 2001 (incorporated by reference to Exhibit 10.11 to our Annual Report on Form 10-K for the fiscal year ended December31, 2001)

 

 

10.11*

Executive Employment Agreement, dated as of February 16, 2001, betweenSummus, Inc. and Gary E. Ban (incorporated by reference to Exhibit 10.12 to our Annual Report on Form 10-K for the fiscal yearended December 31, 2001)

 

 

10.12*

Executive Employment Agreement, dated as of February 16, 2001, betweenSummus, Inc. and Robert S. Lowrey (incorporated by reference to Exhibit 10.15 to our Annual Report on Form 10-K for the fiscal yearended December 31, 2001)

 

 

10.13*

Lease Agreement, dated as of October 15, 1999, as modified on March 23, 2000 and June 9,2000, between Phoenix Limited Partnership of Raleigh and Summus, Inc. (incorporated by reference to Exhibit 10.31 to our Form 10filed on July 5, 2001)

 

 

10.14*

Lease Agreement, dated as of August 12, 1999, between Phoenix Limited Partnership ofRaleigh and Summus, Ltd. (incorporated by reference to Exhibit 32 to our Form 10 filed on July 5, 2001) 
 
10.15*

Lease Modification Agreement Number 1, dated as of December 22, 1999, between PhoenixLimited Partnership of Raleigh and Summus, Ltd. . (incorporated by reference to Exhibit 33 to our Form 10 filed on July 5,2001) 
 
10.16*

Summus, Inc. Invention Awards Plan, effective October 30, 2000 (incorporated by referenceto Exhibit 10.40 to Amendment No. 1 to our Form 10 filed on September 28, 2001)
 
10.17*

Master Porting Agreement, dated July 27, 2001, between Summus, Inc. and SamsungElectronics America (incorporated by reference to Exhibit 10.41 to Amendment No. 2 to our Form 10 filed on October 31,2001)
 
10.18*

Alternative Compensation Plan, adopted as of August 1, 2002 (incorporated by reference toExhibit 10.19 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2002)   .

 

 

14.1

Code of Ethics

 

 

21.1

Subsidiaries of Summus – None

 

 

23.1

Consent of Ernst & Young LLP
 
31.1

Rule 13a-14(a)/15(d)-14(a) Certificate of Gary E. Ban, Chief Executive Officer

 

 

31.2

Rule 13a-14(a)/15(d)-14(a) Certificate of Donald T. Locke, Chief FinancialOfficer

 

 

32.1

Section 1350 Certificate of Gary E. Ban, Chief Executive Officer
 
32.2

Section 1350 Certificate of Donald T. Locke, Chief Financial Officer