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                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934 (FEE REQUIRED)

For the fiscal year ended December 31, 1999

                                       OR

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934 (NO FEE REQUIRED)

For the transition period from ____________________  to  ____________________

                           Commission File No. 0-28348
                                               -------

                              DBS INDUSTRIES, INC.
                 (Name of small business issuer in its charter)

          Delaware                                       84-1124675
          --------                                       ----------
(State or other jurisdiction of                          (I.R.S. Employer
incorporation or organization)                           Identification No.)

100 Shoreline Highway, Suite 190A    Mill Valley, California      94941

(Address of principal executive                                  (Zip Code)
offices)

                    Issuer's telephone number: (415) 380-8055

--------------------------------------------------------------------------------

Securities registered under Section 12(b) of the Exchange Act:  None

Securities registered under Section 12(g) of the Exchange Act: Common Stock, par
value $.0004 per share


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         Indicate by check mark whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.

         YES    X       NO
             ------
         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is contained herein, or will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]

         Issuer's revenues for its most recent fiscal year:  $ -0-.

         As of March 13, 2000, the aggregate market value for the 13,590,331
shares of the common stock, par value $.0004 per share, held by non-affiliates
was approximately $61,580,508.

         The number of shares outstanding of registrant's only class of Common
Stock, as of March 13, 1999, was 14,376,187 shares of its common stock, par
value $.0004 per share.

                      DOCUMENTS INCORPORATED BY REFERENCE:

         Certain exhibits required by Item 13 have been incorporated by
reference from the Company's previous Form 10-KSBs, Form 8-Ks, and its
Registration Statement on Forms SB-2.

         Information called for by Items 9 through 12 of Part III have been
incorporated by reference to the Company's Proxy Statement for its annual
meeting of shareholders to be filed within 120 days of its fiscal year end.

         Exhibit Index is located at Page 28.


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                                     PART I

                           FORWARD-LOOKING STATEMENTS

         This report contains forward-looking statements, as that term is
defined in the Private Securities Litigation Reform Act of 1995, in the items
entitled "Business," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and elsewhere. These statements relate to
future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential" or "continue" or the negative of these terms or other
comparable terminology. These statements are only predictions and involve known
and unknown risks, uncertainties and other factors, including the risks set
forth below under "Risk Factors," that may cause our or our industry's actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements.

         Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. Except as required by
applicable law, including the securities laws of the United States, we do not
intend to update any of the forward-looking statements after the date of this
report to conform these statements to actual results.


ITEM 1.  BUSINESS

GENERAL

         DBS Industries, Inc. ("DBSI" or "We" or the "Company") is a
telecommunications company dedicated to providing low-cost satellite-to-Internet
data messaging to and from remote locations. DBSI is the only company currently
licensed by the Federal Communications Commission (through the E-SAT license) to
provide commercial two-way data messaging using store-and-forward
satellite-based communications system using Code Division Multiple Access
technology and low-earth-orbiting satellites. We expect to begin providing our
data messaging services, currently marketed under the "NewStar" name, during
2002.

         The Company is a Delaware corporation, formed in 1989, with principal
executive offices located in Mill Valley, California. The Company has conducted
its principal operations from its office in California since completing a share
exchange reorganization with DBS Network in 1992. Since 1994, our focus has been
to pursue business opportunities in satellite telecommunications. We began this
pursuit originally by purchasing interests in direct broadcast satellite
licensees. We had an interest in Direct Broadcast Satellite Corporation that was
subsequently acquired by EchoStar Communications Corporation ("EchoStar"). In
addition, we held an equitable interest in Continental Satellite Corporation.
During 1997, we sold our last indirect interest in a direct broadcast satellite
licensee and agreed to settle litigation involving our equitable interest in
another direct broadcast satellite licensee.

         Prior to our decision to apply for the E-SAT license discussed
below, we were developing hardware and software to enhance data collection
and transmission for utility companies. In the course of this development, we
investigated the effectiveness and viability of low-earth-orbit satellites
for collecting and transmitting data from fixed meters. These satellites are
often called "Little LEO satellites - "LEO" is shorthand for low-earth-orbit
satellites, and "Little LEO" is shorthand for low-earth-orbit satellites
operating in this lower radio band. The success of these tests led us to
believe that this technology could offer utilities lower data collection
costs and enhanced energy management through two-way

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communications with utility meters.

         As a result, we formed E-SAT, Inc., a Colorado corporation, in
partnership with EchoStar and on November 1994 applied for a Federal
Communications Commission ("FCC") license. On March 31, 1998, the FCC issued
a license to E-SAT to launch and operate a Little LEO satellite system. (See
"Regulatory Environment"). Pursuant to the initial formation agreement for
E-SAT, we hold 20% of the capital stock of E-SAT and EchoStar holds the
remaining 80%. In July 1999, we executed an agreement to acquire an
additional 60.1% from EchoStar, to bring our total ownership of E-SAT to
80.1% (See "Ownership in E-SAT"). This transfer is subject to the approval of
the FCC.

         In addition to E-SAT, we established two other subsidiaries: NewStar
Ltd. and Global Energy Metering Service, Inc.

         -    We formed NewStar Ltd., a Bermuda corporation, in 1998. It is a
              wholly owned subsidiary organized to participate in the
              construction, operation and marketing of our system.

         -    We formed Global Energy Metering Service, Inc., a Delaware
              corporation, in 1994. It is a wholly owned subsidiary organized to
              provide us with early market studies and management support for
              the NewStar System design. It is now inactive and does not engage
              in any business activity.

BUSINESS STRATEGY

         The key components of our business strategy include the following:

         -    PROVIDING A RELIABLE, WORLDWIDE TWO-WAY DATA COMMUNICATIONS
              NETWORK BASED ON EXISTING TECHNOLOGY. We believe that, by
              incorporating existing and proven technologies such as CDMA
              communications technology and a store-and-forward design into the
              NewStar System and by using six Little LEO satellites in polar
              orbits, we will be able to provide reliable, global, two-way data
              and messaging communications services. The distribution of our
              satellite constellation in polar orbits is designed to provide us
              access to all of the earth's populated land mass approximately
              every hour with each satellite, reducing the potential risks
              from the loss or outage of one or more satellites.

         -    OFFERING A LOW-COST SERVICE. We believe that the NewStar System's
              relatively low cost to design, construct, launch and operate,
              together with lower-powered, relatively inexpensive ground
              transceivers, will allow us to provide data messaging services to
              customers in hard-to-access or remote locations at substantially
              lower rates than competing low-Earth orbit systems. We have
              designed our system specifically for the two-way communication of
              short messages, using fewer satellites than competing near-real
              time low-Earth orbit systems. Our system should utilize less
              complex and less expensive components than those required for
              larger satellite systems designed to carry voice, video and
              high-intensity data traffic. Competing Little LEO systems using
              the older TDMA communications technology will require more
              satellites and more gateway earth stations than the NewStar
              System. Because we have relatively inexpensive satellites and a
              relatively low-cost ground infrastructure, we believe that we will
              be able to offer a more affordable service for our targeted
              markets than competing systems.

         -    OFFERING A LOW-COST GROUND TRANSCEIVER. Using CDMA communications
              technology and an Application Specific Integrated Circuit ("ASIC"
              technology) is expected to allow us to produce smaller and
              lower-cost ground transceivers than competing systems. We believe
              that our ground transceivers will cost less than competing
              systems' transceivers, providing us with a competitive advantage
              in the marketplace.


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         -    CAPITALIZING ON NOT BEING THE FIRST TO MARKET. We believe we have
              learned a great deal from earlier commercial satellite operators
              whose services have not developed as they may have anticipated.
              This experience has provided us with the ability to market what we
              believe is a superior system using, among other things, the CDMA
              technology and lower cost transceivers, to help differentiate our
              services from those of our competitors.

         -    CAPITALIZING ON THE BARRIERS TO ENTRY INTO OUR MARKETPLACE. The
              primary barrier to entry into the Little LEO satellite service
              market in the U.S. is the acquisition of an operating license
              from the FCC. Before the FCC issues any licenses to additional
              entities, it must allocate an additional portion of the frequency
              spectrum for use, which we do not expect to happen in the near
              future.

         -    DIRECTLY MARKETING TO LARGE INDUSTRIAL CUSTOMERS AND GOVERNMENTAL
              ENTITIES. We believe that marketing directly to large industrial
              customers and governmental entities will ensure greater customer
              service and support in each geographic region or targeted market
              than will value-added resellers, and will reduce our selling and
              administrative expenses for bringing the NewStar System to market.
              Outside of the U.S., it will also aid us in securing any necessary
              local regulatory and other approvals.

         -    CAPITALIZING ON THE COMMITMENT AND EXPERTISE OF OUR STRATEGIC
              PARTNERS. We have successfully assembled a group of investors whom
              we believe are highly qualified strategic partners. We negotiated
              equity investments totaling $10 million: $5 million by Eurockot
              Launch Services (our launch service provider), and Surrey
              Satellite Technology Limited (our satellite manufacturer); and
              an additional $5 million by Alcatel Space Industries, our
              end-to-end system prime contractor, which is contingent on our
              bringing into effect the prime contract effective date. Due
              to delays in our financing, we did not meet the milestone
              payment necessary to establish the "Effective Date of
              Contract" and, as of March 27, 2000, we continue to be
              overdue on this payment requirement (see "Development
              Contract Commitments").

MILESTONES ACHIEVED

         Since our inception, we have achieved the following milestones:

         -    DEVELOPMENT OF THE SYSTEM. We initially conducted research and
              testing to develop our NewStar System design and were successful
              in integrating our satellite transmitter and antenna completely
              within a utility meter.

         -    COMPLETE PROOF-OF-CONCEPT TRIALS. In 1995, we successfully
              completed our proof-of-concept demonstrations with 36 electric and
              natural gas utilities.

         -    GRANTING OF FCC LICENSE. On March 31, 1998, E-SAT, Inc. was
              issued a license by the FCC to provide Little LEO satellite
              services in the U.S.

         -    COMMENCED CONSTRUCTION OF THE SATELLITES. On March 31, 1999, we
              signed a contract with Surrey Satellite Technology Limited for the
              construction of our constellation of six Little LEO satellites. We
              have assigned this contract to our prime contractor, Alcatel Space
              Industries.

         -    ENGAGED A LAUNCH SERVICE PROVIDER TO DELIVER OUR SATELLITES INTO
              ORBIT. On March 31, 1999, we signed a contract with Eurockot
              Launch Services GmbH, for two launches. Two launches are currently
              expected to occur in 2002, each for a set of three satellites. The
              total contract price for the two launches is $30.0 million.

         -    ACQUIRED CONTROLLING INTEREST, SUBJECT TO FCC APPROVAL, OF THE FCC
              LICENSE. On July 31, 1999, we signed a contract with EchoStar DBS
              Corporation which will increase our ownership in our subsidiary
              E-Sat, Inc. to 80.1%. EchoStar will have the right to use 20% of
              the NewStar System's communications capacity. (See "Risk
              Factors - Transfer of Control of E-SAT, Inc. to Us is Subject
              to FCC Approval").


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         -    ENTERED INTO AN AGREEMENT WITH AN END-TO-END PRIME CONTRACTOR FOR
              THE NEWSTAR SYSTEM. On October 8, 1999, we signed a contract with
              Alcatel Space Industries for the final design, construction and
              delivery to the launch site of six Little LEO satellites. This
              agreement also includes the final design, construction and
              delivery of the ground infrastructure, including the gateway earth
              station, mission center, satellite control center, ground
              communications network and ground-based transceivers to be
              installed into devices, like utility meters. Alcatel is also
              responsible for providing in-orbit testing of the NewStar System.
              The total contract price for the end-to-end system is $88.5
              million. Either party has the right to terminate this agreement
              under certain circumstances. We have paid $2 million in
              construction payments to Alcatel, and have not yet made the
              milestone payment necessary to establish the "Effective Date of
              Contract." (See "Business Strategy" and "Risk Factors -
              Development Contract Commitments")

         -    NEGOTIATED EQUITY INVESTMENTS IN US BY ALL OF OUR STRATEGIC
              PARTNERS. We negotiated equity investments totaling $10 million
              Alcatel Space Industries (the investment by Alcatel is still
              pending, see "Risk Factors"), Eurockot Launch Services and Surrey
              Satellite Technology Limited.

         -    ORGANIZED OUR RISK MANAGEMENT THROUGH INSURANCE. On July 14, 1999,
              we engaged Frank Crystal and Co. and its subsidiary, International
              Space Brokers ("ISB"), as our exclusive risk management advisors
              and insurance brokers for both space and ground segments.


TARGET MARKETS

         We have designed our system, called the NewStar System, to provide low
cost, two-way data messaging services to industrial customers throughout the
world who need regular, but not real-time, information. By focusing on the
non-real-time market (where data collection is not triggered by a real-time
event such as an emergency condition, and delay between data collection and
transmission to the customer has insignificant business consequence), we are
able to substantially lower the costs of our system, and therefore lower the
price to the customer. By focusing on collecting data that is in remote or
hard-to-access locations, we reduce our competition from terrestrial
technologies (e.g., cellular communications) who cannot justify the
infrastructure expense in each remote location, and we increase the value
offered to the customer as their costs are highest in these areas.

         Two-way communication capabilities can substantially reduce customer
costs while enabling new customer applications such as initiating remote
diagnostics and remote turn-on/turn-off of electric meters. This market niche
represents over a billion potential units worldwide and a multi-billion dollar
market for DBSI.

         Our initial focus is on energy meters in remote locations. One of the
Company's target markets is the U.S. electric and natural gas utilities,
particularly their high-cost-to-read metering segment which historically
required such "meter reading" to be conducted by utility personnel. This labor
intensive activity presents logistical issues such as (i) significant travel
time to a meter site; (ii) rugged terrain; (iii) physical risk; (iv) restricted
sites; (v) environmental issues; and (vi) mis-reads requiring additional site
visits, all of which can contribute to higher costs for utilities. Our messaging
services can deliver benefits such as:

         -    The cost to gather data from hard-to-access meters is greatly
              reduced. We expect to charge significantly less than the costs to
              utility companies of sending meter reading personnel out to each
              of those difficult to reach locations.

         -    Planning and decision-making is improved through greater and more
              timely availability of their consumers' energy-related
              information.

         -    Estimated billing is eliminated.


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         -    Service connects and disconnects can be scheduled and performed
              automatically.

         -    Value added features are available such as meter diagnostics,
              tamper detection, outage reporting, and power quality information.

         In the U.S., the emergence of automatic meter reading ("AMR") as an
accepted technology and the deregulation of the utility industry in a number of
states - forcing utilities to focus on all aspects of cost of service and in
some cases to compete to retain the meter reading activity - has provided a
foundation for us to market our services. In the U.S. electric utility market
alone, there are over 160 million meters, of which over 13 million are in remote
locations.

         A significant portion of our potential market for services is in
countries who do not broadly monitor energy consumption. For these countries,
implementing or expanding coverage of metering is of significant strategic and
economic benefit, as this is a critical component of implementing the energy
infrastructure that is important to many forms of foreign investment. By working
with these countries as they develop their services and providing them with a
low-cost alternative to traditional meter reading methods, we believe we can
succeed in becoming an integral part of their utility infrastructure.

         Other significant markets segments for our non-real-time, low-cost,
two-way messaging services include:

         -    PROPANE TANKS: Propane tanks represent another AMR opportunity,
              where metering fuel levels for replenishment benefit customer and
              distributor alike. The distributor enjoys a paradigm shift. Under
              the current approach, customers can be invoiced only on fuel
              delivery. Metering enables monthly billing based on actual
              consumption, which improves the distributor's cash flow and
              creates an opportunity for fuel arbitrage. Since the consumer no
              longer pays upon delivery, the distributor can fill customer tanks
              in the summer, when fuel prices are at their lowest. The consumer
              also avoids more than just the inconvenience of running out of
              fuel; they also reduce the safety issues associated with
              re-lighting the pilots on their appliances.

         -    OIL AND GAS WELLHEADS: In the energy sector, data from
              particularly remote and hard-to-access oil and gas wellheads can
              be collected electronically, providing material savings in costs
              per read. Some of these wellheads are located in areas that are
              not only extremely remote, but are also high-risk, where the
              physical safety of the meter reader is a real concern. AMR, in
              addition to eliminating the personal safety risk, also creates the
              opportunity to aggregate data internationally - but only if the
              service provider has global coverage.

         -    CATHODIC PROTECTION ALERTS: Monitoring for cathodic protection,
              flow control and leakage from gas pipelines--is another
              application requiring periodic data transmission from sensors that
              are generally located in isolated areas. Most of the cathodic,
              flow control and leakage sensors around the world are read
              manually, which is a tedious process--frequently using
              helicopters--for typical pipeline terrain. Given the cost of
              product flowing through the pipeline and the ecological impact of
              a pipeline failure, energy companies are keenly motivated to
              quickly identify the source of the problem. Although the number of
              sensors required per linear mile varies upon the specific
              geography, an average of two sensors per mile is normal.

         -    VENDING MACHINES: Vending machines can use AMR for inventory and
              cash control. By collecting data from each machine on a timely
              basis, distributors can deliver the right product to the right
              machine at the right time, thereby improving sales, the
              productivity of their route personnel, and greatly simplifying the
              cash reconciliation process. While it is important to


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              recognize that most vending machines are not located in
              hard-to-access places, a system that offers both ease-of-use and
              complete geographic coverage offers significant benefits to the
              distributor.

         -    ENVIRONMENTAL AND AGRICULTURE: The waste disposal industry, faced
              with an increased public awareness of pollution problems, is
              required by U.S. Federal, state, and local governments to closely
              monitor air and water quality at all waste disposal sites. Reading
              data from these locations and reporting it to both operating and
              regulatory agencies is another service our system is capable of
              performing. In addition, we believe that existing irrigation
              systems can become far more efficient through timely monitoring of
              usage data.

         We are currently focusing our efforts on marketing directly to large
industrial customers and governmental entitities rather than through value-added
resellers. We believe this will ensure greater customer service and support in
each geographic region or targeted market and will reduce our selling and
administrative expenses for bringing the NewStar System to market. Outside of
the U.S., it will also aid us in securing any necessary local regulatory and
other approvals.


DESCRIPTION OF SYSTEM

         In response to customer requirements, DBSI developed a technology to
meet the needs of this marketplace. Our system is designed to minimize
infrastructure investment and maximum spectral efficiency, including (1) a small
constellation of Low Earth Orbiting (LEO) satellites reaching markets beyond
terrestrial technologies; (2) Code Division Multiple Access (CDMA) technology,
which has superior noise tolerance and dramatically reduces power requirements
and cost; (3) store-and-forward communications technology to reduce the number
of ground stations; and (4) secure internet distribution of data to customers.


NEWSTAR SYSTEM

         The radio terminal unit (RTU) attaches to the customer's meter device
and transmits data to orbiting Low Earth Orbit (LEO) satellites. From these
LEO's, the data is then transmitted to our Ground Station, which sorts the data
and transmits the final data files, via the Internet, to our customers.
Inversely, the two-way service also allows our customers to send instructions,
messages, and updates to their remote meters.


                               [GRAPHIC OMITTED]


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         1.       SPACE SEGMENT

         The initial constellation to be launched will consist of six
satellites. The Company plans to initially launch three satellites on a single
launch vehicle in a circular, near polar orbit at an altitude of approximately
550 miles and a 99 degree inclination angle. At this altitude, there will be
fourteen revolutions per satellite per day, taking about 100 minutes per orbit.
After the initial three satellites are deployed and become operational, and the
system is established, an additional three satellites will be deployed in a
second near-polar orbital plane within FCC guidelines. These Little LEO
satellites, which will weigh about 110 kg each, will be almost constantly
illuminated by the sun, thereby significantly reducing battery usage.
Supplemental battery power will be required only for power load leveling,
occasional brief eclipse periods and contingencies. Based on the current design,
we estimate that each satellite will operate for a period of five years.

         The satellites consist of two functional segments--the "Platform" and
the "Payload". Put simply, the platform is the structure part of the satellite.
The payload is the radio frequency equipment on board the satellite that allows
it to communicate with earth-based transceivers. The platform provides the
payload with the power and thermal control, allowing it to operate and perform
its mission. The platform provides the attitude control in order to keep the
payload antenna pointing towards the earth. Orbit determination and control is
performed by the platform in order to maintain the proper constellation
configuration.

         We are licensed by the FCC to operate from the Earth to Space in the
148.0000 - 148.905 MHz band, from Space to the Earth in the 137.0725 - 137.9275
MHz band. The communications plan for our system will utilize Direct Sequence
Spread Spectrum Multiple Access (DS-SSMA) transmission for service and feeder
links. This modulation technique is designed to allow the communications to
disseminate between messages and the background noise emanating into space. We
are the only commercial LEO operator licensed in the U.S. to implement spread
spectrum CDMA into its communications protocol. CDMA technology reduces the
power requirement for the ground terminal and provides another competitive
advantage by its ability to operate within an inherently noisy VHF-band.

         2.       GROUND SEGMENT

         Rather than using traditional "bent pipe" technology, transmitting the
data to a ground station as soon as it is received, the non-real-time nature of
our market allows us to use a store-and-forward design. That is, our satellites
are designed to receive the information from terminals on the ground, store it
in memory and hold all of the data until they pass over a "Gateway Earth
Station." This allows us to use fewer ground stations, reducing costs and radio
frequency licensing and coordination requirements. We currently intend to locate
our initial Gateway Earth Station (GES) on Svalbard Island in Spitzbergen,
Norway, and are evaluating certain sites in Alaska for additional service.

         The Mission Control Center manages the collection and retrieval of
data. It will interface with the Gateway Earth Station via the Satellite Control
Center, which will provide overall operational control of the satellites. The
Mission Center location is currently in review; the Satellite Control Center is
currently planned to be located in the United Kingdom.

         Secure Internet communication with customers is a crucial part of the
NewStar System. Data collected or delivered will utilize the Internet as a
global, cost-effective vehicle to disseminate data and maximally automate the
customer servicing system. Data will lack meaningful descriptors or customer
identification and so should have no meaning if intercepted, but may also be
encrypted.


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         3.       TERMINAL

         Also on the ground, our remote terminal unit ("RTU" or "terminal") will
connect to a device such as an electric utility meter and allow that device to
send and receive signals to and from our system. The terminal provides the
communication link between the meter and our satellites. This particular
communications link is called the communications "Service Link". A relatively
low-cost terminal is a key success factor for this business plan. Therefore, we
will seek to strictly control the development and manufacturing of the terminal.

         The complete terminal will consist of two parts, those being the "Core
Engine" and the "Fixed Asset Interface Module". The Core Engine is principally
comprised of a "Base Band" and a Radio Frequency section. The base-band section
utilizes a digital signal processor used to impose the Direct Sequence Spread
Spectrum CDMA modulation code to the incoming bit stream from the client device.
The Radio Frequency (RF) section is used to convert the base-band signal to the
carrier frequency allowing the signal to be transmitted via an antenna into
space within the parameters of the FCC license. The Core Engine will include a
programmable controller unit. We intend that the Core Engine will be
standardized and therefore the design and manufacturing of the engine will
incorporate the cost-saving benefits of "Application Specific Integrated
Circuitry" (ASIC). This silicon process allows us to manufacture the terminal
chip sets at the lowest cost to the client. The second component of the terminal
is the Fixed Asset Interface Module (FAIM) that will be optimized for the
specific application (i.e., electric-meter, vending machine, propane tank, etc.)
and will contain all the application-specific functions required to interface a
client device with the Core Engine. The FAIM will contain any necessary power
conditioning components to allow reliable communication between terminal and the
satellites.

         During 1998, we worked with SAIT Radio Holland SA ("SAIT") to
perform studies on antennas for the proposed RTU, and to develop and test RTU
prototypes. Terminal development was included as a cost-plus item under our
Prime Contract with Alcatel in 1999. We have not yet identified a main
subcontractor for the engineering, development and provision of hardware and
software for terminals, or for the manufacture of terminals.

         4.       PROOF-OF-CONCEPT DEMONSTRATIONS

         The technology of using Little LEO satellites has been in existence for
over 40 years and has been used extensively in weather satellite applications
worldwide. The commercial use of Little LEO satellites is in its development
stage.

         To test our technology, we integrated the first satellite transmitter
and antenna completely within an electric utility meter and conducted
proof-of-concept demonstrations with 36 electric and natural gas utilities that
demonstrated LEO satellite technology as a viable method to collect data from
hard-to-access locations.

         GEMS, a wholly owned DBSI subsidiary, was formed in December 1994 to
develop commercial service applications utilizing Little LEO satellite
technology. We conducted a proof-of-concept trial for Pacific Gas & Electric Co.
in California, in which data from several natural gas wellhead meters was
collected and transmitted by Little LEO satellites to the customer. This trial
was completed in April 1995. Subsequently, a series of proof-of-concept
demonstrations were conducted in conjunction with ABB Power T&D Company, Inc.
("ABB"), in which prototype satellite radios (RTU's) and electric meters were
installed at 34 electric utilities in the continental U.S. and two international
utility companies in South America and Canada. Typical trial demonstrations
lasted for a 30-day period, and the demonstrations were completed in late 1997.
These early trials utilized the Argos System, a satellite location and data
collection system operated and controlled by the Centre National d'Etudes
Spatiales (France) and the National Oceanic and Atmospheric Administration
("NOAA").

         These tests demonstrated the ability of Little LEO satellite
communications to communicate to electric


                                       10
<PAGE>

utility meters.

         5.       IMPORTANCE OF CDMA/DSSS TECHNOLOGY

         Due to the continuing growth of electrical and electronic equipment,
such as personal paging systems that incorporate wireless communication
technology, the radio frequency-spectrum has become crowded or "noisy".
Commercial applications demand reliable communication systems. This objective
is harder to achieve with conventional solutions because of numerous wireless
systems creating more noise in the frequency bands of operation. To minimize
the impact of noise and interference on the data being transmitted, we are
implementing Code Division Multiple Access/Direct Sequence Spread Spectrum
("CDMA/DSSS") modulation techniques. CDMA/DSSS is designed to enable our
system to provide high functionality in a noisy radio frequency environment
and achieve those particular data transmission objectives.

         With most conventional modulation techniques, energy concentration is
maximized for a narrowband transmission channel. While narrowband solutions opt
for a single carrier channel, the transmitted signal must be strong enough to be
recognized over the background noise. Therefore, terminals operating in a
narrowband technique must have relatively high power capability. CDMA/DSSS
spreads the data signal over the entire band of operations reducing the power
required by a terminal to transmit data to a satellite. We are presently the
only commercial Little LEO system licensed in the U.S. to implement CDMA/DSSS in
its communications protocol. We believe CDMA/DSSS is a strategic advantage over
competing systems to effectively transmit data messages.

         6.       COST OF SYSTEM

         We expect that the aggregate cost to construct and launch the NewStar
System into commercial service will be approximately $120 million, of which
approximately $12 million had been spent through 1999.

DEVELOPMENT STRATEGY

         Our development strategy includes aligning ourselves with partners who
have (1) shown expertise in the development and delivery of data telemetry
systems and services to clients who may operate internationally; (2) are willing
to enter into fixed-cost agreements; and (3) who will demonstrate their
alignment with and commitment to our project through equity investment.

         On March 31, 1999, the Company entered into a contract with Surrey
Satellite Technology Ltd. of the U.K. to design and construct the six
satellites for our system.

         On October 8, 1999, we signed a contract with Alcatel for the final
design, construction, and delivery to the launch site of our constellation of
six LEO satellites, using Surrey Satellite as a subcontractor, and for the final
design, construction and delivery of the ground infrastructure, including the
gateway earth station, mission center, satellite control center, ground
communications network, and the ground-based transceivers to be installed into
fixed assets such as electric utility meters. The total contract price for the
end-to-end system is $88.5 million. (See "Business Strategy" and "Risk
Factors - Development Contract Commitments").

         Currently, Alcatel is responsible for the final design, construction,
and delivery to the launch site of our constellation of six LEO satellites,
using Surrey Satellite as a subcontractor, and for the final design,
construction and delivery of the system infrastructure, including gateway earth
station, the ground communications network, the mission control center, and the
ground transceiver.

           The Company entered into a launch reservation agreement with Eurocket
Launch Services GmbH ("Eurockot") during 1997. Under the terms of the launch
reservation agreement, Eurockot reserved for E-SAT a launch opportunity on a
launch vehicle at the Plesetzk, Russia launch site for two dedicated, triple
satellite


                                       11
<PAGE>

launches. On March 31, 1999, the Company entered into a formal launch service
contract with Eurockot. The first three satellites, when constructed, are
expected to be launched on a single Eurockot launch vehicle in 2002.

OWNERSHIP INTEREST IN E-SAT

         E-SAT was incorporated in 1994 and is owned 20% by the Company and
80% by EchoStar. E-SAT was formed for the purpose of acquiring an FCC license
to develop, construct and operate its E-SAT satellite system. In July 1999,
the Company and EchoStar agreed to restructure E-SAT in order to allow the
Company to acquire an additional 60.1%, to bring its total ownership of E-SAT
to 80.1%. In this agreement, EchoStar will have a 20% undivided interest in
the satellite transmission capacity associated with the FCC E-SAT license.

         This acquisition of a majority interest in E-SAT is subject to FCC
approval as a "change of control." (See "Risk Factors - Transfer of Control
of E-Sat, Inc. to Us is Subject to FCC Approval").

REGULATORY ENVIRONMENT

         1.       U.S.

         All commercial non-voice, non-geostationary mobile-satellite service
"NVNG-MSS" or "Little LEO" such as E-SAT's satellites in the U.S. are subject to
the regulatory authority of the FCC. Little LEO operators must obtain
authorization from the FCC to launch and operate their satellites and to provide
permitted services in assigned spectrum segments.

         In November 1994, E-SAT filed an application with the FCC for a license
to develop a commercial Little LEO satellite system for data collection and
transmission. E-SAT was one of five applicants requesting approval for
essentially the same frequency band but proposing a different use. The five
applicants mutually agreed upon a spectrum sharing plan (the "Joint Proposal")
which requires the applicants to share an uplink and downlink frequency band
with other satellite systems. In October 1997, the FCC released a Report and
Order which concluded that with use of appropriate transmission techniques,
proper system coordination, the time-sharing of frequencies and the adoption of
the Joint Proposal, there was sufficient spectrum to license all five
applicants. Thereafter, E-SAT filed an amendment conforming its application to
the guidelines adopted by the FCC Report and Order.

         On March 31, 1998, the FCC approved E-SAT's application for a Little
LEO satellite license. Under the license, E-SAT is authorized to launch and
operate six Little LEO satellites to provide a two-way, low-cost messaging
service in the U.S. in the 148-148.905 MHz for service and feeder uplinks,
and the 137.0725-137.9725 MHz frequency band for service and feeder
downlinks. For its uplink, E-SAT is licensed to utilize 500 kHz of contiguous
spectrum in the 148-148.855 MHz band that is not shared with the other U.S.
licensees. However, some of this spectrum may be required to be operated
co-frequency with the French S-80 system, based on intergovernmental
agreements between the U.S. and France. E-SAT is licensed to utilize
148.855-148.905 MHz for feeder uplinks. E-SAT will operate in the other 355
kHz of the 148-148.905 MHz band on a co-frequency basis with the following
licensees: LEO One, Final Analysis and ORBCOMM. In the downlink direction,
E-SAT will operate in the band 137.0725-137.9275 MHz co-frequency with NOAA
satellites, ORBCOMM and Final Analysis. E-SAT is obligated to coordinate with
the other U.S. Little LEO licensees and NOAA, coordinate internationally and
engage in consultations as required by Article 14 of the INTELSAT Agreement
and Article 8 of the Inmarsat Convention.

         In order to maintain the validity of the FCC license, E-SAT must
comply at all times with the terms of such FCC license, unless specifically
waived or modified by the FCC. These terms include, among other things,
system construction milestones. In order to comply with the milestone


                                       12
<PAGE>

requirements of the FCC license, E-SAT was required to commence construction
of the first two satellites by March 1999 and the remaining four satellites
by March 2001. On March 31, 1999, we, on E-SAT's behalf, entered into an
agreement with Surrey Satellite for the construction of the Little LEO
satellites, and we notified the FCC on April 8, 1999, that we had met the
first milestone of the license (commencement of satellite construction by
March, 1999). The FCC has neither confirmed nor denied our assertion. Because
of the competitive nature of the Little LEO market, the other U.S. licensees
may challenge in the future our timeliness or ability to meet the conditions
of the license. If the FCC or any competing licensee is successful in
challenging the conditions of the license, the FCC license could be
jeopardized. Further, although we intend to meet future milestone
requirements, no assurance can be given that these or any other requirements
and conditions of the FCC license can be met by E-SAT or us. In the event
that we cannot meet these milestone requirements, and the FCC does not waive
or modify such requirements, E-SAT will lose the FCC license. Such a loss
would have an immediate and significant adverse effect on our financial
position and results of operations. The terms of the FCC license also require
that construction, launch and operation of the NewStar System be accomplished
in accordance with the technical specifications set forth in the FCC
application, as amended, and consistent with the FCC's rules, unless
specifically waived. During the process of constructing the NewStar System,
there may be certain modifications to the design set forth in the FCC
application that may necessitate regulatory approval. No assurance can be
given that such modifications will be approved by the FCC.

         Assuming continued compliance, the FCC license will remain effective
for ten years from the date on which we certify to the FCC that the initial
satellites have been successfully placed into orbit and that the operations of
such satellites conform to the terms and conditions of the FCC license.

         In addition, the NewStar System's ground transceiver to be integrated
with the fixed devices must be approved by the FCC in a single authorization
that, if granted, would apply to all transceivers to be operated in the U.S.

         2.       INTERNATIONAL REGULATIONS

         LANDING RIGHTS. In addition to the FCC license for operation of the
NewStar System in the U.S., we will be required to seek certain "landing
rights" in each country in which our ground transceivers will be located. The
Company intends to utilize international clients, partners or affiliates in
each country to obtain such authority. In the event we are unsuccessful in
obtaining a foreign license in a particular country, we will be able to offer
only one-way (broadcast from the satellite) NewStar System data and messaging
services in such country. Depending on the number of proposed ground
transceivers to be operating in a country, the inability to offer data
messaging services to such country may materially adversely affect our
business plan.

         INTERNATIONAL TELECOMMUNICATIONS UNION COORDINATION. The E-SAT System
operates in frequencies that are allocated on an international basis under the
authority of the International Telecommunications Union ("ITU"). The U.S., on
behalf of various Little LEO service providers, pursued international
allocations of additional frequencies for use by Little LEO systems. In addition
to cooperation through the FCC, E-SAT will be required to engage in
international coordination with respect to other satellite systems, and in some
cases, with terrestrial communication systems. The purpose of this coordination
is to ensure, to the maximum extent feasible, that communication systems will be
able to operate without unacceptable radio frequency interference from other
communication systems. This process, called "satellite coordination," takes
place under the auspices of the ITU and is essentially a first come, first
served process. That is, earlier filings generally establish some priority over
later filings although the ITU encourages applicants to cooperate to enable as
many satellite systems as possible to be implemented. While there can be no
assurance that the NewStar System will successfully complete the international
coordination process, most countries seek to accommodate satellite


                                       13
<PAGE>

systems of other countries and historically, virtually all coordination requests
have been ultimately successful. However, any delays in obtaining international
satellite coordination would result in delays in our offering messaging services
outside the U.S.

         No assurance can be given that the FCC or any other international
organization will make any of the above approvals or licenses. (See "Regulatory
Risks").



COMPETITION

         Competition in the communications industry is intense, fueled by rapid
and continuous technological advances and alliances between industry
participants seeking to use such advances on an international scale to capture
significant market share. At this time, Orbcomm Corp. has a Little LEO in
operation using TDMA "narrow band" communication protocols and a "bent pipe"
satellite system using thirty-eight satellites and numerous gateway earth
stations. In the future, we expect that potential competitors will include other
Little LEO systems, certain geosynchronous or geostationary orbit ("GEO")-based
systems, certain terrestrial-based communications systems, certain LEO satellite
systems operating above 1GHz (so-called "Big LEO" systems) and various
medium-earth orbit ("MEO") systems.

         In addition to the license issued to our subsidiary, four other
entities have been licensed by the FCC to provide Little LEO satellite
services in the U.S., although no other entity has been issued a license to
use CDMA communication protocols AND "store-and-forward" system designs. In
1998, the FCC's International Bureau granted licenses to Leo One USA
Corporation, Final Analysis Communication Services and an additional license
to Orbcomm Corp. Further in 1998, the FCC granted a license to Volunteers in
Technical Assistance to transmit health, research and scientific data on a
delayed basis between developing countries and the U.S.

         Based on published reports, other than Orbcomm's existing TDMA based
system, we do not believe that any of the other proposed Little LEO systems will
be commercially operational in the near term. We believe that we hold a
substantial advantage over these potential competitors by having obtained an FCC
license for the only CDMA based "store-and-forward" Little LEO system in the
U.S. and by achieving international coordination of our designated frequencies
through the ITU. Over the course of the next several years, we expect to obtain
further advantages over these potential competitors by demonstrating that a CDMA
"store-and-forward" system can offer service at lower cost than TDMA based or
"bent-pipe" systems offered by the competition.

         Plans for Little LEO systems have been announced in Australia, Brazil,
France, Russia, South Korea, Tonga and Uganda, although we believe that, without
additional allocations of spectrum in the U.S., these systems will be unable to
offer services in the U.S. nor will they be able to coordinate the use of these
frequencies at the ITU.

         In addition, we believe that we will compete in certain of our
market segments with existing operators and users of certain GEO-based
systems such as American Mobile and Qualcomm, and companies providing
services using the Inmarsat system. American Mobile offers SKYCELL mobile
data services, both satellite only and "dual-mode," i.e., satellite and
terrestrial, through a public data network that can reach both densely
populated urban areas and sparsely populated rural areas. In 1998, American
Mobile acquired Motorola's ARDIS two-way terrestrial-based wireless messaging
network, which complements American Mobile's existing satellite-based voice
and data communications services. This allows American Mobile to offer a
hybrid solution that has the ability, among other things, to serve urban
areas and to penetrate buildings. Qualcomm designs, manufactures, distributes
and operates the OmniTRACS(R) Communications System, a

                                       14
<PAGE>

satellite-based, two-way mobile communications and tracking system that provides
messaging, position reporting and other services for transportation companies
and other mobile and fixed site customers using certain GEO satellites. In
addition, various companies using the Inmarsat system are providing fishing
vessel and other marine tracking applications. We believe that the NewStar
System will have certain advantages over these other systems including worldwide
coverage and lower equipment costs.

         While we do not intend to compete in general with existing and planned
terrestrial-based communications systems, in certain of our market segments we
believe that we may compete with certain of these systems. SkyTel provides
messaging services in cities in the U.S. and is using its messaging network to
provide fixed location services, specifically utility meter reading in urban
areas. Because of the inherent coverage limitations of a terrestrial-based
communications system, we believe that the NewStar System will also complement
these systems, which provide cost-effective services primarily in metropolitan
areas where subscriber densities justify construction of radio towers. Such
systems generally do not have sufficient coverage outside metropolitan areas,
making them less attractive to certain market segments such as the
"hard-to-access" locations that we target. We believe that the NewStar System
will present an attractive complement to tower-based services because it can
provide geographic gap-filler service at affordable costs without the need for
additional infrastructure investment. The NewStar System's ability to serve as a
geographic gap-filler may be reduced, however, as terrestrial-based
communications systems expand their coverage.

         The Big LEO and MEO systems are expected to provide real time,
uninterrupted service. These systems are designed primarily to provide two-way
voice services that require larger, more complex satellites than our satellites
and larger constellations to provide coverage. As a result, the cost of the Big
LEO and MEO systems is significantly greater than those of the NewStar System.
However, the marginal cost on a per-message basis of providing services similar
to those we will offer could be relatively low for a Big LEO or MEO system that
is unable to sell its capacity for voice services. For example, the satellite
system operated by Globalstar, L.P. is expected to utilize a multi-billion
dollar constellation of 48 satellites, as compared with our planned system of 6
satellites with an expected cost of approximately $120 million.

         We may also face competition in the future from companies using new
technologies and new satellite systems. Our business could be adversely affected
if competitors begin operations or existing or new communications service
providers penetrate our targeted markets. A number of these new technologies,
even if they are not ultimately successful, could have an adverse effect on our
future financial condition and results of operations.

EMPLOYEES

         As of December 31, 1999, the Company had 14 full-time employees. The
Company considers its relationship with its employees to be good.


                                       15
<PAGE>

                                  RISK FACTORS

DEVELOPMENT STAGE COMPANY

         We are a development stage company and as of December 31, 1999, we had
no customers. Although we previously earned revenues through the sale of
interests in entities which own direct broadcast satellites licenses, we have
earned no significant operating revenues since our formation. Given our limited
operating history and lack of revenues, no assurances can be given that we will
be able to construct and implement the NewStar System, and, if implemented, to
develop a sufficiently large customer base to be profitable.

INCREASING EXPENSES AND LOSSES

         We expect our operating expenses to significantly increase as the our
system reaches critical stages of development. We recorded operating losses of
approximately $2,996,000 for 1998 and approximately $6,029,000 for 1999, and do
not anticipate any revenues during the year 2000. We expect to continue to incur
substantial and increasing operating losses and negative net cash flow until our
system is developed, deployed and operating in a profitable manner.

NEED FOR FUTURE CAPITAL; ANTICIPATED RESTRICTIVE CONDITIONS

         We currently estimate that we will require approximately $120 million
in capital related to the construction and launch costs associated with our
system. Given the risks in an undertaking of this nature, no assurances can be
given that actual cash requirements will not exceed our estimates. In
particular, additional capital, over and above amounts anticipated, will be
required in the event that we (i) incur unexpected costs in completing the
NewStar System design or encounter any unexpected technical or regulatory
difficulties; (ii) incur delays and additional expenses as the result of a
launch or satellite failure; (iii) are unable to enter into marketing agreements
with third parties or sell our metering services; or (iv) incur any significant
unanticipated expenses. The occurrence of any such events could adversely affect
the ability to meet our business objectives.

         We anticipate that we will depend almost exclusively on long-term
debt and equity financings to pay for our system. No assurance can be given
that capital will be available to us to meet development costs or on terms
acceptable to us. The issuance of additional equity securities by us will
result in significant dilution of the equity interests of the current
stockholders. Selling debt securities such as bonds will increase our
liabilities and future cash commitments. Further it is anticipated that, in
the event of a significant bond placement, bondholders would require that all
of our assets, including our ownership interest in E-SAT, serve as security
for the repayment of the bonds. In the event of a default on such bonds, it
would be unlikely that there will be any assets remaining to be distributed
to equity holders. If we are unable to obtain financing sufficient amounts
necessary to complete our system and on commercially-acceptable terms, our
business and future success will be adversely affected.

                                       16
<PAGE>

DEVELOPMENT CONTRACT COMMITMENTS

         In order to comply with development milestones required by the FCC
license, we have entered into various development contracts including a
satellite construction contract and a satellite launch contract. Entering into
these and other development and service contracts are critical to the overall
development of the NewStar System. The satellite construction and launch
contracts require progress payments of approximately $60 million over the next
12 months. Failure to maintain these contracts would adversely affect our
ability to construct the NewStar System.

         The contract with our Prime Contractor, Alcatel Space Industries,
required a payment at the end of 1999 of approximately $9.1 million in cash
and the equivalent of $5 million in common stock. This payment is necessary
for Alcatel to continue work and trigger an effective date for our full
system development schedule (the "Effective Date of Contract" or "EDC"). As
of March 24, 2000, this payment has not been made, and Alcatel therefore has
the right to consider this contract void. Although Alcatel has
verbally indicated that it does not intend to terminate the Prime Contract,
it therefore has the right to do so. Until EDC, we continue to have a direct
satellite construction contract with Surrey Satellite Technology Limited. At
EDC, this contract would be assigned to Alcatel. Any cancellation or
termination of these contracts could result in loss of the FCC license. (See
"Risk Factors--Need for Future Capital; Anticipated Restrictive Conditions").

TECHNOLOGICAL RISKS

         The design and construction of the NewStar System are subject to risks
associated with a space-based communications system. Although we believe that
the NewStar System is based on sound technology, its design will contain certain
technology that has not been used in a commercial application. Although we will
engage contractors that are experienced in the satellite and communications
industry, we have no experience in developing, constructing, and operating a
data communications system. The failure of the NewStar System to function as
designed, or the failure of system components to function with other components
or to specification could result in delays, unanticipated costs, and loss of
system performance, thereby rendering the NewStar System unable to perform at
the quality and capacity levels anticipated.

         In addition, future advances in the telecommunications industry could
lead to new technologies, products or services competitive or superior to the
products or services to be provided by us. Such technological advances could
also lower the costs of other products or services that may compete with the
NewStar System, resulting in pricing pressures on our products and services,
which could adversely affect our results of operations.

TRANSFER OF CONTROL OF E-SAT, INC. TO US IS SUBJECT TO FCC APPROVAL

         E-SAT, Inc. has been granted an FCC license to construct, launch and
operate six Little LEO satellites to provide two-way, low-cost data and
messaging services in the United States. Currently, we hold a 20% interest in
E-SAT with EchoStar DBS Corporation ("EchoStar") holding the remaining 80%
interest. On July 30, 1999, we reached an agreement with EchoStar concerning
the transfer of control of the E-SAT license from EchoStar to us, subject to
regulatory approval. We intend to file an application with the FCC for their
consent to the transfer of control of E-SAT. As part of the application, we
may be required to demonstrate both technical and financial ability.
Financial ability consists of funding the construction and launch of two
satellites and the financial ability to operate the system for one year. We
do not at this time have the financial ability to complete the transfer of
control, if such financial ability is required. Assuming FCC approval of such
transfer of control, we will hold an 80.1% interest in E-SAT, and EchoStar
will hold the remaining 19.9%. In addition EchoStar will have a 20% undivided
interest in the satellite transmission capacity associated with the FCC
license. In the event that we are unable to obtain control of the FCC license
held by E-SAT, we may be unable to obtain the financing necessary to fulfill


                                       17
<PAGE>

our business objectives. (See "Risk Factors - Need for Future Capital;
Anticipated Restrictive Conditions").

UNSCHEDULED DELAYS

         Delays and related increases in costs in the construction, launch and
implementation of the NewStar System could result from a variety of causes,
including: (i) delays encountered in the construction, integration and testing
of the NewStar System; (ii) launch delays or failures; (iii) delays caused by
design reviews in the event of a launch vehicle failure or a loss of satellites
or other events beyond our control; (iv) further modification of the design of
all or a portion of the NewStar System in the event of, among other things,
technical difficulties or changes in regulatory requirements; (v) our failure to
enter into agreements with marketing providers at the times or on the terms
expected; and (vi) the failure to develop or acquire effective applications for
use with the NewStar System. There can be no assurance that the Little LEO
satellites or the data and messaging services of the NewStar System will be
available on a timely basis, or at all. A significant delay in the completion of
the NewStar System could erode our competitive position, could result in
cancellation of the FCC license, and could have a material adverse effect on our
financial condition and results of operations. (See "Risk Factors - Regulatory
Risks").

LAUNCH RISKS

         Satellite launches are subject to considerable risks, including the
possible failure of the launch vehicle, which may result in the loss or
damage to the satellite or its deployment into an incorrect or unusable
orbit. Furthermore, each launch is expected to carry three Little LEO
satellites. Consequently, an unsuccessful launch could adversely affect
one-half of our planned satellite constellation. We will be obtaining
insurance to cover our exposure to loss in this area, but there is no
assurance that the insurance will cover all incidents. (See "Risk Factors -
Limited Insurance").

         We have entered into a launch services agreement with Eurockot Launch
Services GmbH, Breman, Germany ("Eurockot") providing for two payload launches
from a launch site in Plesetzk, Russia during specified periods. Eurockot has
limited experience in launching commercial satellites. Further, it is
anticipated that any launch must be approved by a governmental agency of the
Russian Federation. No assurance can be given that the launches will be approved
by the Russian Federation or such launches will take place as planned.

POTENTIAL SATELLITE MALFUNCTION

         A number of factors will affect the useful lives of the NewStar
System's Little LEO satellites, including the quality of construction, the
expected gradual environmental degradation of solar panels, the amount of fuel
on board and the durability of component parts. Random failure of satellite
components could result in damage to or loss of a satellite. In rare cases,
satellites could also be damaged or destroyed by electrostatic storms, high
levels of radiation or collisions with other objects in space. Any premature
loss of satellite performance or capacity could have a material adverse effect
on the efficiency of the overall system and the operation of the NewStar System.

LIMITED INSURANCE

         We expect to obtain launch insurance for each of our satellite launches
and have engaged Frank Crystal & Co. and its subsidiary, International Space
Brokers, Inc., Washington, D.C., to provide risk management counsel and
insurance coverage for our planned Little LEO satellite constellation. This
insurance would, in the event of a launch failure, provide funds for replacement
launch satellites. In addition, we expect to obtain satellite replacement
insurance, which would provide funds for rebuilding satellites damaged in
construction, shipment or launch. In the event a covered loss occurs prior to
the next event that would be


                                       18
<PAGE>

subject to any such policy, we will need to satisfy the insurance underwriters
that the technological or other problems associated with the covered loss have
been addressed. The launch and replacement insurance marketplace is volatile and
no assurance can be given that launch or replacement insurance, or both, will be
available to us, or if available, will be available on terms acceptable to us.
We will continue to evaluate the insurance marketplace to determine the level of
risk we are willing and able to absorb internally versus the amount of risk to
be transferred to third parties.

REGULATORY RISKS

         The Company's business is subject to both U.S. and international
regulations and licensing. The E-SAT license has several milestone conditions,
including (1) the completion of construction of the first two satellites by
March 2002 and the launch of those satellites by September 2002, and (2) the
construction and launch of the remaining four satellites by March 2004.
Furthermore, the Company will need to secure "landing rights" in various
countries where it hopes to do business. Failure to secure such foreign rights
would preclude the Company from offering its full services in such countries,
which would adversely affect the Company's anticipated results of operation. In
addition, if the FCC fails to approve our application for consent to transfer
control of the FCC license or if other technological or financial difficulties
arise, we may be unable to meet our obligations under our construction and
launch agreements. Any cancellation or termination of these contracts could
result in loss of one or more license. (See "Regulatory Environment").

UTILITY INDUSTRY ACCEPTANCE

         Our success is largely dependent on whether utility and other
related companies will contract for services utilizing the NewStar System.
Although we have other proposed uses for the data messaging services, utility
companies, such as gas, electrical and water utility companies, remain the
primary focus of our marketing and development efforts. Although we have
demonstrated the ability of Little LEO satellites to read data from ground
transceivers located in meters in proof-of-concept trials with utility
companies, no assurance can be given that we will be successful in completing
the development and commercial implementation of automatic meter reading
("AMR") using the NewStar System. We must complete a number of technical
developments and continue to expand and upgrade NewStar's System capabilities
prior to implementing our AMR services on a full commercial basis. Utility
companies typically go through numerous steps before making final decisions
which can take up to several years to complete.

         Further, AMR utilizing satellite data messaging services is a
relatively new and evolving business. It is difficult to predict the future
growth of the market or the potential size of the market. Utility companies are
testing products from a number of entities developing various communication
technologies. The use of the NewStar System is but one possible solution for
hard-to-access meter sites. No assurances can be given that we will be
successful in achieving the adoption of the NewStar System or to what extent
utilities will employ it. In the event that utility companies do not adopt our
technology, or do so less rapidly than expected, our future results, including
our ability to achieve profitability, will be materially and adversely affected.

         The development of low-cost ground transceivers to collect and
transmit data from fixed devices such as meters will be important in the
development of a broad utility market for NewStar's data messaging services.
Ground transceivers must be manufactured and operated at a low cost in order
to make NewStar's data messaging services attractive to commercial users. It
is expected that the cost of ground transceivers will decline as the volume
of units produced increases. We believe that we can develop a low-cost ground
transceiver which requires less power to operate and will be attractive to
utility and other companies that may be interested in NewStar's data
messaging services. However, there can be no assurance that ground
transceivers can be developed at a cost and with the capabilities that will
attract a large enough commercial subscriber base for us to achieve
profitability.

                                       19
<PAGE>

RELIANCE ON VENDORS AND CONSULTANTS

         We have relied on and will continue to rely on vendors and consultants
that are not our employees to complete the design, construction and
implementation of the NewStar System, to market its data messaging services and
for representation on regulatory issues. While we believe that vendors and
consultants will continue to provide the expertise necessary to complete the
design and construction of the NewStar System, there can be no assurance that
such vendors and consultants will be available in the future, and if available,
will be available on terms deemed acceptable to us.

         In addition, we rely and will continue to rely on outside parties to
manufacture parts and equipment for the NewStar System such as meters,
transceivers, antennas, and other Little LEO satellite related devices. No
assurances can be given that these manufacturers will be able to meet our needs
in a satisfactory and timely manner or that we will be able to obtain additional
manufacturers when and if necessary. A significant price increase, a quality
control problem, an interruption in supply or other difficulties with third
party manufacturers could have a material adverse effect on our plan of
business. Further, the failure of third parties to deliver the requisite
products, components, necessary parts or equipment on schedule, or the failure
of third parties to perform at expected levels, could delay our deployment of
the NewStar System. Any such delay or increased costs could have a material
adverse effect on our business.

DEVELOPMENT OF BUSINESS AND MANAGEMENT GROWTH; KEY PERSONNEL

         We expect to experience significant and rapid growth in the scope and
complexity of our business as we proceed with the development. We will need to
add staff to market our services, manage operations, control the operations of
the proposed satellites, handle sales and marketing efforts and perform finance
and accounting functions. We will be required to hire a broad range of
additional personnel before we begin commercial operations. This growth is
likely to place a strain on our management and operational resources. The
failure to develop and implement effective systems, or to hire and train
sufficient personnel for the performance of all of the functions necessary to
effectively service and manage its subscriber base and business, or the failure
to manage growth effectively, would have a material adverse effect on our
business and financial condition.

         Our performance is substantially dependent on the performance of our
executive officers and key personnel and on our ability to retain and motivate
high-quality personnel. The loss of any of our key personnel, particularly Fred
W. Thompson, President, could have a material adverse effect on our business,
financial condition, and operating results.

COMPETITION

         We will encounter competition from other Little LEO satellite systems,
as well as from an increasingly competitive terrestrial-based communications
industry. The market for collection and transmission of data from fixed devices
such as meters and the potential market for other applications of data messaging
services have led to substantial and increasing competition. Many of our present
and future competitors using Little LEO satellites have begun to address
collecting and transmitting data from the fixed devices for the utility industry
and vending machine industry and have substantially greater (i) financial,
marketing, technical and manufacturing resources; (ii) name recognition; and
(iii) experience than we do. Such competitors may be able to respond more
quickly to new or emerging advancements in the industry and to devote greater
resources to the development, promotion and sale of their products and services.
While we believe that our technology is competitive and that the NewStar System
has been designed to provide a data transmission service at a cost lower than
our competitors' systems, no assurances can be given that such competitors, in
the future, will not succeed in developing better or more cost-effective data
transmission systems.


                                       20
<PAGE>

         In addition, current and potential competitors may make strategic
acquisitions or establish cooperative relationships among themselves or with
third parties that could increase their ability to reach commercial customers or
subscribers of data messaging services. Further, terrestrial-based wireless
communication systems are providing data messaging services to the utility
industry. Such existing and future competition could affect our ability to form
and maintain agreements with utility companies and other customers. No
assurances can be given that we will be able to compete successfully against
current and future competitors, and any failure to do so would have a material
adverse effect on our business.

PENNY STOCK REGULATIONS

         The Securities and Exchange Commission has adopted regulations which
generally define "penny stock" to be any equity security that has a market
price (as defined) less than $5.00 per share or an exercise price of less
than $5.00 per share, subject to certain exceptions. Our securities may be
covered by the penny stock rules, which impose additional sales practice
requirements on broker-dealers who sell to persons other than established
customers and accredited investors (generally, institutions with assets in
excess of $5,000,000 or individuals with a net worth in excess of $1,000,000
or annual income exceeding $200,000 or $300,000 jointly with their spouse).
For transactions covered by this rule, the broker-dealers must make a special
suitability determination of the subscriber and receive the subscriber's
written agreement of the transaction prior to the sale. Consequently, the
rule may affect the ability of broker-dealers to sell our securities and
affect the ability of existing stockholders to sell their shares in the
secondary market.

CERTAIN ANTI-TAKEOVER PROVISIONS

         Our Certificate of Incorporation contains a fair price provision that
requires a certain threshold approval by our board of directors in the event of
a merger, sale of assets or other types of business combinations. In addition,
our board consists of staggered three year terms, and the board of directors is
authorized to issue preferred stock, the terms of which may be determined by the
board of directors. These provisions may have the effect of deterring a change
in control of in our management.

NO DIVIDENDS

         We have not declared or paid any dividends on our Common Stock, and
do not anticipate paying any dividends for the foreseeable future. Further,
it is anticipated that if we obtain bond financing, we will be restricted in
our ability to declare dividends.

FLUCTUATION OF STOCK PRICE

         Our Common Stock is quoted on the OTC Bulletin Board and is thinly
traded. In the past, our trading price has fluctuated widely, depending on many
factors that may have little to do with our operations or business prospects.

DILUTIVE EFFECTS FROM OUTSTANDING WARRANTS AND OPTIONS

         The exercise of outstanding warrants and options will dilute existing
shareholders. As of December 31, 1999, there were outstanding warrants and
options to purchase an aggregate of 6,153,167 shares of Common Stock. The
majority of the options and warrants have exercise prices at less than the
current trading price of our Common Stock. Further, the outstanding options and
warrants may have a detrimental impact on the terms under which we may obtain
financing through a sale of our Common Stock in the future since they may hinder
our ability to raise capital at a higher market price due to the dilutive effect
to new investors. For these reasons, any evaluation of the favorability of
market conditions for a subsequent stock offering must take into account any
outstanding warrants and options.


                                       21
<PAGE>

ITEM 2.  PROPERTIES

         We have leased 4,566 square feet at a monthly rate of $14,845, for our
principal offices at 100 Shoreline Highway, Suite 190A, Mill Valley, California,
on a three-year lease which expires on July 31, 2003. We also have office
locations in Paris and Toulouse in France on short-term leases.

ITEM 3.  LEGAL PROCEEDINGS

         The company is not a party to any legal proceedings. In July 1998, a
complaint was filed in the Superior Court of California, County of Marin, by
Bridge Group (HK) International, Ltd. (the "Bridge Group") against the Company's
president, alleging that the Bridge Group was promised shares of the Company's
common stock. The Company agreed to indemnify its president for any damages or
settlement related to this lawsuit. This case was settled during 1999 by issuing
63,239 shares of the Company's common stock and paying $15,000 to the Bridge
Group.

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

         None.


                                       22
<PAGE>

                                     PART II

ITEM 5.  MARKET FOR COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

PRICE RANGE OF COMMON STOCK

         The following table sets forth the high and low bids for the Company's
Common Stock during each quarter for the past two fiscal year ends as quoted on
the OTC Bulletin Board. The Company's trading symbol is "DBSS."

<TABLE>
<CAPTION>

                                                          Common Stock
                                                          ------------
Quarter Ended                                               High  Low
-------------
<S>                                                        <C>   <C>
December 31, 1999                                           2.25  2.16
September 30, 1999                                          2.56  2.44
June 30, 1999                                               3.00  2.75
March 31, 1999                                              4.97  4.06


December 31, 1998                                           4.25  4.00
September 30, 1998                                          4.63  1.88
June 30, 1998                                               2.88  1.50
March 31, 1998                                              2.32   .50
</TABLE>

         These quotations reflect inter-dealer prices, without retail markup,
mark-down or commission, and may not represent actual transactions.

         As of December 31, 1999, the Company had 14,354,911 shares of Common
Stock outstanding and approximately 443 stockholders of record. This number
does not include stockholders who hold the Company's securities in street
name.

DIVIDEND POLICY

         The Company has not declared or paid any cash dividends on Common
Stock since its inception. The Company currently intends to retain future
earnings, if any, for use in the operation and expansion of the business. The
Company does not intend to pay any cash dividends on Common Stock in the
foreseeable future.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

GENERAL

         We have historically recognized operating costs and expenses primarily
through our twenty percent (20%) interest in E-SAT. However, effective March 31,
1998, we began recognizing all of these costs and


                                       23
<PAGE>

expenses, including expenditures for the development of the Newstar system,
within DBSI.

PLAN OF OPERATION

         Throughout fiscal 2000, we plan to continue the deployment of the
E-SAT license and the construction of our system, subject to our success in
raising adequate financing (See "Risk Factors - Need For Future Capital;
Anticipated Restrictive Conditions.")

         We established a dedicated marketing and sales group in 1999 and plan
to increase our marketing activities during fiscal 2000.

         We seek to satisfy our fiscal 2000 cash requirements by raising new
equity and debt capital, as well as by seeking the exercise of previously issued
third-party warrants and stock options. Through March 24, 2000, we committed to
issue 20,833 shares of the Company's preferred stock in exchange for gross
proceeds of $624,990 in cash.

RESULTS OF OPERATIONS FOR FISCAL YEARS 1999, 1998 AND 1997

REVENUES

         Our Company remains in the development stage and did not generate
revenues in the last three fiscal years ended December 31, 1999, December 31,
1998 or December 31, 1997.

OPERATING EXPENSES

         Total operating expenses in 1999, 1998, and 1997 were $6,028,829,
$2,995,848, and $1,682,277 respectively. These costs are related to marketing
and sales expenses, general and administrative expenses, and research and
development expenses.

         MARKETING AND SALES EXPENSES

         Marketing and sales expenses primarily the costs of personnel
(including non-cash stock compensation) and travel. Marketing and sales expenses
for 1999 were $922,623 (15.3% of operating expenses). No marketing and sales
expenses were incurred in 1998 or 1997. This increase is due to the
establishment of our dedicated marketing and sales group in June, 1999.

         GENERAL AND ADMINISTRATIVE EXPENSES

         General and Administrative expenses include the costs of finance,
legal, administrative and general management functions of DBSI. General and
administrative expenses for 1999, 1998, and 1997 were $4,060,910 (67.4% of
operating expenses), $2,198,701 (73.4% of operating expenses), and $1,472,162
(87.5% of operating expenses) respectively. The increase of $1,862,209 from 1998
to 1999 was primarily due to increased personnel costs arising from the
expansion of the management team, and from non-cash stock compensation of
approximately $760,000. The increase of $726,539 from 1997 to 1998 was primarily
due to approximately $350,000 in stock and cash as settlement of a lawsuit
against an officer of the Company, a compensation expense of $159,000 relating
to options for services provided by consultants, and the expansion of our
business interests in Europe and the U.S.


                                       24
<PAGE>

         RESEARCH AND DEVELOPMENT EXPENSES

         Research and development expenses represent the costs incurred to
develop our system. Research and development expenses for 1999, 1998, and 1997
were, respectively, $1,045,296 (17.3% of total operating expenses), $797,147
(26.6% of total operating expenses), and $210,115 (12.5% of total operating
expenses). The increase of $248,149 in 1999 compared to 1998 is due to the
expansion of our research and development staff in Toulouse, France, and from
non-cash stock compensation of approximately $50,000. The increase of $587,032
from 1997 to 1998 was due primarily to the issuance of the E-SAT license in
April 1998 and the increased engineering and design costs not capitalized by the
Company and associated with meeting the terms of the FCC license and the
development of the satellite system.

         NON-CASH STOCK COMPENSATION

         In order to attract and retain personnel, we have granted options to
purchase 1,913,106 shares of Common Stock at exercise prices ranging from
$0.39 to $2.81 to several employees and service providers. Some of the
exercise prices were below the fair market value of the Common Stock at the
time of grant, resulting in deferred stock compensation of $2,490,337. This
amount is being amortized over the vesting periods of the granted options,
and as a result, $957,755 was recognized as non-cash stock compensation
expense during 1999 in the relevant expense category as described above. No
similar expenses were incurred during 1998 or 1997.

OTHER INCOME AND EXPENSES

         We experienced a non-operating gain of $113,336, consisting solely of
net interest income, for the fiscal year ended December 31, 1999, an increase of
$80,915 over net interest earned of $32,421 for the year ended December 31,
1998. This gain was generated from investment income arising from substantial
fundraising activities during the year ended December 31, 1999. We recorded no
net loss of investees in 1999, as compared to a loss of $100,143 in 1998 and a
loss of $80,975 in 1997. We also recorded no gains or losses on sale of
investments in 1999, compared to a loss in 1998 of $228,323 arising from the
sale of Seimac, and a gain in 1997 of $5,221,063 arising from the sale of
marketable securities.

NET INCOME (LOSS)

         Our net loss for the year ended December 31, 1999, was $5,915,493
compared to a net loss for the year ended December 31, 1998 of $3,293,493 and a
net income for the year ended December 31, 1997 of $3,068,917. The 1997 net
income was due primarily to a one-time gain on sale of marketable equity
securities of approximately $6.2 million offset by operating and non-operating
expenses.

LIQUIDITY AND CAPITAL RESOURCES FOR FISCAL YEARS 1999 AND 1998

         The Company has been in the development stage since its inception
and has not recognized any significant revenues. Our monthly expenses
averaged approximately $300,000 per month during calendar year 1999 for
operating, legal and consulting expenses. However, expenses will continue to
increase during fiscal 2000 with the demands of increased efforts in both
systems and business development. Additional capital will be necessary to
expand operations or continue current operations.

         Traditionally, we have relied on equity and debt placements to finance
our operations. This financing was supplemented from the sale of our interest in
entities that held direct broadcast satellite licenses. We no longer have any
interest in direct broadcast satellite licensees.


                                       25
<PAGE>

         From January 1, 2000 through March 24, 2000, we committed to issue
20,833 shares of the Company's preferred stock in exchange for gross proceeds of
$624,990 in cash. Each share of preferred stock is convertible, at the election
of the holder, into ten shares of the Company's common stock at a conversion
price of three dollars per common share, or based upon the average trading price
of the common stock within a specified period if the common stock is trading at
less than $3.00 per share.

         During 1999, we received proceeds from the sale of common stock
totaling approximately $15 million before stock issuance costs of
approximately $154,000. These transactions included a private placement of
500,000 units at $3.00 per unit for an aggregate amount of $1.5 million with
each unit consisting of one share of Common Stock, and one warrant to
purchase one share of Common Stock at $4.00 per share; a private placement of
50,000 units at $2.50 per unit for an aggregate amount of $125,000 with each
unit consisting of one share of Common Stock, and one warrant to purchase one
share of Common Stock at $3.50 per share; the sale of 1,666,667 shares of the
Company's common stock to two of our European contractors for a total of $5
million; proceeds in the amount of approximately $7.8 million from the
exercise of warrants in exchange for 2.818 million shares of the Company's
common stock; and proceeds in the amount of approximately $786,000 from the
exercise of 675,228 options. These proceeds were used primarily to fund our
satellite construction costs and investing activities.

         During 1998, we conducted a private placement of up to 3 million units
at $2.00/unit for an aggregate amount of $6 million with each unit consisting of
one share of Common Stock and one warrant to purchase one share of Common Stock
at $3.00 per share. The offering closed in October 1998, with the Company
selling 2.4 million units for gross proceeds of $4.8 million before stock
issuance costs of $442,500.

         We had cash and cash equivalents of $282,945 and $1,291,711 as of
December 31, 1999 and 1998 respectively. We had a negative working capital of
$941,527 as of December 31, 1999 and a positive working capital of $233,078 as
of December 31, 1998. Until we are able to develop, construct and operate the
NewStar System and derive revenues therefrom, we must continue to raise cash
from outside sources for operations and for the development of the NewStar
System.

         Net cash used in operating activities for the year ended December 31,
1999 was $3,681,956. This resulted from a net loss of $5,915,493, offset
primarily by (1) non-cash stock compensation of $957,755, (2) the issuance of
options and warrants for services rendered in the amount of $774,298, (3) the
issuance of $324,391 of common stock (63,239 shares) in connection with a
litigation settlement (see "Legal Proceedings"); and (4) an increase in accounts
payable of $204,675 arising from increased marketing and general administrative
activities in the final quarter of 1999.

         Net cash used in operating activities during 1998 was a result of the
1998 loss of $3,293,493 as offset by certain non-cash charges, a loss on sale of
investment in Seimac and the equity in E-SAT losses. Cash expenditures
accelerated in the fourth quarter of 1998 as we increased our level of
development activity relating to the NewStar System which included a $1,000,000
payment to Alcatel. Net cash used in operating activities was $2,972,153 for the
year ended December 31, 1997, which reflects an increase compared to 1996, due
to the payment of accounts payable which accrued during 1996 and were paid in
1997.

         Net cash used in investing activities for the year ended December
31, 1999, was $12,413,265. This was an increase of $10,928,307 over the same
period ended December 31, 1998. Approximately $10.8 million of the net cash
used in investing activities was related to satellite construction payments
made to our satellite contractors in Europe, and approximately $1.5 million
was paid to a consultant to negotiate the terms of an agreement with EchoStar
(see "Ownership Interest in E-SAT").

                                       26
<PAGE>

         Net cash used in investing activities for the year ended December 31,
1998, was $1,484,958. This net cash used represents the difference between the
proceeds from the divestiture of Seimac of $199,940 less cash advances to E-SAT
of $407,292 and approximately $1.3 million in progress payments relating to
satellite construction costs. Net cash provided by investing activities was
$4,183,565 in 1997 as we received proceeds of $3,573,677 in connection with the
divestiture of our interest in Continental Satellite Corporation.

         Net cash provided by financing activities for the year ended
December 31, 1999, was $15,086,455 compared to $4,554,726 for the same period
ended December 31, 1998. Net cash provided by financing activities during
1999 was related primarily to the net proceeds from the sale of units of
common stock, the exercise of warrants by our stockholders and the sale of
common stock to two of our European contractors.

         Net cash provided by financing activities for the year ended December
31, 1998, was $4,554,726 compared to $1,230,994 used in financing activities for
the year ended December 31, 1997. Net cash provided by financing activities
during 1998 related to the net proceeds from the sale of units of common stock.
Net cash used in financing activities of $1,230,994 during 1997 related
primarily to the repayment of debentures in the amount of $1,043,445 and
stockholder's loans of $149,750.

         In 1996, we received milestone payments under the terms of a $1.2
million purchase order for 10,000 satellite radio units from ABB. Under this
agreement, the Company was eligible to receive up to $500,000 towards
development costs upon meeting the milestone requirements of the contract. We
met the first four milestones of the contract and have received $400,000 in
cash. The parties agreed to suspend all development under this agreement due
to the expiration of the Company's agreement for the use of the Argos System
on December 31 1997, and the subsequent limits placed on future commercial
use of the Argos System. Therefore, such milestone payments could be subject
to refund, in whole or in part.

FACTORS AFFECTING FUTURE OPERATING RESULTS

         Factors that could cause future results to differ materially from
historical results, include, in addition to other factors identified in this
report, our ability to raise significant additional capital from outside
sources for the development of the NewStar System, the availability of
capital on commercially acceptable terms, the completion of a commercially
viable NewStar System, the dependence and uncertainty of utility companies or
other commercial customers to utilize such data messaging service, the
reliance on third parties for the advancement of the design, manufacturing
and marketing of the NewStar System, satisfying the milestones of E-SAT's FCC
license, the fulfillment of contract obligations by suppliers and other third
parties, the availability of qualified personnel and equipment, delays in the
receipt of or failure to receive necessary governmental approvals, obtaining
permits and licenses or renewals thereof, risks and uncertainties relating to
general economic and political conditions, both domestically and
internationally, changes in the law and regulations governing our activities
in the Little LEO satellite technology, results of the Company's financing
efforts and marketing conditions, and other risk factors related to our
business. Readers of this report are cautioned not to put undue reliance on
"forward looking" statements which are, by their nature, uncertain as
reliable indicators of future performance.

         Successfully addressing the factors discussed above is subject to
various risks described in this report, as well as other factors that generally
affect the market for stocks of development stage, high technology companies.
These factors could affect the price of the Company's stock and could cause such
stock prices to fluctuate over relatively short periods of time.

ITEM 7.  FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA


                                       27
<PAGE>

         The response to this item is being submitted in a separate section of
this report beginning on page F-1.

ITEM 8.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE

         None.

                                   PART III

ITEMS 9-12.

         The information called for in Items 9-12 is hereby incorporated by
reference into the Company's Proxy Statement for its annual meeting of
shareholders, to be filed in 120 days of our fiscal year end.

        ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

FINANCIAL STATEMENTS

         The following Financial Statements pertaining to the Company are filed
as part of this report:

<TABLE>
<S>                                                        <C>
Report of Independent Accountants                          F-1

Consolidated Balance Sheets                                F-2

Consolidated Statements of Operations                      F-3

Consolidated Statements of Stockholders' Equity            F-4

Consolidated Statements of Cash Flows                      F-10

Notes to Consolidated Financial Statements                 F-11
</TABLE>

EXHIBITS

         The following Exhibits are filed with or incorporated by reference into
this report:


<TABLE>
<S>                  <C>
         *(2.1)      Plan and Agreement of Reorganization, dated September 30,
                     1992, entered into with DBS Industries, Inc. Network, Inc.
                     and certain of its Shareholders which was previously filed
                     in, and is hereby incorporated by reference to, the
                     Company's Current Report on Form 8-K, date of report,
                     December 2, 1992.

         (3.0)       Restated Certificate of Incorporation, effective May 28,
                     1997.

         (3.1)       Bylaws, effective February 19, 1999.

         (3.2)       Certificate of Amendment of Certificate of Incorporation,
                     effective April 28, 1999.

         *(4.1)      Form of Unit Warrant Agreement, which was previously filed
                     in, and is hereby incorporated by reference to, the
                     Company's Registration Statement on Form S-18,
                     No. 33-31868-D, effective May 11, 1990.
</TABLE>

                                       28
<PAGE>

<TABLE>
<S>                  <C>
         *(4.2)      Specimen Stock Certificate.

         *(10.6)     1993 Incentive Stock Option Plan for DBS Industries, Inc.

         *(10.7)     1993 Non-Qualified Stock Option Plan for Non-Employee
                     Directors of DBS Industries, Inc.

         *(10.8)     1993 Non-Qualified Stock Option Plan for Consultants of DBS
                     Industries, Inc.

         *(10.20)    AXION Royalty Agreement incorporated by reference to the
                     Company's Current Report on Form 8-K dated May 16, 1994.

         *(10.24)    DBS Industries, Inc. $3,000,000, Three Year Convertible
                     Debenture Series B due January 12, 1999, incorporated by
                     reference to the Company's Current Report on Form 8-K dated
                     February 1, 1996.

         *(10.25)    Memorandum of Understanding between ABB Power T&D Company,
                     Inc. and Global Energy Metering Service, Inc. dated
                     February 9, 1996.

         *(10.26)    Stock Purchase Agreement between Seimac Limited and DBS
                     Industries, Inc., comprised of Common Stock Exchange
                     Agreement and Shareholders Agreement both dated December 13,
                     1995.

         *(10.30)    DBS Industries, Inc. $640,000 Three Year Convertible
                     Debenture, Series C, due December 31, 1999.

         *(10.31)    Employment Agreement between Fred W. Thompson and the
                     Company, dated April 18, 1996.

         *(10.32)    Employment Agreement between Randall L. Smith and GEMS (the
                     Company's subsidiary), dated March 1, 1996.

         *(10.33)    Employment Agreement between E.A. James Peretti and GEMS
                     (the Company's subsidiary) dated April 18, 1996.

         *(10.34)    1996 Stock Option Plan.

         *(10.36)    1998 Stock Option Plan.

         **(10.37)   Memorandum of Understanding Between DBS Industries and
                     Matra Marconi Space.

         **(10.38)   Letter of Intent with SAIT-Radio Holland SA.

         **(10.39)   Purchase Agreement with Astoria Capital, L.P. and Microcap
                     Partners, L.P.

         **(10.40)   Warrant Agreement with Astoria Capital, L.P. and Microcap
                     Partners, L.P.

         **(10.41)   Employment Agreement between Gregory T. Leger and DBS
                     Industries, Inc. dated March 1, 1998.

         ***(10.42)  Unit Purchase Agreement with Michael Associates.

         **(10.43)   Unit Purchase Agreement with Lodestone Capital Fund LLC,
                     Fourteen Hill Capital, LP, High Peak Limited and Michael
                     Fitzsimmons.
</TABLE>

                                       29
<PAGE>

<TABLE>
<S>                  <C>
         ***(10.44)  Launch Services Agreement with Eurockot Launch Services
                     GmbH dated March 31, 1999. (Redacted per Confidential
                     Treatment Request)

         ***(10.45)  Satellite Construction Agreement with Surrey Satellite
                     Technology Limited dated March 31, 1999. (Redacted per
                     Confidential Treatment Request)

         (10.46)     Amendment to Employment Agreement between Fred W. Thompson
                     and DBS Industries, Inc. dated September 1, 1999.

         (10.47)     Amendment to Employment Agreement between Gregory T. Leger
                     and DBS Industries, Inc., dated September 1, 1999.

         (10.48)     Employment Agreement between Frederick R. Skillman, Jr. and
                     DBS Industries, Inc., dated July 28, 1999.

         (10.49)     Amendment to Employment Agreement between Frederick R.
                     Skillman, Jr., and DBS Industries, Inc., dated September 1,
                     1999.

         (10.50)     Employment Agreement between H. Tate Holt and DBS
                     Industries, Inc., dated June 1, 1999.

         (10.51)     Employment Agreement between Stanton C. Lawson and DBS
                     Industries, Inc., dated October 18, 1999.

         (10.52)     Employment Agreement between Randy Stratt and DBS
                     Industries, Inc., dated November 8, 1999.

         (10.53)     Prime Contract for ESAT Communications System between DBS
                     Industries, Inc., and Alcatel Space Industries dated
                     October 8, 1999, and as amended on December 22, 1999.
                     (Redacted per Confidential Treatment Request)

         (10.54)     Share Purchase Agreement between EchoStar DBS Corporation,
                     and DBS Industries, Inc., dated July 30, 1999. (Redacted
                     per Confidential Treatment Request)

         **(21.1)    List of Subsidiaries of DBS Industries, Inc.

             (27)    Financial Data Schedule
</TABLE>

     *   Previously filed in, and incorporated by reference to, Form 10-KSB for
         Fiscal Years July 31, 1993, July 31, 1994, July 31, 1995, and December
         31, 1995, and December 31, 1996.

    **   Previously filed with Registration Statement on Form SB-2 filed on
         September 16, 1998.

   ***   Previously filed with Registration Statement on Form SB-2 filed on
         May 3, 1999.

REPORTS ON FORM 8-K

         On October 8, 1999, the Company filed a Form 8-K documenting the
signing of a contract with Alcatel Space Industries for the final design,
construction and delivery of the Company's constellation of


                                       30
<PAGE>

six LEO satellites.


                                       31
<PAGE>

                      DBS INDUSTRIES, INC. AND SUBSIDIARIES
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                   SIGNATURES

         In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant caused this Annual Report to be signed on its behalf by
the undersigned, thereunto duly authorized.


Dated:   March 30, 2000                    DBS INDUSTRIES, INC.


                                           By:  /s/ Fred W. Thompson
                                                --------------------
                                                FRED W. THOMPSON, President


         In accordance with the Securities Exchange Act of 1934, this Annual
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.


<TABLE>
<CAPTION>
       NAME                              TITLE                                 DATE
<S>                                      <C>                                   <C>
FRED W. THOMPSON                         President, Chairman                              March 30, 2000
Fred W. Thompson                         Principal Executive Officer

MICHAEL T. SCHIEBER                      Director                                         March 30, 2000
Michael T. Schieber

JEROME W. CARLSON                        Director                                         March 30, 2000
Jerome W. Carlson

H. TATE HOLT                             Director                                         March 30, 2000
H. Tate Holt

JESSIE J. KNIGHT, JR.                    Director                                         March 30, 2000
Jessie J. Knight, Jr.

STANTON C. LAWSON                        Director                                         March 30, 2000
Stanton C. Lawson                        Principal Financial Officer

ROY T. GRANT
Roy T. Grant                             Director                                         March 30, 2000

</TABLE>
<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Stockholders of
DBS Industries, Inc. and Subsidiaries:


In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity, and of cash
flows present fairly, in all material respects, the financial position of DBS
Industries, Inc. and Subsidiaries (a development stage company) as of December
31, 1999 and 1998, and the results of their operations and their cash flows for
the three years ended December 31, 1999 and for the period from April 25, 1990
(date of inception) to December 31, 1999, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion expressed
above.

The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the consolidated
financial statements, the Company has incurred losses and negative cash flows
from operating activities since inception and will require additional financing.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. Management's plans as to these matters are also described in
Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

PricewaterhouseCoopers LLP

March 10, 2000, except for Note 13 as
to which the date is March 24, 2000
San Francisco, California

                                      F-1
<PAGE>

DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                            DECEMBER 31,
                                                                                       ---------------------------
                                                                                         1999              1998
ASSETS
<S>                                                                                  <C>                <C>
Current assets
    Cash and cash equivalents                                                          $ 282,945        $1,291,711
    Prepaid and other current assets                                                     114,439            71,138
                                                                                     -----------        ----------
      Total current assets                                                               397,384         1,362,849
                                                                                     -----------        ----------

Furniture and equipment, net                                                              48,211            22,527
Investments, advances and other                                                        2,370,618           855,052
Satellite construction costs                                                          12,072,873         1,272,083
Deferred stock offering costs                                                            673,500                 -
                                                                                     -----------        ----------
                                                                                      15,165,202         2,149,662
                                                                                     -----------        ----------
        Total assets                                                                $ 15,562,586        $3,512,511
                                                                                     -----------        ----------
                                                                                     -----------        ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
    Accounts payable                                                                   $ 478,334         $ 240,240
    Customer advances                                                                    400,000           400,000
    Accrued liabilities                                                                  460,577           489,531
                                                                                     -----------        ----------
        Total current liabilities                                                      1,338,911         1,129,771
                                                                                     -----------        ----------
Commitments (Notes 4 and 7)

STOCKHOLDERS' EQUITY
    Common stock, $0.0004 par value; 50,000,000 shares authorized;
      14,354,911 and 8,581,117 issued and outstanding at
      December 31, 1999 and 1998, respectively                                             5,762             3,452
    Capital in excess of par value                                                    26,968,174         8,511,410
    Warrants                                                                           1,890,436         1,085,500
    Note receivable from stockholder                                                     (60,000)                -
    Deferred stock-based compensation                                                 (1,532,582)                -
    Deficit accumulated during the development stage                                 (13,048,115)       (7,132,622)
    Treasury stock (0 and 51,562 shares as of December 31,
      1999 and 1998)                                                                           -           (85,000)
                                                                                     -----------        ----------
        Total stockholders' equity                                                    14,223,675         2,382,740
                                                                                     -----------        ----------
           Total liabilities and stockholders' equity                               $ 15,562,586        $3,512,511
                                                                                     -----------        ----------
                                                                                     -----------        ----------
</TABLE>

       The accompanying notes are an integral part of these consolidated
                             financial statements.


                                      F-2
<PAGE>

DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                                                                         APRIL 25,
                                                                                                           1990
                                                                                                        (INCEPTION)
                                                                                                            TO
                                                                           DECEMBER 31,                 DECEMBER 31,
                                                         -----------------------------------------
                                                             1999            1998            1997           1999

<S>                                                    <C>             <C>            <C>            <C>

REVENUE                                                $          -    $          -   $          -    $    161,420
                                                          ---------       ---------      ---------      ----------
COST AND OPERATING EXPENSES
    Cost of revenue                                               -               -              -         127,580
    Marketing and sales                                     922,623               -              -         922,623
    General and administrative                            4,060,910       2,198,701      1,472,162      12,722,599
    Research and development                              1,045,296         797,147        210,115       4,012,014
                                                          ---------       ---------      ---------      ----------
                                                          6,028,829       2,995,848      1,682,277      17,784,816
                                                          ---------       ---------      ---------      ----------
      Loss from operations                               (6,028,829)     (2,995,848)    (1,682,277)    (17,623,396)
                                                          ---------       ---------      ---------      ----------
OTHER INCOME (EXPENSE)
    Interest,                                               113,336          32,421       (308,094)       (596,123)
    net
    Equity in loss of investees, net                              -        (100,143)       (80,975)       (512,920)
    Gain (loss) on sale of investments                            -        (228,323)     5,221,063       5,829,218
    Other, net                                                    -               -              -         (56,634)
                                                          ---------       ---------      ---------      ----------
                                                            113,336        (296,045)     4,831,994       4,663,541
                                                          ---------       ---------      ---------      ----------
Income (loss) before provision for income taxes
    and minority interests                               (5,915,493)     (3,291,893)     3,149,717     (12,959,855)
Provision for income taxes                                        -          (1,600)       (80,800)        (96,835)
                                                          ---------       ---------      ---------      ----------
      Income (loss) before minority interests            (5,915,493)     (3,293,493)     3,068,917     (13,056,690)

Minority interests in income of consolidated
    subsidiaries                                                  -               -              -           8,575
                                                          ---------       ---------      ---------      ----------
        Net income (loss)                              $ (5,915,493)   $ (3,293,493)   $ 3,068,917    $(13,048,115)
                                                          =========       =========      =========      ==========

Basic net income (loss) per share                      $      (0.45)   $      (0.47)   $      0.52
                                                          =========       =========      =========

Diluted net income (loss) per share                    $      (0.45)   $      (0.47)   $      0.49
                                                          =========       =========      =========
Weighted average number of shares of common
    stock, basic                                         13,088,723       6,979,818      5,863,261
                                                          =========       =========      =========
Weighted average number of shares of common
    stock, diluted                                       13,088,723       6,979,818      6,235,144
                                                          =========       =========      =========
</TABLE>
    The accompanying notes are an integral part of these consolidated
                             financial statements.


                                      F-3
<PAGE>

DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                               COMMON STOCK
                                                            -------------------    CAPITAL IN
                                                                         PAR       EXCESS OF                     NOTES
                                                            SHARES      VALUE      PAR VALUE      WARRANTS     RECEIVABLE
<S>                                                         <C>         <C>        <C>            <C>          <C>
Balance at December 31, 1990, of DBSN as restated
    pursuant to the merger on December 2, 1992                301,000     $ 120      $  46,375       $     -       $     -

Issuance of common stock for professional services
    at $1.01 to $2.14 per share                               520,000       208         47,542             -             -
Issuance of common stock for cash at $.01 to $1.00
    per share                                                 244,500        98        124,507             -             -
Stock issue costs for the twelve months ended
    December 31, 1991                                               -         -        (15,774)            -             -
Net loss for the twelve months ended December 31, 1991              -         -              -             -             -
                                                            ---------    ------      ---------       --------       -------

Balance at December 31, 1991                                1,065,500       426        202,650             -             -

Issuance of common stock for cash at $.01 to $1.00 -
    per share                                               1,317,290       527        538,998             -             -
Issuance of common stock for professional services at
    $.01 to $.10 - per share                                  214,240        86         12,338             -             -
Issuance of common stock in payment of stockholder loans:
    June 1992 at $.01 per share                               230,000        92          2,208             -             -
Net loss for the seven months ended July 31, 1992                   -         -              -             -             -
                                                            ---------    ------      ---------       --------       -------
Balance at July 31, 1992                                    2,827,030     1,131        756,194             -             -

Shares of Fi-Tek IV, Inc. from August 3, 1989
    (inception) through December 2, 1992                      817,540       327        155,450             -             -
Issuance of common stock for cash at $.01 to $3.20
    per share                                               1,313,926       527        998,088             -             -
Issuance of common stock for interest at $5.00 per share       10,000         4          4,996             -             -
Issuance of common stock for JPS common stock on
    September 11, 1992 at $.80 per share                       61,447        24         49,134             -             -
Issuance of common stock for professional services on
    September 11, 1992 at $.10 per share                        6,679         3            665             -             -
Issuance of common stock in exchange for DBSC common
    stock on October 9, 1992, at $2.00 per share                6,375         2         12,748             -             -
Redemption of 97,450 common stock warrants on
    October 2, 1992, at $8.00 per share                             -         -        (19,490)            -             -
</TABLE>

<TABLE>
<CAPTION>
                                                                           DEFICIT
                                                                         ACCUMULATED
                                                             DEFERRED     DURING THE                  TOTAL
                                                           STOCK-BASED    DEVELOPMENT   TREASURY   STOCKHOLDERS'
                                                           COMPENSATION     STAGE         STOCK       EQUITY
<S>                                                        <C>           <C>            <C>        <C>
Balance at December 31, 1990, of DBSN as restated
    pursuant to the merger on December 2, 1992                  $     -   $  (219,990)     $    -   $  (173,495)

Issuance of common stock for professional services
    at $1.01 to $2.14 per share                                       -             -           -        47,750
Issuance of common stock for cash at $.01 to $1.00
    per share                                                         -             -           -       124,605
Stock issue costs for the twelve months ended
    December 31, 1991                                                 -             -           -       (15,774)
Net loss for the twelve months ended December 31, 1991                -      (115,339)          -      (115,339)
                                                             --------       ---------     ----------   --------
Balance at December 31, 1991                                          -      (335,329)          -      (132,253)

Issuance of common stock for cash at $.01 to $1.00 -
    per share                                                         -             -           -       539,525
Issuance of common stock for professional services at
    $.01 to $.10 - per share                                          -             -           -        12,424
Issuance of common stock in payment of stockholder loans:
    June 1992 at $.01 per share                                       -             -           -         2,300
Net loss for the seven months ended July 31, 1992                     -       (90,750)          -       (90,750)
                                                             --------       ---------     ----------   --------
Balance at July 31, 1992                                              -      (426,079)          -      331,246

Shares of Fi-Tek IV, Inc. from August 3, 1989
    (inception) through December 2, 1992                              -             -           -       155,777
Issuance of common stock for cash at $.01 to $3.20
    per share                                                         -             -           -       998,615
Issuance of common stock for interest at $5.00 per share              -             -           -         5,000
Issuance of common stock for JPS common stock on
    September 11, 1992 at $.80 per share                              -             -           -        49,158
Issuance of common stock for professional services on
    September 11, 1992 at $.10 per share                              -             -           -           668
Issuance of common stock in exchange for DBSC common
    stock on October 9, 1992, at $2.00 per share                      -             -           -        12,750
Redemption of 97,450 common stock warrants on
    October 2, 1992, at $8.00 per share                               -             -           -       (19,490)
</TABLE>

    The accompanying notes are an integral part of these consolidated
                             financial statements.


                                       F-4
<PAGE>

<TABLE>
<CAPTION>

                                                              COMMON STOCK
                                                           --------------------    CAPITAL IN
                                                                         PAR       EXCESS OF                     NOTES
                                                            SHARES      VALUE      PAR VALUE      WARRANTS     RECEIVABLE
<S>                                                        <C>          <C>        <C>            <C>          <C>
Issuance of common stock December 2, 1992, at closing
    of acquisition of DBSN as a finder's fee at $.0004
    per share                                                  25,000     $  10        $     -       $     -       $     -
Issuance of common stock for Axion common stock
    during March 1993 at $1.60 per share                       50,000        20         79,980             -             -
Issuance of common stock for DBSC common stock
    on July 2, 1993, at $1.60 per share                       133,306        53        213,238             -             -
Stock issue costs for the period from August 1, 1992
    through July 31, 1993                                           -         -         (6,374)            -             -
Net loss for the twelve months ended July 31, 1993                  -         -              -             -             -
                                                            ---------    ------      ---------       --------       -------
Balance at July 31, 1993                                    5,251,303     2,101      2,244,629             -             -

Issuance of common stock for cash at $4.00 per share
    (August 1993 through April 1994)                          102,256        41        411,943             -             -
Stock issued in exchange for 46% of JPS stock on
    November 19, 1993                                           3,379         1         10,137             -             -
Stock issued for professional services:
    January 28, 1994, at $3.60 per share                        5,331         2         19,188             -             -
    July 29, 1994, at $2.00 per share                           3,833         2          7,663             -             -
Stock issued due to exercise of warrants, at $2.00
    per share (March and April 1994)                            2,500         1          4,999             -             -
Stock issued for interest on July 31, 1994, at $2.00
    per  share                                                  1,000         -          2,000             -             -
Purchase of shares of common stock on January 28, 1994,
    at $3.20 per share                                         (1,563)        -              -             -             -
Reacquisition of common stock pursuant to sale of
    investment in Axion in May 1994, at $1.60 per share       (50,000)        -              -             -             -
Net loss for the twelve months ended July 31, 1994                  -         -              -             -             -
                                                            ---------    ------      ---------       --------       -------
Balance at July 31, 1994                                    5,318,039     2,148      2,700,559             -             -
</TABLE>

<TABLE>
<CAPTION>
                                                                                DEFICIT
                                                                              ACCUMULATED
                                                                 DEFERRED      DURING THE                  TOTAL
                                                                STOCK-BASED    DEVELOPMENT   TREASURY    STOCKHOLDERS'
                                                                COMPENSATION     STAGE         STOCK       EQUITY
<S>                                                             <C>          <C>             <C>         <C>
Issuance of common stock December 2, 1992, at closing
    of acquisition of DBSN as a finder's fee at $.0004
    per share                                                   $        -         $     -      $    -       $    10
Issuance of common stock for Axion common stock
    during March 1993 at $1.60 per share                                 -               -           -        80,000
Issuance of common stock for DBSC common stock
    on July 2, 1993, at $1.60 per share                                  -               -           -       213,291
Stock issue costs for the period from August 1, 1992
    through July 31, 1993                                                -               -           -        (6,374)
Net loss for the twelve months ended July 31, 1993                       -        (755,040)          -      (755,040)
                                                                ----------        --------     ---------   ----------
Balance at July 31, 1993                                                 -      (1,181,119)          -     1,065,611

Issuance of common stock for cash at $4.00 per share
    (August 1993 through April 1994)                                     -               -           -       411,984
Stock issued in exchange for 46% of JPS stock on
    November 19, 1993                                                    -               -           -        10,138
Stock issued for professional services:
    January 28, 1994, at $3.60 per share                                 -               -           -        19,190
    July 29, 1994, at $2.00 per share                                    -               -           -         7,665
Stock issued due to exercise of warrants, at $2.00
    per share (March and April 1994)                                     -               -           -         5,000
Stock issued for interest on July 31, 1994, at $2.00
    per share                                                            -               -           -         2,000
Purchase of shares of common stock on January 28, 1994,
    at $3.20 per share                                                   -               -      (5,000)       (5,000)
Reacquisition of common stock pursuant to sale of
    investment in Axion in May 1994, at $1.60 per share                  -               -     (80,000)      (80,000)
Net loss for the twelve months ended July 31, 1994                       -         (26,909)          -       (26,909)
                                                                ----------        --------     ---------   ----------
Balance at July 31, 1994                                                 -      (1,208,028)    (85,000)    1,409,679
</TABLE>

    The accompanying notes are an integral part of these consolidated
                             financial statements.


                                      F-5
<PAGE>

<TABLE>
<CAPTION>
                                                              COMMON STOCK
                                                            -------------------    CAPITAL IN
                                                                         PAR       EXCESS OF                     NOTES
                                                            SHARES      VALUE      PAR VALUE      WARRANTS     RECEIVABLE
<S>                                                        <C>         <C>         <C>           <C>           <C>
Stock issued for services:
    November 30, 1994, at $1.88 per share                      10,000     $   4      $  18,796       $     -       $     -
    May 15, 1995, at $2.00 per share                           10,724         4         21,443             -             -
    July 15, 1995, at $1.60 per share                          11,373         5         18,192             -             -
Net loss for the twelve months ended July 31, 1995                  -         -              -             -             -
                                                            ---------    ------      ---------       --------       -------
Balance at July 31, 1995                                    5,350,136     2,161      2,758,990             -             -

Issuance of common stock for 1% JPS common stock
    on September 21, 1995 at $1.20 per share                    9,450         4         11,336             -             -
Issuance of common stock for 20% Seimac Limited
    common stock on December 13, 1995 at $4.00 per share      165,519        66        662,010             -             -
Issuance of common stock for professional services at
    $5.60 per share                                             2,934         1         16,427             -             -
Net loss for the twelve months ended December 31, 1995              -         -              -             -             -
                                                            ---------    ------      ---------       --------       -------
Balance at December 31, 1995                                5,528,039     2,232      3,448,763             -             -

Warrants issued on January 13, 1996, to purchase 75,000
    shares of common stock for services rendered at an
    exercise price of $7.30 per share                               -         -              -       112,500             -
Issuance of common stock for cash
    January 15, 1996, at $4.00 per share, less noncash
      issuance cost of $63,900                                200,000        80        736,020             -             -
    February 15, 1996, at $5.20 per share, less noncash
      issuance cost of $19,999                                 38,462        15        179,988             -             -
Stock issued for services
    January 1 - June 30, 1996, at $3.75 per share              22,743         9         85,277
    August 15, 1996, at $4.80 per share                         6,018         2         28,884
    September 21, 1996, at $5.60 per share                      4,821         2         26,996
    July 1 - December 31, 1996, at $2.00 per share              7,605         3         15,207
    Placement fee associated with January 15 and
      February 15, 1996, issuances settled through             19,821         8         83,891
      issuance of common stock
Net loss for the twelve months ended December 31, 1996              -         -              -             -             -
                                                            ---------    ------      ---------       --------       -------
Balance at December 31, 1996                                5,827,509     2,351      4,605,026       112,500             -
</TABLE>

<TABLE>
<CAPTION>
                                                                         DEFICIT
                                                                         ACCUMULATED
                                                            DEFERRED     DURING THE                  TOTAL
                                                          STOCK-BASED    DEVELOPMENT   TREASURY   STOCKHOLDERS'
                                                          COMPENSATION     STAGE         STOCK       EQUITY
<S>                                                        <C>           <C>           <C>         <C>
Stock issued for services:
    November 30, 1994, at $1.88 per share                      $     -       $     -      $    -     $  18,800
    May 15, 1995, at $2.00 per share                                 -             -           -        21,447
    July 15, 1995, at $1.60 per share                                -             -           -        18,197
Net loss for the twelve months ended July 31, 1995                   -   (1,284,558)           -    (1,284,558)
                                                             --------      ---------    ----------   ---------
Balance at July 31, 1995                                             -   (2,492,586)    (85,000)       183,565

Issuance of common stock for 1% JPS common stock
    on September 21, 1995 at $1.20 per share                         -             -           -        11,340
Issuance of common stock for 20% Seimac Limited
    common stock on December 13, 1995 at $4.00 per share             -             -           -       662,076
Issuance of common stock for professional services at
    $5.60 per share                                                  -             -           -        16,428
Net loss for the twelve months ended December 31, 1995               -     (662,877)           -      (662,877)
                                                             --------      ---------    ----------   ---------
Balance at December 31, 1995                                         -   (3,155,463)    (85,000)       210,532

Warrants issued on January 13, 1996, to purchase 75,000
    shares of common stock for services rendered at an
    exercise price of $7.30 per share                                -             -           -       112,500
Issuance of common stock for cash
    January 15, 1996, at $4.00 per share, less noncash
      issuance cost of $63,900                                       -             -           -       736,100
    February 15, 1996, at $5.20 per share, less noncash
      issuance cost of $19,999                                       -             -           -       180,003
Stock issued for services
    January 1 - June 30, 1996, at $3.75 per share                                                       85,286
    August 15, 1996, at $4.80 per share                                                                 28,886
    September 21, 1996, at $5.60 per share                                                              26,998
    July 1 - December 31, 1996, at $2.00 per share                                                      15,210
    Placement fee associated with January 15 and
      February 15, 1996, issuances settled through                                                      83,899
      issuance of common stock
Net loss for the twelve months ended December 31, 1996               -   (3,752,583)           -    (3,752,583)
                                                             --------      ---------    ----------   ---------
Balance at December 31, 1996                                         -   (6,908,046)    (85,000)    (2,273,169)
</TABLE>

    The accompanying notes are an integral part of these consolidated
                             financial statements.


                                      F-6
<PAGE>

<TABLE>
<CAPTION>


                                                              COMMON STOCK
                                                            -------------------    CAPITAL IN
                                                                         PAR       EXCESS OF                     NOTES
                                                            SHARES      VALUE      PAR VALUE      WARRANTS     RECEIVABLE
<S>                                                         <C>         <C>        <C>            <C>          <C>
Stock issued for services
    January 31, 1997, at $1.69 per share                        5,088         2          8,586
    February 14, 1997, at $1.75 per share                       4,701         2          8,225
    February 28, 1997, at $2.00 per share                       7,918         3         15,834
    March 31, 1997, at $1.63 per share                            302         -            491
    April 10, 1997, at $2.00 per share                          7,500         3         14,997
    April 30, 1997, at $1.50 per share                            332         -            498
    June 30, 1997, at $1.13 per share                          14,578         6         16,394
    July 9, 1997, at $0.75 per share                           15,000         6         11,244

Net income for the twelve months ended December 31, 1997            -         -              -             -             -
                                                            ---------    ------      ---------       --------       -------
Balance at December 31, 1997                                5,882,928     2,373      4,681,295       112,500             -

Common stock issued for cash, on April 16, 1998,
    at $2.00 per share                                        102,000        41        203,959             -             -
Common stock issued upon exercise of options, on
    June 11, 1998, at $1.44 per share                          12,500         5         17,964
Common stock issued (voided) in connection with
    services rendered
    February 12, 1998, at $0.53 per share                      26,209        10         13,906
    April 1, 1998, at $3.25 per share                          10,000         4         32,496
    May 14, 1998, at $3.75 per share                           13,646         6         51,168
    May 14, 1998, at $3.75 per share                          (22,743)       (9)       (85,277)
Common stock issued for cash in August and September 1998
    at $2.00 per share net of issuance costs of $485,826    2,800,000     1,120      5,113,054
Common stock issued upon exercise of options at $0.53
    per share                                                  17,202         6          9,128
Fair value of Common Stock warrants committed to
    representing stock issuance costs                                                 (973,000)      973,000
Fair value of options granted in connection with
    services rendered                                                                  159,000
</TABLE>

<TABLE>
<CAPTION>
                                                                            DEFICIT
                                                                          ACCUMULATED
                                                              DEFERRED     DURING THE                  TOTAL
                                                            STOCK-BASED    DEVELOPMENT   TREASURY   STOCKHOLDERS'
                                                            COMPENSATION     STAGE         STOCK       EQUITY
<S>                                                         <C>           <C>            <C>         <C>
Stock issued for services
    January 31, 1997, at $1.69 per share                                                                   8,588
    February 14, 1997, at $1.75 per share                                                                  8,227
    February 28, 1997, at $2.00 per share                                                                 15,837
    March 31, 1997, at $1.63 per share                                                                       491
    April 10, 1997, at $2.00 per share                                                                    15,000
    April 30, 1997, at $1.50 per share                                                                       498
    June 30, 1997, at $1.13 per share                                                                     16,400
    July 9, 1997, at $0.75 per share                                                                      11,250

Net income for the twelve months ended December 31, 1997               -     3,068,917           -     3,068,917
                                                             --------        ---------    ----------   ---------
Balance at December 31, 1997                                           -    (3,839,129)    (85,000)       872,039

Common stock issued for cash, on April 16, 1998,
    at $2.00 per share                                                 -             -           -       204,000
Common stock issued upon exercise of options, on
    June 11, 1998, at $1.44 per share                                                                     17,969
Common stock issued (voided) in connection with
    services rendered
    February 12, 1998, at $0.53 per share                                                                 13,916
    April 1, 1998, at $3.25 per share                                                                     32,500
    May 14, 1998, at $3.75 per share                                                                      51,174
    May 14, 1998, at $3.75 per share                                                                     (85,286)
Common stock issued for cash in August and September 1998
    at $2.00 per share net of issuance costs of $485,826                                               5,114,174
Common stock issued upon exercise of options at $0.53
    per share                                                                                              9,134
Fair value of Common Stock warrants committed to
    representing stock issuance costs                                                                          -
Fair value of options granted in connection with
    services rendered                                                                                    159,000
</TABLE>

    The accompanying notes are an integral part of these consolidated
                             financial statements.


                                      F-7
<PAGE>

<TABLE>
<CAPTION>


                                                              COMMON STOCK
                                                            -------------------    CAPITAL IN
                                                                         PAR       EXCESS OF                     NOTES
                                                            SHARES      VALUE      PAR VALUE      WARRANTS     RECEIVABLE
<S>                                                         <C>         <C>        <C>            <C>          <C>
Common stock issued for exercise of options $0.60 per          37,500        15         22,485
    share 10/1/98
Common stock returned to investees at $2.00 per share in
    October 1998                                             (400,000)     (160)      (799,840)
Common stock issued upon exercise of options $0.531 per
    share in October 1998                                      94,375        38         50,075
Common stock issued representing stock issuance costs           7,500         3         14,997
Net loss for the year ended December 31, 1998                       -         -              -             -             -
                                                            ---------    ------      ---------       --------       -------
Balance at December 31, 1998                                8,581,117     3,452      8,511,410     1,085,500             -

Common stock issued for cash
  February 1999 at $2.50, net of issuance
    costs of $2,104                                            50,000        20        122,876
  February 1999 at $3.00, net of issuance
    costs of $25,246                                          500,000       200      1,474,554
  April 1999 at $3.00 per share                             1,666,667       667      4,999,333
Common stock issued upon exercise of options
  January, March, August, and December 1999
    at $0.53 per share                                        195,227        78        103,557
  February 1999 at $0.58                                       12,625         5          7,368
  January and February 1999 at $0.60                           26,667        11         15,990
  February 1999 at $1.44                                       37,500        15         53,891
  February and March 1999 at $1.45                            200,000        80        289,920
  January, February, and March 1999 at $1.50                  195,084        78        292,548
  January 1999 at $2.80                                         8,125         3         22,747
Common stock issued upon exercise of warrants
  January 1999 at $0.50 per share                             200,000        80         99,920
  January 1999 at $1.44 per share                              11,080         4         15,923
  January and February 1999 at $1.50 per share                 64,380        26        183,251      (86,707)
  March 1999 at $2.00 per share                                 7,500         2         24,673       (9,675)
  February and March 1999 at $2.10 per share                   33,700        13        111,534      (40,777)
  January - March 1999 at $3.00 per share,
    net of issuance costs of $123,805                       2,452,000       983      7,239,689       (8,475)
  March 1999 at $3.50 per share
    net of issuance costs of $3,344                            50,000        20        172,035
</TABLE>

<TABLE>
<CAPTION>
                                                                            DEFICIT
                                                                          ACCUMULATED
                                                              DEFERRED     DURING THE                  TOTAL
                                                             STOCK-BASED   DEVELOPMENT   TREASURY   STOCKHOLDERS'
                                                            COMPENSATION     STAGE         STOCK       EQUITY
<S>                                                         <C>           <C>            <C>         <C>
Common stock issued for exercise of options $0.60 per                                                     22,500
    share 10/1/98
Common stock returned to investees at $2.00 per share in
    October 1998                                                                                        (800,000)
Common stock issued upon exercise of options $0.531 per
    share in October 1998                                                                                 50,113
Common stock issued representing stock issuance costs                                                     15,000
Net loss for the year ended December 31, 1998                       -     (3,293,493)              -  (3,293,493)
                                                             --------      ---------      ----------   ---------
Balance at December 31, 1998                                        -     (7,132,622)        (85,000)  2,382,740

Common stock issued for cash
  February 1999 at $2.50, net of issuance
    costs of $2,104                                                                                      122,896
  February 1999 at $3.00, net of issuance
    costs of $25,246                                                                                   1,474,754
  April 1999 at $3.00 per share                                                                        5,000,000
Common stock issued upon exercise of options
  January, March, August, and December 1999
    at $0.53 per share                                                                                   103,635
  February 1999 at $0.58                                                                                   7,373
  January and February 1999 at $0.60                                                                      16,001
  February 1999 at $1.44                                                                                  53,906
  February and March 1999 at $1.45                                                                       290,000
  January, February, and March 1999 at $1.50                                                             292,626
  January 1999 at $2.80                                                                                   22,750
Common stock issued upon exercise of warrants
  January 1999 at $0.50 per share                                                                        100,000
  January 1999 at $1.44 per share                                                                         15,927
  January and February 1999 at $1.50 per share                                                            96,570
  March 1999 at $2.00 per share                                                                           15,000
  February and March 1999 at $2.10 per share                                                              70,770
  January - March 1999 at $3.00 per share,
    net of issuance costs of $123,805                                                                  7,232,197
  March 1999 at $3.50 per share
    net of issuance costs of $3,344                                                                      172,055
</TABLE>

    The accompanying notes are an integral part of these consolidated
                             financial statements.


                                      F-8
<PAGE>

<TABLE>
<CAPTION>
                                                           COMMON STOCK
                                                         ------------------     CAPITAL IN
                                                                      PAR       EXCESS OF                      NOTES
                                                         SHARES      VALUE      PAR VALUE      WARRANTS      RECEIVABLE
<S>                                                      <C>         <C>        <C>            <C>           <C>
Expiration of warrants                                                              15,730        (15,730)
Deferred stock compensation                                                      2,490,337
Options issued in connection with
    services rendered                                                              751,497
Amortization of deferred stock compensation
Warrants issued in connection with services
    rendered in November and December 1999                                                         22,800
Issuance of common stock in connection with
Litigation settlement in March 1999
    at $5.00 per share                                     63,239        25        324,391
Fair value of Common Stock warrants committed to
    representing deferred stock issuance costs                                                    673,500
    in December 1999
Warrant issued in connection with stock issuance                                  (270,000)       270,000
    costs
Note Receivable from Stockholder                                                                                (60,000)
Retirement of Treasury Stock                                                       (85,000)
Net loss for the year ended December 31, 1999
                                                        ---------    ------      ---------       --------       -------
Balance at December 31, 1999                           14,354,911    $5,762     26,968,174     $1,890,436     $ (60,000)
                                                        ---------    ------      ---------       --------       -------
                                                        ---------    ------      ---------       --------       -------
</TABLE>

<TABLE>
<CAPTION>
                                                                        DEFICIT
                                                                      ACCUMULATED
                                                         DEFERRED      DURING THE                   TOTAL
                                                        STOCK-BASED    DEVELOPMENT    TREASURY   STOCKHOLDERS'
                                                       COMPENSATION      STAGE         STOCK       EQUITY
<S>                                                    <C>           <C>             <C>          <C>
Expiration of warrants
Deferred stock compensation                             (2,490,337)                                         -
Options issued in connection with
    services rendered                                                                                 751,497
Amortization of deferred stock compensation                 957,755                                   957,755
Warrants issued in connection with services
    rendered in November and December 1999                                                             22,800
Issuance of common stock in connection with
    litigation settlement in March 1999
    at $5.00 per share                                                                                324,416
Fair value of Common Stock warrants committed to
    representing deferred stock issuance costs                                                        673,500
    in December 1999                                                                                        -
Warrant issued in connection with stock issuance                                                            -
    costs
Note Receivable from Stockholder                                                                     (60,000)
Retirement of Treasury Stock                                                            85,000              -
Net loss for the year ended December 31, 1999                           (5,915,493)               (5,915,493)
                                                         ----------     ----------    ----------   ----------
Balance at December 31, 1999                            $(1,532,582)  $(13,048,115)     $    -    $14,223,675
                                                         ----------     ----------    ----------   ----------
                                                         ----------     ----------    ----------   ----------
</TABLE>

    The accompanying notes are an integral part of these consolidated
                             financial statements.


                                      F-9
<PAGE>

DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                                                  APRIL 25, 1990
                                                                                                  (INCEPTION) TO
                                                               YEAR ENDED DECEMBER 31,              DECEMBER 31,
                                                        -------------------------------------
                                                           1999           1998          1997           1999
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
   USED IN OPERATING ACTIVITIES
<S>                                                     <C>           <C>             <C>         <C>
   Net income (loss)                                    $ (5,915,493)  $(3,293,493)   $3,068,917  $  (13,048,115)
   Adjustments to reconcile net income (loss) to net
   cash used in operating activities:
     Depreciation and amortization                            15,719        73,122       126,989         446,975
     Minority interest's share of net loss                         -             -             -          (8,575)
     Noncash charges                                               -       573,999        76,293       1,084,545
     Amortization of stock-based compensation                957,755             -             -         957,755
     Issuance of options and warrants for services           774,298             -             -         774,298
       rendered
     Issuance of common stock in connection
      with litigation settlement                             324,391             -             -         324,391
     Equity in loss of investees, net                              -       100,143        80,875         529,972
     Loss (gain) on sale of investments                            -       228,323    (5,221,063)     (5,829,218)
     Allowance for losses on advances                              -       216,932             -         216,932
     Common stock issued as payment for interest                   -             -             -           7,000
     Decrease (increase) in accounts receivable and
      other assets                                           (43,301)       48,127       (50,320)        (95,235)
     Increase (decrease) in accounts payable                                                                   -
      accrued liabilities                                    204,675      (108,264)   (1,053,843)        609,915
     Increase in customer advances                                 -             -             -         400,000
                                                       -------------   -----------    ----------     -----------
        Net cash used in operating activities             (3,681,956)   (2,161,111)   (2,972,152)    (13,629,360)
                                                       -------------   -----------    ----------     -----------
CASH FLOWS FROM INVESTING ACTIVITIES
   Proceeds from sale of investment                                -       199,940             -       1,099,940
   Proceeds from Loral settlement                                  -             -     3,573,677       3,573,677
   Purchase of fixed assets                                  (34,394)       (5,523)            -        (145,441)
   Satellite construction payments                       (10,800,790)   (1,272,083)            -     (12,072,873)
   Organization costs                                              -             -             -         (28,526)
   Advances to officer                                       (60,000)            -             -         (91,187)
   Purchase of interest in Continental                             -             -             -      (2,292,409)
   Investments and advances                               (1,518,081)     (407,292)      309,888      (2,726,807)
   Net assets of purchased subsidiaries                            -             -             -        (147,500)
   Cash transferred from Fi-Tek IV, Inc. pursuant to                                                           -
   the merger and reorganization                                   -             -             -         156,648
   Cash of divested subsidiary                                     -             -             -            (277)
   Purchase of patents                                             -             -             -         (18,251)
   Proceeds from repayment of advances to affiliate                -             -             -         152,500
   Restricted cash on credit line                                  -             -       300,000         300,000
                                                       -------------   -----------    ----------     -----------
        Net cash provided by (used in) investing         (12,413,265)   (1,484,958)    4,183,565     (12,240,506)
           activities                                  -------------   -----------    ----------     -----------

CASH FLOWS FROM FINANCING ACTIVITIES
   Repayment of borrowing under credit line                        -             -      (295,000)       (300,000)
   Issuance of debentures                                          -             -       107,501       4,817,501
   Issuance of common stock                               15,240,555     4,997,226             -      23,391,297
   Redemption of common stock warrants                             -             -             -         (19,490)
   Stock issue costs                                        (154,100)     (442,500)            -        (653,835)
   Purchase of shares                                              -             -             -          (5,000)
   Payment of debentures                                           -             -    (1,043,445)     (1,168,445)
   Proceeds from stockholders' loans                               -             -       149,750         442,750
   Payment of stockholders' loans                                  -             -      (149,750)       (351,967)
                                                       -------------   -----------    ----------     -----------
        Net cash provided by (used in) financing          15,086,455     4,554,726    (1,230,944)     26,152,811
        activities                                     -------------   -----------   ----------      -----------
Net increase (decrease) in cash                          (1,008,766)       908,657      (19,531)         282,945
Cash and cash equivalents, beginning of period             1,291,711       383,054       402,588               -
                                                       -------------   -----------    ----------     -----------
Cash and cash equivalents, end of period                  $  282,945    $1,291,711     $ 383,057     $   282,945
                                                       -------------   -----------    ----------     -----------
                                                       -------------   -----------    ----------     -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
   Interest                                                $   4,672       $     -     $  11,456      $   24,892
                                                       -------------   -----------   ----------      -----------
                                                       -------------   -----------    ----------     -----------
   Income taxes                                             $      -       $     -     $   1,600        $      -
                                                       -------------   -----------   ----------      -----------
                                                       -------------   -----------    ----------     -----------
</TABLE>

    The accompanying notes are an integral part of these consolidated
                             financial statements.


                                      F-10
<PAGE>

DBS INDUSTRIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
1.   ORGANIZATION AND BASIS OF PRESENTATION

     These consolidated financial statements include the accounts of DBS
     Industries, Inc. (the "Company"), and its wholly-owned subsidiaries, Global
     Energy Metering Service, Inc. ("GEMS"), and NewStar Limited ("NewStar").
     Intercompany transactions and balances have been eliminated in
     consolidation.

     The Company was organized as a Delaware corporation on August 3, 1989.
     Since inception the Company has been in the development stage. The
     Company's current business plan is to develop a data communication service
     using a constellation of low earth orbit satellites and the internet. The
     Company's financial statements have been prepared assuming the Company will
     continue as a going concern. Since inception, the Company has devoted
     substantially all of its efforts to developing its business. The Company
     has therefore incurred substantial losses and negative cash flows from
     operating activities as reflected in these consolidated financial
     statements. Accordingly, the Company has relied primarily upon obtaining
     equity capital and debt financing to support its operations.

     The Company does not expect revenue to exceed costs and expenses in 2000
     and, accordingly, will continue to incur losses and negative cash flows
     from operating activities. To address financing needs, the Company is
     pursuing various financing alternatives. These circumstances raise
     substantial doubt about the Company's ability to continue as a going
     concern. During fiscal 1999, the Company raised approximately $15 million
     from warrant exercises and sale of shares of common stock. However, the
     Company will need substantial additional capital, at least $100 million, to
     construct its proposed satellite constellation. Such financing is likely to
     result in a significant dilution in the equity interests of the current
     stockholders. The construction of the first two of the six planned
     satellites was required to commence by April 1999 pursuant to the terms of
     the Federal Communications Commission (FCC) license granted to E-SAT. The
     Company notified the FCC that it has achieved this milestone by entering
     into a construction contract on March 31, 1999. These financial statements
     do not reflect any adjustments that might result from the outcome of this
     uncertainty.

     GEMS is a Delaware corporation in the development stage whose primary
     activity has been the development of satellite and radio systems for use in
     automating the control and distribution of gas and electric power by
     utility companies. GEMS had no significant activity during fiscal 1999.

     The Company's investments in E-SAT Corporation, in which the Company has an
     ownership interest of 20%, are accounted for using the equity method. The
     Company's investment in EchoStar Communication, Inc. (EchoStar) and
     interest in Continental Satellite Corporation were disposed of during 1997
     (see Notes 3 and 6) and its interest in Seimac Limited was disposed of
     during 1998 (see Note 3).

     In January 1998, the Company created NewStar Limited, a wholly-owned
     subsidiary organized under the Laws of the Republic of Bermuda.


                                      F-11
<PAGE>

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Hereafter, unless otherwise specified, all references to the "Company"
     include DBS Industries, Inc. and its wholly-owned subsidiaries.

         USE OF ESTIMATES

         The preparation of financial statements in conformity with generally
         accepted accounting principles requires management to make estimates
         and assumptions that affect the reported amounts of assets and
         liabilities and disclosures of contingent assets and liabilities at the
         date of the financial statements and the reported amounts of revenues
         and expenses during the reporting period. Such estimates include the
         recoverability of satellite construction costs and the investment in
         E-SAT. Actual results could differ from those estimates.

         CASH EQUIVALENTS

         The Company considers all money market instruments and other highly
         liquid investments with original maturities of three months or less to
         be cash equivalents.

         DEPRECIATION

         Furniture and equipment are depreciated over the estimated useful lives
         of the assets ranging from five to seven years using the straight-line
         method of depreciation. When assets are disposed of, the related cost
         and accumulated depreciation are removed from the books and the
         resulting gain or loss is recognized in the year of disposal.

         SATELLITE CONSTRUCTION COSTS

         Satellite construction costs will be depreciated over the useful
         economic lives of the satellites once they enter into service.

         The Company adopted Statement of Financial Accounting Standards
         ("SFAS") No. 121, "Accounting for Impairment of Long-Lived Assets
         and Long-Lived Assets to be Disposed of." The Company reviews
         satellite construction costs and other long-lived assets for
         impairment whenever events or changes in circumstances indicate that
         the carrying amount of an asset may not be recoverable. There was no
         impact as of December 31, 1999.

         GOODWILL

         Goodwill is amortized using the straight-line method over five years.
         Amortization expense charged to operations for the years ended December
         31, 1999, 1998 and 1997, was $2,515, $5,564, and $20,715 respectively.

         INCOME TAXES

         Income taxes are accounted for in accordance with Statement of
         Financial Accounting Standards ("SFAS") No. 109, ACCOUNTING FOR INCOME
         TAXES. Under SFAS No. 109, deferred income tax liabilities and assets
         are determined based on the difference between the financial reporting
         amounts and tax bases of assets and liabilities that will result in
         taxable or deductible amounts in the future. Such amounts are based on
         enacted tax laws and rates in effect for the years in which the
         differences are expected to affect taxable income, net operating loss
         and tax credit carryforwards. Valuation allowances are established when
         necessary to reduce deferred tax assets to the amounts expected to be
         realized. Income tax expense is the tax payable for the period and the
         change during the period in deferred tax assets and liabilities.


                                      F-12
<PAGE>

         NET EARNINGS (LOSS) PER SHARE

         In February 1997, the Financial Accounting Standards Board issued SFAS
         No. 128, EARNINGS PER SHARE, which establishes standards for computing
         and presenting earnings (loss) per share. Under these standards, basic
         earnings per share is computed based on the weighted average number of
         common shares outstanding and excludes any potential dilution; diluted
         earnings per share reflects diluted effects of all outstanding common
         stock equivalents. Options and warrants are excluded from the EPS
         calculation in loss years due to their antidilutive effect. The
         following table summarizes options and warrants outstanding:

<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                               1999              1998              1997
                                          --------------------------------------------------
<S>                                       <C>              <C>                 <C>
Options and warrants (excluded
    from) included in EPS calculation        (6,153,167)       (6,220,695)         1,748,938

Price range                               $0.40 - $5.60     $0.40 - $5.60      $0.39 - $5.60
</TABLE>

         RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

         In March 1997, SFAS No. 129, DISCLOSURE OF INFORMATION ABOUT CAPITAL
         STRUCTURE, was issued and has been implemented by the Company. In June
         1997, SFAS No. 130, REPORTING COMPREHENSIVE INCOME and SFAS No. 131,
         DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
         were issued and are effective for the year ended December 31, 1998. The
         Company has not implemented SFAS Nos. 130 and 131 as their provisions
         are not applicable to the Company's operations.

         RECLASSIFICATIONS

         Certain prior period balances have been reclassified to conform to the
         current year's presentation.

         SEGMENT REPORTING

         Effective May 1, 1998, the Company adopted the Statement of Financial
         Accounting Standards No. 131, "Disclosures about Segments of an
         Enterprise and Related Information" ("SFAS 131"). SFAS 131 requires
         that an enterprise report financial and description information about
         its reportable operating segments. Generally, financial information is
         required to be reported on the basis that is used internally for
         evaluating segment performance and deciding how to allocate resources
         to segments. The Company has determined that they operate in a single
         segment as defined by SFAS 131. Adoption of this standard does not
         affect the Company's results of operations or financial position.

         COMPREHENSIVE INCOME

         In June 1997, the FASB issued Statement of Financial Accounting
         Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130").
         SFAS No. 130 established standards for reporting and display of
         comprehensive income and its components and is effective for


                                      F-13
<PAGE>

         periods beginning after December 15, 1997. The Company's comprehensive
         income approximated net income for all periods presented.

3.   INVESTMENTS IN AND ADVANCES TO AFFILIATED COMPANIES

     Following is a summary of the Company's significant investment
     activities:

         DIRECT BROADCASTING SATELLITE CORPORATION (DBSC)

         DBSC is one of nine permittees of the Federal Communications Commission
         for Direct Broadcast Satellite (DBS) services. As of December 31, 1996,
         the Company owned approximately 25% of the common stock of DBSC. The
         Company accounted for its investment using the equity method.

         On December 21, 1995, DBSC and EchoStar agreed to a merger, subject to
         government approval. Under the terms of the merger agreement, (1) both
         parties agreed to merge DBSC into a wholly-owned subsidiary of
         EchoStar, and (2) DBSC stockholders would be entitled to receive at
         their option, $7.99 in cash or .67417 shares of EchoStar common stock
         for each of the 973,148 DBSC shares not already owned by EchoStar. At
         December 31, 1996, the Company owned 401,107 shares of the common stock
         of DBSC. The requisite government approvals were obtained and the
         merger consummated on January 8, 1997. On January 23, 1997, the Company
         elected to exchange all of its 401,107 DBSC shares for 270,414 shares
         of EchoStar common stock which was valued at $25.00 per share as of
         January 8, 1997, the effective date of the merger. In connection with
         this transaction, the Company recorded a gain of approximately $6.2
         million in its first quarter of 1997.

         On August 29, 1997, the Company transferred the 270,414 shares back to
         EchoStar in exchange for the retirement of certain debentures and
         recognized a loss on such transfer of approximately $2.3 million due to
         a decline in the market value in the EchoStar stock.

         E-SAT, INC. (E-SAT)

         In October 1994, the Company and EchoStar formed E-SAT for the purpose
         of filing with the FCC for a license to operate a low earth orbit
         satellite system. E-SAT filed with the FCC on November 16, 1994. The
         Company holds a 20% interest in E-SAT. The Company's total investments
         in, and advances to, E-SAT were $851,490 as of December 31, 1999 and
         1998. The investment is accounted for using the equity method. The
         Company's equity in losses of E-SAT for the years ended December 31,
         1999 and 1998, were $0 and $134,524, respectively.

         On March 31, 1998, the Federal Communications Commission approved
         E-SAT's application for a low earth orbit satellite license. E-SAT is
         required to meet certain milestones and other covenants in order to
         maintain its license.

         On April 8, 1999, the Company notified the FCC that it had entered into
         a construction contract for the first two satellites of the E-SAT
         system on March 31, 1999.

         On July 30, 1999, the Company entered into an agreement with EchoStar
         under which it will receive 60.1% of E-SAT's shares from EchoStar in
         exchange for consideration, including the grant of rights to use up to
         20% of the satellite capacity of the E-SAT system by EchoStar. As


                                      F-14
<PAGE>

         a result of this transaction, the Company will own 80.1% of the E-SAT
         shares. This share purchase agreement is subject to approval by the
         FCC. In connection with the negotiations of the share purchase
         agreement with EchoStar, the Company paid $1,517,187 to a consultant
         during 1999 and capitalized such costs in the E-SAT investment
         account.

         SEIMAC LIMITED

         On November 30, 1995, the Company acquired 232,829 shares representing
         20% of the voting shares of common stock of Seimac Limited, a Canadian
         company, pursuant to a stock purchase and exchange agreement in
         exchange for 165,519 shares of common stock of the Company, valued at
         $662,010. The Company's investments of $662,010 was $464,255 in excess
         of the Company's proportionate share of the net book value of Seimac as
         of November 30, 1995. This excess is being amortized over a period of
         five years. The amortization of this excess book value amounted to
         $30,949 and $92,851 for the years ended December 31, 1999 and 1998.
         This investment is accounted for using the equity method.

         For the year ended December 31, 1998, the Company has recorded its
         proportionate share of Seimac Limited's net income of $34,381.

         On April 30, 1998, the Company sold its entire interest consisting of
         232,829 Seimac shares in exchange for $200,000 in cash and $51,417 in
         forgiven debt. The Company recorded a loss of approximately $228,000 in
         connection with this transaction.

         CONTINENTAL SATELLITE CORPORATION (CONTINENTAL)

         On January 12, 1996, the Company entered into a stock purchase
         agreement with a third party (the Seller) to acquire 72,030 shares of
         common stock of Continental in exchange for approximately $2,300,000 in
         cash. A $50,000 advance was paid to the seller in December 1995.
         Continental has received one of the nine DBS licenses awarded by the
         FCC.

         In connection with this agreement, the Company issued a three-year,
         Series B convertible debenture to EchoStar on January 12, 1996, for
         proceeds of $3,000,000.

         On January 22, 1996, Loral Aerospace Holdings, Inc., a Continental
         common stockholder (the plaintiff), filed a complaint in the Superior
         Court of the State of California against Continental and its
         stockholders alleging that the common shares purchased by the Company
         were improperly issued and, therefore, should be voided. On May 16,
         1996, the Court ruled that the Continental shares were invalidly
         issued. However, the Court also rule that the Company was not without
         equitable remedy and allowed the Company to commence an action against
         Loral.

         On April 21, 1997, the Superior Court of Santa Clara County awarded the
         Company damages of approximately $4.1 million, plus 50 percent annual
         interest. On August 17, 1997, the Company and Loral formally completed
         an agreement wherein the Company received a cash payment of
         approximately $3.5 million from Loral in exchange for dismissals of
         appeals by both parties.


                                      F-15
<PAGE>

         The excess of the settlement payment over the Company's carrying value
         for its interest in Continental of $1.2 million was recorded as a gain
         on sale of investment for the year ended December 31, 1997.

4.   SATELLITE CONSTRUCTION COSTS

     During the construction of the System, the Company is capitalizing all
     design, engineering, launch and construction costs. Such costs amounted to
     approximately $12 million as of December 31, 1999.

     On December 15, 1998, the Company and Alcatel entered into a Memorandum of
     Understanding and authorization to proceed ("MOU") pursuant to which
     Alcatel would become the General Contractor for the design, construction
     and launch services for the Company's planned low earth orbit satellites.
     Upon signing of the MOU, the Company made a $1 million advance payment to
     Alcatel.

     In January and February 1999, the Company made additional payments to
     Alcatel totaling $1 million.

     On March 31, 1999, the Company signed construction and launch contracts
     with Surrey Satellite Technology Limited ("Surrey") and Eurockot,
     respectively, and made advance payments of $7.8 million in April 1999 and
     $2.0 million in July 1999. Total payments under these cancelable contracts
     will amount to approximately $47 million through January 2001. In July
     1999, the Company, Surrey and Eurockot reached agreements under which $3.2
     million of the required milestone payments due in July 1999 totaling $4.8
     million were deferred to yet to be agreed upon dates.

     On October 8, 1999, the Company and Alcatel entered into an agreement under
     which Alcatel will serve as prime contractor for the construction of the
     Company's low earth orbit satellite communications system. This agreement
     becomes effective upon the Company's payment of $14.1 million to Alcatel.

5.   CUSTOMER ADVANCES

     The Company's wholly-owned subsidiary, Global Energy Metering Services,
     Inc. (GEMS), is party to a contract to deliver 10,000 satellite radio
     units. The purchase order is for $1.2 million and under the terms of the
     purchase order, GEMS would receive a total of $500,000 in advance payments
     on the contract, based on certain milestone achievements. As of December
     31, 1998, this purchase order had been suspended by both parties when the
     Argos System became unavailable. The $400,000 in milestone payments
     received are reported as customer advances on the accompanying balance
     sheet. These milestone payments could be subject to refund in whole or in
     part.

6.   RETIREMENT OF CONVERTIBLE DEBENTURES

     On August 29, 1997, the Company completed an agreement with EchoStar to
     retire three convertible debentures in the principal amount of $4,640,000
     with accrued interest of $722,811 and certain legal fees and other expenses
     related to the transaction. In exchange for EchoStar's retirement of the
     debt, the Company transferred back to EchoStar 270,414 shares of EchoStar
     Class A common stock and made a cash payment of approximately $936,000 from
     the proceeds of its settlement with Loral (Note 3). The value of the
     EchoStar shares was determined based on a per share price of $16.57


                                      F-16
<PAGE>

     which represented the closing bid price on August 27, 1997, the date the
     parties initially agreed to the terms of the transaction.

7.       COMMITMENTS

         OPERATING LEASES

         The Company and its wholly-owned subsidiaries lease their facilities
         under noncancelable operating leases which run concurrently and expire
         in July 2003. Minimum future rental payments under the leases, are as
         follows:

<TABLE>
<CAPTION>

   YEAR ENDING
   DECEMBER 31,
<S>                                                     <C>
      2000                                                 $ 178,128
      2001                                                   178,128
      2002                                                   178,128
      2003                                                   103,908
                                                        -------------
                                                           $ 638,292
                                                        -------------
                                                        -------------
</TABLE>

         Total rent expense was $150,084 and $82,615 for the years ended
         December 31, 1999 and 1998, respectively.

         OTHER

         Refer to Note 4 for certain contract commitments.

8.  STOCKHOLDERS' EQUITY

         COMMON STOCK

         The Company's Certificate of Incorporation, as amended in 1999,
         authorizes the issuance of 50,000,000 shares of common stock with a par
         value of $0.0004 per share. Each record holder of common stock is
         entitled to one vote for each share held on all matters properly
         submitted to the stockholders for their vote. Cumulative voting of the
         election of directors is not permitted by the Certificate of
         Incorporation.

         PREFERRED STOCK

         The Company's Certificate of Incorporation, as amended in 1999,
         authorizes the issuance of 5,000,000 shares of preferred stock with par
         value of $0.0004 per share. The Board of Directors of the Company is
         authorized to issue preferred stock from time to time in series and is
         further authorized to establish such series, to fix and determine the
         variations in the relative rights and preferences as between the
         series, and to allow for the conversion of preferred stock into common
         stock. No preferred stock has been issued by the Company as of December
         31, 1999.


                                      F-17
<PAGE>

         EQUITY TRANSACTIONS WITH NON-EMPLOYEES

         On January 13, 1996, the Company issued warrants for the purchase of
         75,000 shares of the Company's Common Stock at an exercise price of
         $7.30. On December 31, 1997, the Company replaced these with new
         warrants at an exercise price of $1.44. These warrants were issued for
         services rendered and are exercisable through January 2006. As of
         December 31, 1999, none of these warrants have been exercised.

         On July 9, 1997, the Company issued warrants for the purchase of
         200,000 shares of the Company's Common Stock at an exercise price of
         $0.50 per share. These warrants were issued in connection with a
         $100,000 short-term loan made by a stockholder of the Company. As of
         December 31, 1997, the loan had been repaid. These warrants were
         exercised during 1999.

         In April 1998, the Company granted options to two consulting firms to
         purchase 400,000 and 233,334 shares of the Company's Common Stock at
         prices of $1.45 and $1.50 per share, respectively. These options have
         terms of five years and vest over a one year period.

         In June 1998, the Company issued 102,000 shares of its Common Stock at
         a price of $2.00 per share. In connection with this stock offering, the
         Company issued warrants to purchase 102,000 shares of the Company's
         Common Stock at an exercise price of $3.00 per share through June 30,
         2001.

         In July 1998, the Company's president was named as a defendant in a
         lawsuit filed by a firm claiming that it was promised shares of the
         Company's Common Stock. In March 1999, the Company settled this matter
         by issuing 63,239 shares of the Company's Common Stock, valued at
         approximately $324,000, and paying $15,000 in cash to the plaintiff.

         During the six months ended December 31, 1998, the Company issued
         2,800,000 units each consisting of a share of Common Stock at a price
         of $2.00 per share and a warrant to purchase a share of common stock at
         an exercise price of $3.00. In connection with this stock offering, the
         Company incurred the following stock issuance costs: (i) cash payments
         of $442,500, (ii) 7,500 shares of Common Stock with a fair value of
         $15,000, and (iii) warrants to purchase 728,000 shares of the Company's
         Common Stock at exercise prices varying from $1.50 to $3.00. The fair
         value of such warrants amounted to $973,000 and was recorded as a
         separate element of the Company's equity.

         In October 1998, at the request of two stockholders due to changes in
         their financial condition, the Company rescinded stock purchase
         agreements relating to 400,000 units and refunded $800,000 in proceeds
         to the two stockholders.

         Under the terms of the above stock offerings, the Company registered
         such shares and warrants in November 1998.

         In February 1999, the Company issued (a) 500,000 units each consisting
         of a share of Common Stock at a price of $3.00 per share and a warrant
         to purchase a share of Common Stock at an exercise price of $4.00, (b)
         50,000 units consisting of a share of common stock at a price of $2.50
         per share and a warrant to purchase a share of common stock at an
         exercise price of $3.50. Sale of these units resulted in gross proceeds
         to the Company of approximately $1.6 million. In connection with this
         offering, the Company granted warrants


                                      F-18
<PAGE>

         to purchase 75,000 shares of the Company's common stock at an exercise
         price of $3.75. Such grant represented stock issuance costs and
         therefore, its fair value of $270,000 was recorded as an offset
         against the proceeds of the offering.

         In March 1999, the Company received proceeds of approximately $7.5
         million from the exercise of warrants to purchase 2.5 million shares of
         the Company's Common Stock.

         During April 1999, Surrey and Eurockot purchased 1,666,667 shares of
         the Company's Common Stock for a total $5 million in cash.

         During 1999, the Company granted options and warrants to purchase
         347,273 shares of the Company's common stock at exercise prices ranging
         from $0.79 to $2.75 to several service providers. The fair value of
         such options and warrants, which amounted to approximately $774,000,
         was recorded as an expense during 1999. The following variables were
         used to determine the fair value of such instruments under the
         Black-Scholes option pricing model: volatility of 100%, expected life
         of 10 years for options and 2 to 3 years for warrants, risk free
         interest of 5% to 6% and underlying stock prices equal to fair market
         value at the time of grant.

         In December 1999, the Company granted warrants to purchase 500,000
         shares of the Company's common stock at an exercise price of $2.81 per
         share to a financial institution as consideration for its efforts to
         help raise capital. The fair value of such warrants of $674,000 was
         recorded as a long term asset and will be offset against proceeds once
         they are received. The fair value of the warrants was estimated on the
         date of grant using the Black-Scholes model with volatility of 100%,
         expected life of 3 years, risk-free interest rate of 5% and fair market
         value of the common stock of $2.25 per share.

         During 1999, the Company received proceeds of $598,526 from the
         exercise of options to purchase 425,084 shares of the Company's Common
         Stock, and proceeds of $320,768 from the exercise of warrants to
         purchase 324,160 shares of the Company's common stock.

         EQUITY TRANSACTIONS WITH EMPLOYEES

         In February 1996, the Company adopted the 1996 Stock Option Plan (the
         1996 Plan) to consolidate its three existing plans. In May 1998, the
         Company adopted the 1998 Stock Option Plan ("the 1998 Plan"), which
         provides for the issuance of a maximum of 500,000 shares of the
         Company's Common Stock. Provisions of the 1996 and 1998 Plans are
         substantially similar to those of the earlier plans. The overall
         purpose of the 1996 and 1998 Plans is to advance the long-term interest
         of the Company by motivating its employees, directors and consultants
         with the opportunity to obtain an equity interest in the Company and to
         attract and retain such persons upon whose judgements the success of
         the Company largely depends.

         Eligible employees, directors and consultants can receive options to
         purchase shares of the Company's Common Stock at a price generally not
         less than 100% of the fair market value of the common stock on the date
         of the grant of incentive stock options. Nonqualified and nonplan
         options may be granted at a price lower than fair market value. The
         options granted under the 1996 and 1998 Plans are exercisable over a
         maximum term of ten years from the date of grant and generally vest
         over (i) one year in the case of directors and consultants, and


                                      F-19
<PAGE>

         (ii) up to a five-year period in the case of employees. Shares sold
         under the 1996 and 1998 Plans are subject to various restrictions as
         to resale.

         In February 1997, the Company completed a stock option repricing
         program in which 1,119,646 stock options, originally issued with
         exercise prices ranging from $1.60 to $6.00 per share, were reissued
         with an exercise price of $1.44 per share, which approximated fair
         market value.

         In December 1997, the Company completed a second voluntary stock option
         repricing program in which approximately 1,135,726 stock options,
         originally issued with an exercise price of $1.44 per share were
         reissued with exercise prices ranging from $0.53 to $0.58 per share.
         The Company has maintained the vesting schedule from the original
         grants.

         In addition, the Company granted non-plan options to certain employees
         in connection with their employment agreements.

         Information with respect to plan and non-plan activity is set forth
         below:

<TABLE>
<CAPTION>
                                                    OUTSTANDING OPTIONS
                                  --------------------------------------------------------
                                                                                   WEIGHTED
                                                                                   AVERAGE
                                  NUMBER OF        PRICE PER        AGGREGATE      EXERCISE
                                   SHARES            SHARE            PRICE         PRICE
<S>                               <C>            <C>                <C>            <C>
Balance, December 31, 1997           1,418,233   $0.40 - $5.60      $  1,271,648        0.90

    Granted                            787,500   $0.53 - $2.19           569,329        0.78
    Exercised                         (161,577)  $0.53 - $1.44           (99,722)       0.62
    Terminated                               -         -                       -           -
                                    ----------                       -----------
Balance, December 31, 1998           2,044,156   $0.40 - $5.60         1,741,255

    Granted                          2,149,700   $0.39 - $5.50         2,759,768        1.33
    Exercised                         (280,144)  $0.53 - $2.80          (203,695)       0.73
    Terminated                         (10,340)      $0.53                (5,491)       0.53
                                    ----------                       -----------
Balance, December 31, 1999           3,903,372   $0.39 - $5.60      $  4,291,837
                                    ----------                       -----------
                                    ----------                       -----------
</TABLE>

                                      F-20
<PAGE>

         The following table summarizes information with respect to stock
         options outstanding at December 31, 1999:

<TABLE>
<CAPTION>
                                                                           OPTIONS
                                     OPTIONS OUTSTANDING                  EXERCISABLE
                           ------------------------------------     ------------------------
                                         WEIGHTED
                                          AVERAGE
                                         REMAINING    WEIGHTED                      WEIGHTED
                                        CONTRACTUAL    AVERAGE                      AVERAGE
    RANGE OF               NUMBER          LIFE       EXERCISE        NUMBER        EXERCISE
EXERCISE PRICE           OUTSTANDING      (YEARS)       PRICE       EXERCISABLE      PRICE
<S>                      <C>             <C>         <C>            <C>           <C>
$0.53 - $0.75                1,643,659         7.08      $  0.57        1,384,517     $  0.55
$1.08 - $1.67                2,038,501         9.41         1.31          638,084        1.32
$2.00 - $2.86                  164,928         8.09         2.33          164,928        2.33
$5.50 - $5.60                   56,284         8.13         5.51           56,284        5.51
                            ----------                                -----------
                             3,903,372                                  2,243,813
                            ----------                                -----------
                            ----------                                -----------
</TABLE>

         The stock based compensation for the twelve months ended December 31,
         1999 of $957,755 has been allocated across the relevant functional
         expense categories within operating expense as follows:


<TABLE>

            <S>                                     <C>
            Marketing and sales                     $ 153,324
            General and administrative                756,035
            Research and development                   48,396

</TABLE>


         The Company accounts for employee and board of director stock options
         in accordance with the provisions of APB No. 25 and complies with the
         disclosure provisions of SFAS No. 123.

         Under APB No. 25, compensation expense is recognized based on the
         amount by which the fair value of the underlying common stock exceeds
         the exercise price of the stock options at the measurement date, which
         in the case of employee stock options is typically the date of grant.
         For financial reporting purposes, the Company has determined that the
         deemed fair market value on the date of grant of certain employee stock
         options was in excess of the exercise price of the options. This amount
         is recorded as deferred compensation and is classified as a reduction
         of stockholders' equity and is amortized as a charge to operations over
         the vesting period of the applicable options. The vesting period is
         generally four years. The fair value per share used to calculate
         deferred compensation was derived by reference to the preferred stock
         values and the Company's initial public offering price range.
         Consequently, the Company recorded deferred stock compensation of $0
         and $2,490,337 during the year ended December 31, 1998 and 1999,
         respectively. Amortization recognized for the year ended December 31,
         1998 and 1999 totaled $0 and $957,755, respectively.


                                      F-21
<PAGE>

         The weighted average fair value of the options granted or modified for
         the years ended December 31, 1999 and 1998 was $0.90 and $0.68,
         respectively. The fair value of each stock option is estimated on the
         date of grant using the Black-Scholes option-pricing model with the
         following weighted average assumptions:

<TABLE>
<CAPTION>
                                               1999              1998              1997
<S>                                         <C>               <C>                  <C>
         Risk free interest rate                5.5%              5.7%              5.7%
         Expected life                      4 years           4 years           4 years
         Volatility                             100%              227%               80%
         Dividend yield                           -                 -                 -
</TABLE>

         The following pro forma net income (loss) information has been prepared
         following the provisions of SFAS No. 123:

<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                            -------------------------------------------------
                                               1999              1998              1997
<S>                                         <C>               <C>                  <C>
Net income (loss)
    As reported                             $ (5,915,493)     $ (3,293,493)        $3,068,917
    Pro forma                               $ (6,252,010)     $ (3,713,942)        $1,793,791

Net income (loss) per share
    As reported                                 $  (0.45)         $  (0.47)          $   0.49
    Pro forma                                   $  (0.48)         $  (0.53)          $   0.29
</TABLE>

9.   RELATED PARTY TRANSACTIONS

     In January 1997, the Company began to defer payment of a portion of all
     future compensation of the Company's president. The deferred compensation
     balance was $216,000 as of December 31, 1997. In October 1998, the Company
     paid its president the amount of $246,000 related to his deferred
     compensation through September 1998. The president also received a cash
     bonus of $20,000 in connection with his efforts in securing the E-SAT
     license.

     Refer to Notes 3 and 6 for disclosures regarding related party
     transactions with EchoStar.

10.  INCOME TAXES

     The provision for income taxes for all periods presented relates to current
     minimum taxes.


                                      F-22
<PAGE>

     The estimated tax effect of significant temporary differences and
     carryforwards that gave rise to deferred income tax assets as of December
     31, 1999 and 1998, is as follows:

<TABLE>
<CAPTION>
                                                    1999                           1998
                                          --------------------------     ----------------------------
                                           FEDERAL         STATE          FEDERAL         STATE
<S>                                       <C>              <C>           <C>              <C>
Deferred tax assets:
    Net operating loss carryforwards      $  3,439,000     $ 602,000     $  1,785,000     $ 305,000
    Research and development credit
      carryforwards                            147,000             -          115,000             -
    Excess of tax over book basis of
      investments, deferred
      compensation, and other                   64,000        12,000           10,000         1,500
                                           -----------      --------       ----------      --------
    Deferred tax assets                      3,650,000       614,000        1,910,000       306,500
    Valuation allowance                     (3,650,000)     (614,000)      (1,910,000)     (306,500)
                                           -----------      --------       ----------      --------
        Net deferred tax assets              $       -       $     -        $       -       $     -
                                           -----------      --------       ----------      --------
                                           -----------      --------       ----------      --------
</TABLE>

     Due to the uncertainty of realization, a valuation allowance has been
     provided to offset the net deferred tax assets. The increase in the
     valuation allowance was approximately $2,047,500 and $1,293,500 during the
     years ended December 31, 1999 and 1998, respectively. The provision for
     income taxes differs from the amount which would arise by applying the
     combined statutory income tax rate of approximately 40% due to changes in
     the deferred tax valuation allowance.

     As of December 31, 1999, the Company has net operating loss carryforwards
     of approximately $10,114,000 and $9,800,000 for federal income tax purposes
     and California state franchise tax purposes, respectively. The Company also
     has research and development credit carryforwards. Such carryforwards
     expire in varying amounts between 2000 and 2020.

     As a result of changes enacted by the 1986 Tax Reform Act, utilization of
     net operating loss and tax credit carryforwards may be limited due to
     equity transactions occurring on or after May 6, 1986.

11.  RISKS AND UNCERTAINTIES

     The Company periodically maintains cash balances at banks in excess of the
     Federal Deposit Insurance Corporation insurance limit of $100,000.

12.  SUPPLEMENTAL DISCLOSURES OF NON CASH INVESTING AND FINANCING ACTIVITIES

     During the years ended December 31, 1999, 1998 and 1997, the following
     noncash activities occurred:

     -    During 1997, the Company issued 55,419 of its shares of Common Stock
          to certain individuals in consideration for services rendered. These
          shares were valued at $76,293.


                                       F-23
<PAGE>

     -    On January 23, 1997, the Company elected to exchange all of its
          401,107 DBSC shares for 270,414 shares of EchoStar common stock which
          were valued at approximately $539,000 and $6,760,000, respectively.

     -    On August 29, 1997, the Company settled all principal and accrued
          interest balances outstanding under its convertible debentures, in
          exchange for 270,414 shares of EchoStar common stock and a cash
          payment of approximately $936,000.

     -    In April 1998, the Company granted options to two consulting firms to
          purchase 700,000 shares of the Company's Common Stock. The Company
          recorded a compensation charge of $159,000 in connection with this
          transaction during 1998.

     -    The Company issued 728,000 warrants to purchase shares of Common Stock
          to certain individuals for services rendered in connection with the
          placement of the September 1998 sales of the Company's Common Stock.
          These warrants were valued at $973,000 and were offset against the
          proceeds.

     -    The Company issued a warrant to purchase 500,000 shares of the
          Company's common stock in exchange for efforts to help raise capital.
          The fair value of the warrant of $673,000 was capitalized as a long
          term asset and will be offset against proceeds, once they are
          received.

     -    The Company issued a warrant to purchase 75,000 shares of the
          Company's common stock to a financial institution as consideration for
          its effort to help raise capital. The fair value of $270,000 was
          offset against the proceeds from the issuance of stock.

13.  SUBSEQUENT EVENT

     As of March 24, 2000, the Company committed to issue 20,833 shares of the
     Company's preferred stock in exchange for gross proceeds of $624,990 in
     cash. Each share of preferred stock is convertible, at the election of the
     holder, into ten shares of the Company's common stock at a conversion price
     based upon a $3.00 per common share price, or the average trading price of
     the common stock within a specified period if the common stock is trading
     at less than $3.00 per share.


                                      F-24






Deferred
Stock