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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, 2001

                                         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-

The number of shares  outstanding of registrant's only class of Common Stock, as
of May 6, 2002, was 29,405,231  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  Statements
on Form SB-2.


Exhibit Index is located at Page 55.

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                                    PART I

ITEM 1.  BUSINESS

Overview

The Company

DBS  Industries,  Inc. is a  development  stage  company  dedicated to providing
innovative satellite and  telecommunications  based solutions for the monitoring
and   control   of   energy   and   critical   natural   resources   and   their
often-inaccessible  remote infrastructure.  Through our ten years of development
experience in satellite system design and energy monitoring and control, we have
developed  expertise  that  enabled us to develop what we believe is a currently
marketable data messaging system and obtained  control over a satellite  license
that we believe will significantly aid the future expansion of our service.

Through our 80%  ownership  interest  in E-SAT,  Inc.,  we are the only  company
currently licensed by the FCC to provide commercial two-way data messaging using
low earth orbiting satellites, VHF frequencies and code division multiple access
technology. This license is internationally recognized through the United States
LEOTELCOM-2 license.

We intend to utilize the E-SAT license, whose majority ownership and control was
obtained in 2000, to deliver global low-cost resource infrastructure  monitoring
and control  services,  with our first  target  market  comprised  of  automated
electric meter reading and control.  We have estimated the costs associated with
building the six  satellite  global  constellation  to service this market to be
approximately $60 million.

Financial   difficulties   in  the  satellite   sector  and  sharp  declines  in
telecommunications  and technology sectors have, however,  made it difficult for
us to attract the necessary system construction  financing to complete the E-SAT
system and have made us unable to meet  certain  milestones  required by the FCC
license. (See "Risk Factors-- The E-SAT system has experienced delays that could
lead to the loss of the E-SAT FCC license.").  As a result, in 2001 we developed
a strategy to take  advantage of the  telecommunications  downturn by purchasing
satellite capacity and combining it with the energy communications  technologies
and expertise we have developed over the past ten years. With this strategy,  we
believe that we could more quickly deliver our services to customers and, at the
same time,  demonstrate the market value of low earth orbiting satellite systems
for remote infrastructure services.

We  initiated  our  strategy  in  June  2001  when  we  completed  a  seven-year
operator-to-operator  agreement with Iridium Satellite LLC, the purchaser of the
Iridium  system out of bankruptcy,  gaining low rates on satellite  capacity and
limited  exclusivity through a revenue sharing  arrangement.  We also contracted
with TIAX,  LLC,  formerly  Arthur D. Little,  Inc.'s  Technology and Innovation
business,  a technology  firm with specific  expertise in the Iridium  Satellite
system,  to help us develop a data  network  solution for this  primarily  voice
telecommunications   system.   (See   "Risk   Factors-- Our  key   engineering
subcontractor  is  emerging  from a  bankruptcy  proceeding  that could harm our
completion of the Iridium based system.")

To date,  we have not  recognized  any  significant  revenue and do not have any
customers.  We  plan  to  begin  providing  our  data  messaging  services  on a
commercial basis during 2002,  utilizing this satellite capacity contracted from
Iridium Satellite.

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In June 2001, following the first successful demonstration of turning on and off
a 60-ton shopping mall air conditioner by satellite  before  representatives  of
the California  governor's  office and the media,  we entered into  negotiations
with the  State of  California  to  provide  satellite-based  energy  management
services.  On May 23, 2002, we entered into a Demand Reserves Provider Agreement
with  the  California  Consumer  Power  and  Conservation  Financing  Authority,
commonly  referred  to  as  the  California  Power  Authority,  to  implement  a
satellite-based  automated  conservation system designed to conserve significant
electrical  usage on demand at peak or emergency times.  Under the contract,  we
shall provide a minimum of 200 megawatts and a maximum of 360 megawatts of daily
available demand reduction from qualified end users. This minimum and maximum of
daily available demand  reduction  increases to 400 megawatts and 560 megawatts,
respectively,  effective  June 1, 2003.  We are currently  seeking  financing to
implement  and  complete  the  engineering,  deployment,  and  operation  of the
automated load curtailment  system which is estimated to cost  approximately $15
to $20 million over the next two years.  In  addition,  we are in the process of
signing up customers to participate in the program.  (See "Risk Factors-- We may
be unable to sign up  participants to make load available for our automated load
curtailment  services  and - We may be unable to raise  sufficient  capital  for
implementation of the Iridium-based system").

To aid us in  implementing  and  deploying  services  for the  California  Power
Authority we have engaged  Bechtel  Corporation  to provide  program  management
services, and TIAX, LLC for engineering services.

At the same time we are seeking to implement  services to the  California  Power
Authority,  we plan to continue to pursue  development  of our E-SAT system as a
complementary source of satellite capacity. We believe that our use of Iridium's
L-Band satellite  capacity will be complementary to our ultimate  VHF-Band E-SAT
system.  This is primarily because the E-SAT system operates in the VHF spectrum
that does not require a sky view from the  satellite to the remote  device.  The
Iridium  system  operates in the L-Band  spectrum  and does  require a sky view,
which  prohibits  the  placement  of the devices  inside  buildings  or in other
locations where there is no direct view of the satellite.

Both of these systems are  low-earth-orbiting  satellite systems that we believe
offer  significant  advantages over competing  systems and alternative  customer
solutions, including:

     Global  coverage:  Using a little low earth orbiting  satellite-to-internet
     system,  we will be able to  provide  reliable,  global,  two-way  data and
     messaging communications services.

     Security:  By using  both  the  Iridium  system,  which is used by the U.S.
     Department of Defense,  and the planned  E-SAT  system,  we believe that we
     will be capable of providing  security benefits through the  implementation
     of a virtual  private  network  that does not rely on any  public  switched
     phone system.

     Low cost: Unlike terrestrial systems, no incremental communications network
     infrastructure is required for new locations, regardless of how remote they
     are. In  addition,  both the Iridium  System and the planned  E-SAT  system
     require fewer ground stations than other satellite solutions.  In Iridium's
     case, this is because the system supports  inter-satellite  communications;
     in E-SAT's  case,  this is  because  the  system is  store-and-forward,  so
     satellites can store the information until a ground station is reached.

     Low-cost  ground  transceiver:  As  compared  to  geostationary  satellites
     operating at over 22,000 miles from earth,  the Iridium and E-SAT low earth
     orbiting  systems  operate less than 500 miles from earth and therefore can
     utilize smaller and less expensive  transceivers.  In addition, in the case

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     of the E-SAT system,  the use of spread  spectrum (Code  Division  Multiple
     Access)  communications  technology and an Application  Specific Integrated
     Circuit technology should allow us to produce smaller and lower-cost ground
     transceivers than competing systems.

Our  principal  executive  offices are located at 100 Shoreline  Highway,  Suite
190A, Mill Valley, California, 94941 and our phone number is 415-380-8055.

Our Strategy

To achieve  our  business  objectives,  we have  identified  the  following  key
components to our business strategy:

     Minimizing  risk and entering  into early  commercial  service by obtaining
     communication  capacity on existing satellite platforms.  We believe such a
     strategy  can both reduce the  initial  capital  required  for us to become
     operational,  provide an ability for us to build a customer base and market
     credibility,  and demonstrate the market opportunity to potential investors
     for the purpose of raising  capital to complete  construction  of our E-SAT
     system.

     Providing a reliable,  worldwide, two-way data communications network based
     on existing technologies. We believe that the Iridium system, which is also
     used by the U.S. Department of Defense, is a proven technology. With regard
     to our E-SAT system, we are incorporating  existing and proven technologies
     such as Code  Division  Multiple  Access  communications  technology  and a
     store-and-forward design.

     Offering a low-cost  service.  We believe  that low cost is of  fundamental
     importance  to our  potential  clients.  By  obtaining  existing  satellite
     capacity  from a firm that has been  purchased out of  bankruptcy,  we have
     been able to obtain service at a  significantly  lower cost than we believe
     would  otherwise  have been  possible.  With  regard to our  planned  E-SAT
     system,   we  believe  the  relatively  lower  costs  involved  in  design,
     construction,   launch  and   operations,   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  systems.  We have  designed the
     E-SAT system specifically for the two-way  communication of short messages,
     using  fewer  satellites  than  competing  near-real  time low earth  orbit
     systems and 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 low earth orbiting systems
     using the older Time Division  Multiple  Access  communications  technology
     will require more satellites and more gateway earth stations than the E-SAT
     system.

     Capitalizing on not being the first to market. We have learned a great deal
     from  earlier  commercial  satellite  operators  whose  services  have  not
     developed as they may have anticipated. We believe that this experience has
     confirmed  our focus on  low-cost  solutions  for  clearly  targeted  niche
     markets.

     Capitalizing  on the  barriers to entry for  potential  competitors  to our
     E-SAT  system.  The  primary  barrier  to entry  into the  little low earth
     orbiting  satellite  service market in the United States is the acquisition
     of an operating  license from the FCC. Before the FCC issues any additional
     licenses,  it must allocate an additional portion of the frequency spectrum
     for use, which we do not expect to happen in the near future.

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     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
     E-SAT system to market.  Outside of the United States,  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  allied  ourselves  with  companies and investors who we
     believe are highly qualified strategic partners. For our initial service we
     have contracted with Iridium Satellite for satellite services, TIAX LLC for
     engineering,  and Bechtel Corporation for program management. For our E-SAT
     system,  we have strong  relationships  with Eurockot Launch Services,  our
     launch service  provider,  and Surrey  Satellite  Technology  Limited,  our
     satellite manufacturer.

Development Milestones - Iridium-based system

     To  develop  currently  marketable  remote  infrastructure  monitoring  and
     control  services using the Iridium system,  we have achieved the following
     milestones to date:

     Executed a seven-year operator-to-operator agreement with Iridium Satellite
     LLC. In June 2001, we executed a seven-year  operator-to-operator agreement
     with  Iridium  Satellite  LLC,  the  purchaser  of the Iridium  system from
     bankruptcy,  gaining  low rates and limited  exclusivity  through a revenue
     sharing arrangement.

     Conducted a system  demonstration in June 2001, by successfully  turning on
     and turning off a 60-ton shopping mall air conditioner by satellite  before
     representatives of the California governor's office and the media.

     Entered into a Demand Reserves Provider Agreement.  In May 2002, we entered
     into a five- year demand  reserves  provider  agreement with the California
     Power  Authority to provide a minimum of 200 megawatts and a maximum of 360
     megawatts  of daily  available  electrical  demand  reduction  from  energy
     reduction participants.

Development Milestones - E-SAT system

     We will not be able to deploy  two little  low earth  orbiting  satellites,
     which make up a part of E-SAT's planned six-satellite system, in compliance
     with the milestone  dates required under the FCC license.  As a result,  on
     March 29, 2002,  we applied to the FCC for an  extension  of the  milestone
     requirements  for an additional  two years.  (See "Risk Factors-- The E-SAT
     system has experienced  delays that could lead to the loss of the E-SAT FCC
     license.")

     To date, we have achieved the following milestones:

          Development of the system. We initially conducted research and testing
          to develop our E-SAT system design and were  successful in integrating
          our  satellite  transmitter  and antenna  completely  within a utility
          meter.

          Completed   proof-of-concept  trials.  We  conducted  proof-of-concept
          demonstrations   with  36   electric   and   natural   gas   utilities
          demonstrating  little low earth  orbiting  satellite  technology  as a

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          viable  method to  collect  data  from  hard-to-access  locations.  We
          conducted a proof-of-concept trial for Pacific Gas & Electric Company,
          in which data from several  natural gas wellhead  meters was collected
          and  transmitted  by  little  low  earth  orbiting  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., in which prototype radio
          terminal  units and  electric  meters  were  installed  at 34 electric
          utilities  in the  continental  United  States  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, or NOAA.

          Granting of FCC License. On March 31, 1998, E-SAT was issued a license
          by the FCC to provide little low earth orbiting  satellite services in
          the United States.

          Signed  contract to construct  the  satellites.  On March 31, 1999, we
          signed a contract  with Surrey  Satellite  Technology  Limited for the
          construction of E-SAT's planned  constellation of six little low earth
          orbiting  satellites.  Should we bring into effect our prime  contract
          with Alcatel Space  Industries  (see below in this  section,  "Entered
          into an agreement  with an end-to-end  prime  contractor for the E-SAT
          system"), our contract with Surrey would be assigned to Alcatel.

          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, each for a set of three satellites.

          Entered into an agreement with an end-to-end  prime contractor for the
          E-SAT system  which,  as of March 31, 2002, is no longer in effect but
          did provide us with certain  assets.  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 low earth
          orbiting satellites.  Pursuant to that contract, we paid approximately
          $2 million to Alcatel,  for which Alcatel completed and provided to us
          the  preliminary  engineering  design  review  for the  E-SAT  system,
          including the payload design and designs for the gateway earth station
          and tracking facilities, as well as the satellite orbital analysis and
          communications  link  margins to and from space.  The  agreement  with
          Alcatel  required a payment at the end of 1999 of  approximately  $9.1
          million in cash and the  equivalent  of $5 million of our common stock
          to bring  the  contract  into  effect  in order to  initiate  the full
          development  schedule.  As of March 31, 2002 this  payment,  which was
          originally  due in November  1999, has not been made and therefore the
          agreement with Alcatel is not currently in effect.  (See, "Risks-- The
          contract  with our  prime  contractor  for the E-SAT  system  could be
          declared  void.")  However,   we  did  receive  valuable   engineering
          specifications  and analyses  that we believe are an integral  part of
          E-SAT's ability to construct the satellite system.

          Negotiated equity  investments in us by E-SAT strategic  partners.  We
          negotiated equity  investments  totaling  approximately $10 million by
          Eurockot Launch Services and Surrey Satellite Technology Ltd.

          Organized our risk management through insurance.  On July 14, 1999, we
          engaged Frank Crystal and Co. and its subsidiary,  International Space
          Brokers,  as our  exclusive  risk  management  advisors and  insurance
          brokers for both space and ground segments.

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          Successfully   launched  and  commissioned  first  satellite  payload,
          bringing our international  license into service. On June 28, 2000, we
          launched our first  satellite  payload aboard a SNAP-1  nanosatellite,
          and completed the in-orbit commissioning in August and September.  The
          satellite,  which  is not  being  used  for  commercial  service,  has
          succeeded in its purpose of validating  critical  design elements that
          we  believe  will  lead  to the  successful  deployment  of our  E-SAT
          commercial  satellite  services.   Surrey  Satellite  Technology  Ltd.
          completed  the  payload  from  design to  commissioning  in only seven
          months.  On October  20,  2000,  the FCC  informed  the  International
          Telecommunications  Union that this  payload  brought into service the
          LEOTELCOM-2   international   frequency  license,  under  which  E-SAT
          operates.

          Acquired  controlling interest in E-SAT. On July 31, 1999, we signed a
          contract with EchoStar  Communications Corp. to increase our ownership
          interest in E-SAT to 80.1%.  EchoStar  retains  19.1% of the ownership
          interest in E-SAT,  Inc. Under the terms of that  agreement,  EchoStar
          has the right to use 20% of the  communication  capacity  of the E-SAT
          system. The FCC approved the transfer of control to us on November 21,
          2000 and on December 29, 2000,  we executed  documents  for the formal
          transfer from EchoStar.

Target Markets - Automated Electricity Load Curtailment

Supply and demand imbalances are driving forces in energy markets worldwide. Our
technology seeks to mitigate these imbalances by providing low cost and targeted
automated  load  curtailment  that can  effectively  provide  large  amounts  of
electricity at times of severe  imbalances,  in effect creating strategic energy
conservation   reserves.   Such  reserves  consist  of  non-essential   uses  of
electricity that can be surgically curtailed in the event of local,  regional or
national   energy  crises   without   impacting   health,   safety  or  economic
productivity.  We believe  that our  technology  can  provide a  satellite-based
command and control system that enables us to provide near real-time curtailment
of energy  using  devices,  such as air  conditioners,  at peak  usage and other
emergency times when the shortage of energy could cause blackouts.  This program
incorporates  new  and  highly  secure  metering,   communications  and  control
technologies  that permit  direct,  near real-time and  geographically  targeted
access to significant  amounts of curtailable demand, and direct metering at the
load source. As a result, we endeavor to provide an effective day-in and day-out
energy management tool to reduce energy peaks at a cost significantly below that
of  generating  plants and without  the  significant  environmental,  social and
financial costs of building new generation plants.

In  particular,  we  focused  on the events  surrounding  the  energy  crisis in
California  in the  spring  and  summer  of 2001.  We noted  that a  significant
percentage  of all  electrical  consumption  is  attributed  to  commercial  air
conditioning  systems and concluded that, by providing  automated  curtailing of
these  systems  during  critical  time  periods,  we could  offer the  following
potential benefits:

Prevents blackouts. Through the identification and consolidation of non-critical
and  non-essential  energy use across a state, a massive  voluntary  prospective
reserve of energy can be developed for automated  conservation on command.  This
automated  conservation can be used to protect against rolling blackouts and the
potentially serious health, safety and short and long-term economic consequences
that may result from blackouts.

Protect  consumers and businesses.  By providing an effective method for gaining
greater control over the regional  energy spot market,  we may be able to reduce
price   pressures.   This  could  reduce  the  potential  for  temporary  energy

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bottlenecks  or energy  market  manipulation  by providing an effective  tool to
ratchet  down energy use during  spikes  and,  therefore,  preventing  excessive
energy  pricing.  This could save retail  customers,  businesses  and government
significant amounts from their power bills.

Conserve energy and protect the environment. Using automated energy conservation
at  peak  loads  avoids  the  significant  environmental  cost of  building  and
operating peak generation and transmission facilities.

Enhance grid infrastructure security. In the event of inadvertent or intentional
damage to a portion of the  electricity  grid,  the  ability to execute  command
conservation  could be used to prevent a dramatic  and  cascading  impact on the
regional grid, as illustrated by the Northeast blackout of 1977.

On May 23, 2002,  the  California  Power  Authority and we entered into a Demand
Reserves Provider Agreement. Under the agreement,  beginning October 1, 2002, we
shall provide a minimum of 200 megawatts and a maximum of 360 megawatts of daily
available electrical demand reduction from qualified end users. This minimum and
maximum of daily available demand  reduction  increases to 400 megawatts and 560
megawatts, respectively, effective June 1, 2003.

Through our proposed  services,  the California  Power Authority will be able to
immediately reduce  non-critical  power consumption at locations  throughout the
state in order to create energy  reserves to smooth out energy usage during peak
use and emergency times. It is anticipated that qualified end users will consist
of  primarily  large  private  commercial  energy users such as owners of retail
stores and shopping centers.

For our services,  the  California  Power  Authority  will pay us  approximately
$51,000 per year per megawatt for  "non-spinning  reserves".  A portion of these
fees will be remitted to the qualified end users as an incentive to  participate
in the demand reserve program.

The agreement with the California Power Authority will terminate in May 2007. In
addition,  the  agreement  may be  terminated  earlier if we fail to provide the
California  Power Authority with the daily minimum  megawatt of demand reduction
by  October  1,  2002,  the  California  Power  Authority  fails to enter into a
Participating Load Agreement with the California  Independent System Operator by
October 1, 2002 or such  Participating  Load Agreement is terminated  during the
term of our Demand Reserve Provider Agreement,  or we fail to make available for
reduction a specified  level of energy usage for two  consecutive  months during
the summer.

We expect the capital and operating  costs for the full deployment of the system
to cost  approximately $15 to $20 million over the next two years. We are in the
process of signing up qualified end users to participate in the program.

Other Target Markets

We believe other  significant  markets for the  technology we are developing for
our Iridium-based system include:

Natural  Resource/Energy  Infrastructure  Command  and  Control.  In the  United
States,  an aging and substantially  under-invested  energy and natural resource
infrastructure,  often located in remote areas,  is  increasingly  bottlenecking
efficient resource allocation. Globally there is growing demand for solutions to
critical   natural   resource,   energy  and  water  scarcity  and  distribution
inefficiencies.   These  trends  increase  the  importance  of  and  demand  for

<PAGE> 10

technologies that can provide remote real-time  monitoring and control to remote
natural  resource  infrastructure.  We believe that our  technology  can provide
unique  solutions in this market by providing the ability to remote  command and
control  remote  infrastructure.  Our  technology is designed to provide  direct
remote  monitoring  and  control  of  switches,   transmission  lines,   meters,
pipelines,  hydraulic  controls  and related  equipment to monitor  usage,  send
alerts  and  remotely  control  other  devices  in order to  prevent  or isolate
problems and reroute resources.

Infrastructure Security Command and Control. Recent events have focused national
security concerns on the vulnerabilities of the United States  infrastructure to
terrorism,  serious vandalism, and natural disaster. Utilizing the potential for
secure  communication  of our system,  we believe we are  capable of  addressing
certain  critical  security  concerns  related to United  States  infrastructure
protection.  Much of the energy  infrastructure  is intentionally  located in or
routed through remote and isolated areas for security reasons.  For example, our
nation's   vulnerable   and   decentralized   energy   infrastructure   includes
approximately:

*       670,000 miles of electric power transmission lines
*       200,000 miles of petroleum pipeline
*       180,000 miles of natural gas pipeline
*       70,000 miles of propane pipeline
*       38 major oil refineries
*       10 unconnected independently managed electrical grids
*       6 federal and hundreds of commercial fuel energy reserve depots
*       390 hydroelectric dams
*       100+ nuclear power-generating plants

We believe that our system will be able to provide a comprehensive,  centralized
monitoring  and command  network  for these  disparate  systems to,  among other
things:  (1) monitor,  activate early warning,  and provide a national real-time
view  to  detect   emergency   incidents  and  patterns   across  the  range  of
infrastructure,  from energy to water to ships at sea; and (2) enable  strategic
intervention   to  contain   the  impact  or  spread  of  local   infrastructure
emergencies.

Target Markets - E-SAT system and Automated Meter Reading

We plan to continue to pursue development of our E-SAT system as a complementary
source of satellite  capacity.  We have designed the E-SAT system to provide low
cost,  two-way data messaging  services to industrial  customers  throughout the
world who need regular, but not real-time,  information. We believe that our use
of E-SAT's VHF-Band system will be complementary to our Iridium L-Band satellite
capacity.  This is  primarily  because  the  E-SAT  system  operates  in the VHF
spectrum  that  does not  require a sky view from the  satellite  to the  remote
device  enabling E-SAT  transceivers  to be placed inside  buildings or in other
locations  where  there is no direct  view of the  satellite.  In  addition,  we
believe that the E-SAT  transceivers  can be produced at a  significantly  lower
cost than Iridium transceivers.

By  focusing  on  the  non-real-time  market,  where  some  delay  between  data
collection  and  transmission  to  the  customer  has   insignificant   business
consequence,  the E-SAT system can be developed at relatively low costs compared
to other global  communications  networks,  and therefore  serve markets such as
automated  meter  reading,  where we believe  reduced costs will be an important
consideration.   By   focusing  on   collecting   data  that  is  in  remote  or

<PAGE> 11

hard-to-access   locations,   we  reduce  our   competition   from   terrestrial
technologies,  such  as  cellular  communications,   which  cannot  justify  the
infrastructure  expense  in each  remote  location,  and we  increase  the value
offered to the customer as a result of their higher costs in those areas.

Our initial focus for the E-SAT system is on energy meters in remote  locations.
One of our target markets is the United States  electric and natural gas utility
industries,   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 significant
travel time to a meter site,  rugged terrain,  physical risk,  restricted sites,
environmental  issues,  and mis-reads  requiring  additional site visits, all of
which can contribute to higher costs for utilities.

Our proposed  messaging services are designed to provide a reduction in the cost
to gather data from  hard-to-access  meters.  We expect to charge  significantly
less than the costs utility  companies  normally  incur in sending meter reading
personnel  out to each of those  difficult  to reach  locations.  This  provides
several advantages including:

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

     *    Estimated billing is eliminated.

     *    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.

     *    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.

In the United  States,  the emergence of automatic  meter reading as an accepted
technology and the  deregulation of the utility  industry in a number of states,
which has forced  utility  companies to focus on all aspects of their costs and,
in some cases, to compete to retain the meter reading  activity,  has provided a
foundation for us to market our services.

There is also a significant  potential market for our services in countries that
do not broadly monitor energy consumption. For those countries,  implementing or
expanding coverage of metering is of significant  strategic and economic benefit
both as a source of revenue and as a critical  component of  implementing  their
energy  infrastructure.  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.

Technology: Iridium-based System

The Iridium system is comprised of three  principal  components:  the little low
earth orbiting satellite network, the ground network and the user terminal unit.

<PAGE> 12

This  system,  developed  together  with  Arthur D.  Little,  Inc.,  utilizes  a
proprietary master control system and remote controller connected to the Iridium
Satellite  System to  remotely  monitor and control  roof-top  air  conditioning
systems or other types of electricity-using devices.

As  of  December  31,  2001,  the  Iridium   satellite  network  consists  of  a
constellation of 73 satellites (66 are operational plus 7 on-orbit spares) and a
ground support network.  The satellites are grouped into six polar planes,  each
having eleven satellites functioning as switching nodes in the Iridium telephony
network.  Each satellite weighs  approximately  680 kg and travels in near-polar
orbits at an altitude of 485 miles (780 km) above the earth.  Each  satellite is
cross-linked to four other satellites;  two satellites in the same orbital plane
and two in an adjacent  plane.  This  constellation  is designed to ensure that
every region on the globe is covered by at least one satellite at all times. The
Iridium network operates in the L, K and Ka frequency bands.

Planned aspects of our technology include:

     o    Universal  control of virtually any significant  energy using device -
          remote operation shut-down
     o    Independent control of multiple AC units or other loads
     o    Security
     o    Automatic site identification when connection is initiated
     o    Remote  status  monitoring  of the energy  using device and the remote
          controller
     o    Battery backup for several days without commercial power

     o    Weather-proof  remote control unit is designed for simple installation
          and trouble-free operation

Technology: The E-SAT system

The E-SAT system is designed to minimize infrastructure  investment and maximize
efficiency  by  utilizing  a small  constellation  of little low earth  orbiting
satellites  with  the  ability  to  reach  markets  not  readily  accessible  by
terrestrial  technologies.  We expect that the  aggregate  cost to construct and
launch the E-SAT  system  into  commercial  service  will be  approximately  $60
million,  in addition to the  approximately  $12.2  million which has been spent
through December 31, 2001.

The E-SAT system's  radio  terminal  units will attach to a customer's  meter or
other device and transmit data to the  satellites  using Code Division  Multiple
Access technology.  From these little low earth orbiting satellites, the data is
transmitted to ground stations, which sort the data and transmit the information
to our customers via the Internet. The two-way service also allows our customers
to send  instructions,  messages,  and updates to their  remote  meters or other
devices.

         Space Segment

The  constellation  to be launched  will consist of six  satellites.  We plan 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 low earth orbiting 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.

<PAGE> 13

The  satellites  will 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 power and thermal control,  allowing it to operate and perform the mission.
The platform  provides the altitude 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.

The FCC license  will allow us to operate  from earth to the  satellites  in the
148.0000 - 148.905 MHz band and from the satellites to the earth in the 137.0725
to137.9275 MHz band. The communications  plan for our system will utilize direct
sequence spread spectrum  multiple access  transmission for service links,  from
meter to satellite,  and feeder links,  from ground  station to satellite.  This
modulation  technique  is designed to allow the  communications  to  distinguish
between messages and the background noise emanating into space.

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.  Code Division  Multiple Access 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.  Code Division
Multiple  Access  spreads the data  signal  over the entire  band of  operations
reducing the power  required by a terminal unit to transmit data to a satellite.
Through E-SAT,  we are presently the only  commercial  little low earth orbiting
system  operator  licensed  in the  United  States to  implement  Code  Division
Multiple Access in its communications protocol.

        Ground Segment

Rather than using  traditional  technology  that  transmits the data to a ground
station  as soon as it is  received,  the  non-real-time  nature of our  markets
allows us to use a  store-and-forward  design.  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 ground  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  ground
station on Svalbard Island in Spitzbergen,  Norway,  and are evaluating  certain
sites in other countries for additional service.

The mission  control center will manage the collection and retrieval of data. It
will  interface  with  ground  stations  and a  satellite  control  center.  The
satellite  control  center will  communicate  directly with and provide  overall
operational control of the satellites.  The mission center location is currently
in review and 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 E-SAT
system.  Data  collected  or  delivered  will  utilize the Internet as a global,

<PAGE> 14

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.

         Terminals

The system is also  comprised  of remote  terminal  units that will connect to a
device  such as an  electric  utility  meter and allow  that  device to send and
receive  signals  to  and  from  the  system.  The  terminal  will  provide  the
communication link between the meter and our satellites.  A relatively  low-cost
terminal is a key success factor for this business plan and, for that reason, we
intend to strictly control the development and manufacturing of the terminals.

The complete  terminal  unit will consist of two parts,  the core engine and the
fixed  asset  interface  module.  The core engine  will  include a  programmable
controller  unit and  will  incorporate  the  cost-saving  benefits  of the ASIC
technology. This will allow us to manufacture the terminals at a lower cost. The
fixed asset  interface  module will be optimized  for the specific  application,
such as an electric meter, vending machine or propane tank, and will contain all
the  application  specific  functions  required to interface the device with the
core engine.  The interface will also contain any necessary  power  conditioning
components  to  allow  reliable  communication  between  the  terminal  and  the
satellites.

During 1998, we worked with SAIT Radio Holland SA to perform studies on antennas
for the  proposed  terminal  units  and to  develop  and  test  prototypes.  The
development  of terminal  units was also included as an item under our agreement
with Alcatel.  (See "Development  Milestones--Entered  into an agreement with an
end-to-end prime contractor for the E-SAT system".) We have not yet identified a
main  subcontractor  for the engineering,  development and provision of hardware
and software for terminal units, or for the manufacture of terminals.

Regulatory Environment

         United States

All commercial non-voice,  non-geostationary  mobile-satellite services, such as
little low earth  orbiting  satellites,  in the United States are subject to the
regulatory authority of the FCC. Little low earth orbiting 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  low earth  orbiting  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 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 spectrum
sharing  plan,  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 low earth
orbiting satellite license. Under the license, E-SAT is authorized to launch and
operate six little low earth orbiting satellites to provide a two-way,  low-cost

<PAGE> 15

messaging service in the United States in the 148 to 148.905 MHz for service and
feeder uplinks,  and the 137.0725 to 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 to 148.855 MHz band that is not shared with the
other  United  States  licensees.  Some of this  spectrum  may be required to be
operated  co-frequency with the French S-80 system, based on  inter-governmental
agreements  between the United States and France. In December 1998, we completed
our  coordination  with France on this shared use.  E-SAT is licensed to utilize
148.855 to 148.905 MHz for feeder  uplinks.  E-SAT will operate in the other 355
kHz of the 148 to 148.905  MHz band on a  co-frequency  basis  with three  other
companies,  Leo One USA Corporation,  Final Analysis  Communication Services and
Orbcomm Corp. In the downlink direction, E-SAT will operate in the band 137.0725
to 137.9275 MHz co-frequency  with NOAA satellites,  Orbcomm and Final Analysis.
E-SAT is  obligated  to  coordinate  with the other  little  low earth  orbiting
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 the FCC license,  unless specifically waived or modified
by  the  FCC.  The  terms  include,  among  other  things,  system  construction
milestones.  In  order to  comply  with the  milestone  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 low earth orbiting  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. We have not met the next milestone, which is
the completion of  construction of the first two satellites by March 2002 and it
will be  extremely  difficult  if not  impossible  for us to meet the  following
milestone, which is to launch those two satellites by September 2002. Because of
this, on March 29, 2002,  E-SAT filed the request for an extension of milestones
with the FCC and is awaiting a reply. (See "Risk  Factors--The  E-SAT system has
experienced delays that could lead to the loss of the E-SAT FCC license".

The  terms  of the FCC  license  also  require  that  construction,  launch  and
operation of the E-SAT system be  accomplished  in accordance with the technical
specifications  set forth in the FCC  application  and consistent with the FCC's
rules, unless specifically waived.  During the process of constructing the E-SAT
system,  there may be certain  modifications  to the design set forth in the FCC
application that may necessitate regulatory approval.

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 the
satellites conform to the terms and conditions of the FCC license.

In  addition,  the FCC must approve the  integration  of E-SAT  system's  ground
transceivers  with the fixed devices.  If received,  the approval would apply to
all transceivers to be operated in the United States.

         International Regulations

Landing Rights. In addition to the FCC license for operation of the E-SAT system
in the United States,  we will be required to seek certain  "landing  rights" in
each  country in which our ground  transceivers  will be  located.  We intend to
utilize international clients,  partners or affiliates in each country we intend
to operate in 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,  broadcasting from the satellite,  data and messaging  services in

<PAGE> 16

that country.

International  Telecommunications  Union  Coordination.  The E-SAT  system  will
operate in frequencies  that are allocated on an  international  basis under the
authority of the International  Telecommunications  Union. The United States, on
behalf  of  various  little  low  earth  orbiting  service  providers,   pursued
international  allocations of additional frequencies for use by little low earth
orbiting  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  International
Telecommunications  Union and is essentially a first come, first served process.
That is, earlier  filings  generally  establish some priority over later filings
although the  International  Telecommunications  Union encourages  applicants to
cooperate to enable as many satellite systems as possible to be implemented.

Ownership Interest in E-SAT

E-SAT was incorporated in 1994 in partnership with EchoStar.  In connection with
the formation  agreement,  we hold 80.1% of the outstanding  shares of E-SAT and
EchoStar  holds  the  remaining  19.9%.  E-SAT was  formed  for the  purpose  of
acquiring  an FCC license to develop,  construct  and operate a little low earth
orbiting satellite system. In March 1998 the FCC issued the license to E-SAT. In
July 1999,  we entered  into an agreement  to acquire an  additional  60.1% from
EchoStar,  to bring our total  ownership of E-SAT to 80.1%.  The  agreement  and
transfer  of control of E-SAT is subject  to FCC  approval,  which was  formally
requested  on May 2, 2000 and  approved by the FCC on  November  21,  2000.  The
transfer  agreements  were executed in December 2000. The terms of the agreement
granted EchoStar a 20% undivided interest in the satellite transmission capacity
associated with the FCC E-SAT license.

Competition

Load Curtailment Competition

Our  automated  conservation   capability  falls  in  the  general  category  of
electricity peak load curtailment  services.  For decades,  when utilities had a
problem meeting their peak demand, they called (usually by phone) customers with
large concentrated loads to obtain voluntary reductions. These customers include
industrial  corporations,  government,  and large institutions such as hospitals
and  universities.   Such  reductions  were  generally   voluntary  but  unpaid.
"Interruptible"  electric  rates emerged in the 1970s.  Customers  would pay low
power rates most of the time,  but promised to cut back load by a defined amount
when called-or else pay a stiff penalty.

In the 1980s and early  1990s,  some  utilities  offered  residential  and small
commercial  customers lower electric rates in exchange for installing  automated
demand control devices on electric hot water heaters and air  conditioners.  The
demand control devices would respond to radio signals from the utility.  Many of
those  programs,  however,  were either cut back or not pursued  sufficiently to
make much of a difference. Since there was no easy way to verify which customers
had disabled the devices,  questions were also raised  regarding their sustained
impact.

During the late 1990's a combination  of rapid load growth caused by a sustained
economic boom, a failure to build new power plants, and difficulties with retail
deregulation  contributed to reductions in utility spare capacity and increasing

<PAGE> 17

requirements  for effective  curtailment  solutions.  Curtailable  load programs
often featured the following types of requirements:

     o    Minimum load reduction of 100 kW per customer
     o    Reduction  must be available  between 9 a.m. and 10 p.m. on any day of
          the week
     o    Notification is usually at least 4 hours prior to curtailment
     o    Reduction commitment must be met within 1 hour of curtailment
     o    Customer must be able to receive and act upon the form of notification
          (e.g., beeper, radio signal)
     o    Customer must have installed meters able to record  integrated  hourly
          values for actual net generation


In these  programs,  meters  measure  and report  load both before and after the
reduction request. Samples of several such tariffs may be found at the web sites
of a few utilities and some of the Independent System Operators.

Load curtailment differs from demand-side management (often referred to as DSM),
which typically focuses on permanent or continuous  demand reduction,  unrelated
to market-based pricing.


Many firms  offer a wide  variety  of energy  solutions  for energy  efficiency,
demand-side-management  and load curtailment,  including Apogee (also called The
Demand Exchange), Ancillary Services Coalition,  Infotility,  Planergy, Comverge
Technologies, Retx.com, New West Energy, AES New Energy, Skytel, Silicon Energy,
Circadian  Information Systems, and Energy Interactive.  In addition,  utilities
themselves may compete with these firms for direct relationships with sources of
load to be curtailed.  While the energy  monitoring  and control  marketplace is
highly  populated  with  competitors,  we believe  that these  competitors  rely
dominantly on fixed or wireless mobile terrestrial  communications  technologies
to implement  their  businesses.  We believe that the use of  low-earth-orbiting
satellites  will provide  improved  access to customers over large  geographical
regions with improved  coordination  and targeting of loads,  and  significantly
enhanced security than our competitors.

For discussion of potential  satellite  competitors,  see  "Competition  for our
E-SAT system," below.

Competition for our E-SAT system

Competition  in the  communications  industry  is  intense,  fueled by rapid and
continuous  technological  advances and alliances between industry  participants
seeking  competitive  advantages on an  international  scale to capture  greater
share of existing and emerging markets.

In addition to E-SAT, three other commercial  entities have been licensed by the
FCC to provide little low earth orbiting satellite services in the United States
although no other entity has been issued a license to use Code Division Multiple
Access communication protocols: Orbcomm Global, Leo One, and Final Analysis. The
FCC also  granted a license in 1998 to  Volunteers  in Technical  Assistance  to
transmit  health,  research  and  scientific  data on a  delayed  basis  between
developing countries and the United States.

Of the three commercial entities, only Orbcomm is currently in service.  Orbcomm
failed to generate revenue sufficient to cover its debt and was purchased out of
bankruptcy  protection  in 2001.  Over $800 million has been invested to date in
the Orbcomm  service,  which was initiated in 1996 and consists of approximately
thirty  satellites,  5 gateway control  centers,  and 10 gateway Earth stations.

<PAGE> 18

Orbcomm  aimed at serving on a  near-real-time  basis the broad data  markets of
mobile  asset  tracking of trailers,  containers,  rail cars,  heavy  equipment,
autos,  fishing  vessels  and barges and U.S.  government  assets;  fixed  asset
monitoring of oil and gas tanks,  pipelines,  chemical tanks,  electric  utility
meters,  and  environmental  projects;  two-way  commercial and U.S.  government
messaging; home and commercial security systems; and personal messaging. Orbcomm
uses Time Division Multiple Access narrow band communication protocols.

Other than Orbcomm's  existing Time Division Multiple Access based system, we do
not believe that any of the other  proposed  little low earth  orbiting  systems
will be  commercially  operational  in the near term. We believe that we hold an
advantage over these potential competitors by having obtained an FCC license for
the only Code Division Multiple Access based store-and-forward  little low earth
orbiting  system in the United  States;  by  focusing  on a low-cost  and highly
targeted market; and by achieving  international  coordination of our designated
frequencies through the International  Telecommunications Union. Over the course
of the next several  years,  we expect to obtain further  advantages  over these
potential  competitors by  demonstrating  that a Code Division  Multiple  Access
store-and-forward  system can offer  service at lower cost than those offered by
the  competition.  Plans for little low earth  orbiting  systems  have also been
announced in Australia,  Brazil,  France, Russia, South Korea, Tonga and Uganda,
although we believe  that,  without  additional  allocations  of spectrum in the
United  States,  these  systems  will be unable to offer  services in the United
States, and they will have to reach  coordination  agreements with all countries
who have  prior  International  Telecommunications  Union  filings  for the same
spectrum, namely the spectrum license filed by the FCC which it awarded to us.

We expect that  potential  competitors  will  include  other low earth  orbiting
systems and certain  geosynchronous or geostationary orbit, or GEO-based systems
and terrestrial-based communications systems.

We believe  further 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  data  services,  both  satellite  only and  dual-mode,
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 a  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 GEO
satellites.  In  addition,  various  companies  using the  Inmarsat  system  are
providing fishing vessel and other marine tracking applications. We believe that
the  E-SAT  system  will have  certain  advantages  over  these  other  systems,
including worldwide coverage and lower equipment costs.

The Big Low earth orbiting and Medium Earth Orbiting systems  mentioned  earlier
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 Low earth orbiting and Medium Earth
Orbiting  systems  is  significantly  greater  than  those of the E-SAT  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 low earth  orbiting or
Medium  Earth  Orbiting  system  that is unable to sell its  capacity  for voice
services.  For example,  the satellite  system  operated by Globalstar,  L.P. is

<PAGE> 19

expected to utilize a multi-billion  dollar  constellation of 48  satellites--as
compared with DBS  Industries'  planned system of 6 satellites  with an expected
construction,  marketing and operating cost of approximately  $110 million--with
those  system  costs then having to be  allocated  into each  company's  pricing
structure and strategy.

We  also  face  competition  from  a wide  range  of  terrestrial  technologies,
including paging, cellular, and power line carrier systems. Generally, our focus
is not to compete  with  existing and planned  terrestrial-based  communications
systems.  However,  in  particular  segments  of our  market,  we believe we may
encounter  certain of these systems.  While  providing  cost-effective  services
primarily in metropolitan areas where subscriber  densities justify construction
of radio towers,  terrestrial  systems generally do not have sufficient coverage
outside   metropolitan   areas,   which  makes  them  less   attractive  to  the
hard-to-access  and remote  location  markets  that we  initially  targeted.  In
addition, we believe that the E-SAT system will present an attractive complement
to tower-based services because E-SAT can provide geographic  gap-filler service
at affordable costs without the need for additional  infrastructure  investment.
Because  of  the   inherent   coverage   limitations   of  a   terrestrial-based
communications  system,  we believe that the E-SAT system will  complement  such
systems.

SkyTel,  for example,  provides paging messaging  services in U.S. cities and is
using its messaging  network to provide fixed  location  services,  specifically
utility meter reading in urban areas. Hunt Technologies and Distribution Control
Systems which provide power line carriers  solutions  using very low frequencies
to transmit  messages over power  distribution  lines,  typically  transmit data
one-way and very  slowly.  Phone line  carriers,  which use a  dedicated  common
carrier   telephone   service,   are  constrained  by  industry   infrastructure
transaction volume and addressability  limitations.  Cellemetry,  which operates
within the control channel of common carrier cellular frequencies,  and Cellular
Digital  Packet Data,  which uses common  carrier  cellular  frequencies to send
messages  in high  speed  bursts  during  the idle  time in voice  transmission,
require  local  infrastructures  to operate.  The triple  shortcomings  of these
systems - namely (1) lack of instantaneous,  cross-continental  data collection,
(2) "black  holes" and lack of  ubiquitous  coverage,  and (3) high  incremental
infrastructure and per message costs outside  concentrated  population centers -
are all competitive advantages for the E-SAT system.

Employees

As of December  31,  2001,  we had six  full-time  employees.  We  consider  our
relationship with our employees to be good.

<PAGE> 20
                                RISK FACTORS


An investment in shares of our Common Stock is very risky.  You should carefully
consider  the risks  described  below in addition to other  information  in this
filing.  Our  business,  operating  results  and  financial  condition  could be
seriously  harmed due to any of the  following  risks.  The trading price of the
shares of our Common  Stock  could  decline due to any of these  risks,  and you
could lose all or part of your investment.

We are a development stage company and we do not have any customers.

We  are a  development  stage  company  and  as of  April  30,  2002,  we had no
customers.  Although we previously  recorded gains from the sale of interests in
entities which own direct broadcast satellites licenses,  we have not earned any
significant operating revenues since our formation.  Given our limited operating
history  and lack of  revenues,  we  cannot  assure  you that we will be able to
obtain customers for the Iridium system or any other system, or to construct and
implement the E-SAT system, and, if implemented, to develop a sufficiently large
customer base to be profitable.


We may be  unable  to  sign  up  participants  to make  load  available  for our
automated load curtailment services.

Under  our  Demand  Reserves  Provider   Agreement  with  the  California  Power
Authority,  beginning  October 1, 2002,  we are required to provide a minimum of
200  megawatts  and a maximum of 360  megawatts  of daily  available  electrical
demand  reduction.  This minimum and maximum of daily available demand reduction
increases to 400 megawatts and 560  megawatts,  respectively,  effective June 1,
2003.  In the event we are unable to attract and sign up a sufficient  number of
participants who will voluntarily allow  electricity  usage to be curtailed,  we
may lose our contract with the California Power Authority.

We are dependent on the Iridium system and the design, construction, and testing
of our Iridium-based system has numerous risks.

Our automated load curtailment system is a new application of the Iridium system
and a new approach to electricity load curtailment. The remote curtailment units
are new and will be subject to outside rooftop conditions  including heat, cold,
and  inclement  weather,  for which the failure  rate of these  units  cannot be
assured.  In addition,  in using the Iridium  system for data  transfer,  we are
using it in a manner different from voice telephony,  which was the intention of
the original  design.  Further,  the Iridium  system may  encounter  significant
problems  or  the  software   controlling  the  exchange  of  data  and  control
instructions  may fail and, like any satellite  based  technology,  we are faced
with the potential for  satellite  failure based on a variety of  uncontrollable
factors.  In addition,  we may encounter  unexpected  delays and expenses due to
technical  problems we have not  foreseen.  Should the system fail or  encounter
significant  deficiencies,  our  business  and future  success will be adversely
affected.

We  may  be  unable  to  raise  sufficient  capital  for  implementation  of the
Iridium-based system.

We  currently  estimate  for the  first  two  years  that we may  require  up to
approximately   $15  to  $20  million  to  complete  the   engineering   of  the
Iridium-based  system and to deploy and  operate  the  proposed  automated  load
curtailment  system  for the  California  Power  Authority.  Given the risks and

<PAGE> 21

uncertainties  in this  undertaking,  we  cannot  assure  you that  actual  cash
requirements  will not exceed  our  estimates.  Further,  the  current  state of
capital markets is uncertain,  specifically for telecommunications companies and
companies that rely on energy contracts contracted with the State of California.
As a  result,  we  cannot  assure  you that we will be able to raise  the  funds
required to complete the development and installation of the system, or that the
timing and terms of any such financing will be favorable to us. If we are unable
to obtain a sufficient  amount of financing  necessary to complete the system on
commercially  acceptable terms, our business and future success will be severely
and adversely affected.  Unless and until we begin to generate revenues, we will
continue to generate  further  operating  losses and negative net cash flow both
for engineering the system and for our daily operations.

Future  financings  and  strategic  alliances  will be required  and will likely
result in significant  stockholder  dilution and/or significant  liabilities and
may have restrictive conditions.

Our current plans are to raise capital  through a combination of debt and equity
financing.  Should we sell debt  securities  this would increase our liabilities
and future cash commitments and may subject us to restrictive  conditions on our
growth and operations.  However, we may be unable to obtain debt financing,  and
we would then depend principally on equity financings to pay for our systems, or
even if we obtain debt  financing,  we may be  required to provide  some form of
equity in addition.

The issuance of additional  equity  securities  by us may result in  significant
dilution to the equity  interests  of the current  stockholders.  Other types of
growth  participation  arrangements  may  significantly  lower  the value of the
equity interests of our current  stockholders by reducing the revenue,  profits,
or other elements of the market value of the Company.

In order to execute our business plans, we plan to seek strategic alliances with
entities that can provide communications systems,  engineering,  deployment, and
distribution  services and assets.  Such  alliances  will likely require that we
provide such entities the ability to participate in our growth. Examples of such
participation may be, but are not limited to, revenue and profit sharing and the
issuance of equity securities in us or our subsidiaries.

Regardless of how we structure our financings and strategic alliances, we may be
required to pledge our assets,  including our potential  revenues related to our
contract with the California Power Authority,  and/or our ownership  interest in
E-SAT.  Other  restrictive  conditions may also be imposed on the conduct of our
business.  In the event of a default on such pledges or conditions,  it would be
unlikely  that there  will be any  assets  remaining  to be  distributed  to our
stockholders.

<PAGE> 22

We have incurred  significant  losses to date and could continue to do so, which
continues  to raise  substantial  doubt about our ability to continue as a going
concern.

Without contracts for services utilizing the Iridium system, we will continue to
incur operating losses while we seek to construct our E-SAT system.  We recorded
operating losses of approximately  $4.8 million for 2001 and approximately  $6.5
million  for 2000,  and no  revenues  for either  year.  Without  customers  for
services  utilizing the Iridium  system,  we would not  anticipate  any revenues
during fiscal 2002. Without significant revenue from the Iridium system, we will
continue to incur  substantial and increasing  operating losses and negative net
cash flows until the E-SAT  system is  developed,  deployed  and  operating in a
profitable  manner.  As of  December  31,  2001,  our cash and cash  equivalents
amounted to $20,494  while our current  liabilities,  including  amounts owed to
employees, amounted to $3,730,277.

These  circumstances  raise substantial doubt about our ability to continue as a
going concern as discussed in the report of our independent accountants and Note
1 to our financial statements.

We  currently  estimate  that for the  first two  years we would  require  up to
approximately $15 to $20 million in additional  working capital for engineering,
deployment,  and operation of the proposed automated load curtailment system for
the State of California,  and $60 million in additional  capital  related to the
construction and launch costs associated with the E-SAT system.  Given the risks
in  undertakings  of  this  nature,  we  cannot  assure  you  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:

     o    incur  unexpected  costs in  completing  the design of our  systems or
          encounter any unexpected technical or regulatory difficulties;

     o    find that the power  utilization of participants in our automated load
          conservation  system is significantly lower than our estimates and, as
          a result, additional participants are necessary;

     o    incur delays and  additional  expenses as the result of a E-SAT system
          launch or satellite failure;

     o    are unable to enter into  marketing  agreements  with third parties to
          sell our services; or

     o    incur any other significant unanticipated expenses.

The occurrence of any of these events would adversely affect our ability to meet
our  business  objectives.  If we are  unable to obtain a  sufficient  amount of
financing  to complete our systems and on  commercially  acceptable  terms,  our
business and future success will be adversely affected.

We are subject to development contract commitments for the E-SAT system.

In order to comply with development  milestones required by E-SAT's FCC license,
we  have  entered  into  various   development   contracts  including  satellite
construction  contracts with Alcatel Space Industries and Surrey Satellite and a
satellite  launch  contract  with  Eurockot.   Entering  into  these  and  other
development and service contracts are critical to the overall development of the
E-SAT  system.  We have  failed to make  necessary  payments to Alcatel and that
contract could be declared  void.  (See Risk Factor "The contract with our prime
contractor for the E-SAT system is suspended and could be  cancelled.")  Failure

<PAGE> 23

to  maintain  these  contracts  or to  arrange  acceptable  alternatives,  would
adversely  affect  our  ability  to  construct  the E-SAT  system and our future
success.

The contract  with our prime  contractor  for the E-SAT system is suspended  and
could be cancelled by our prime contractor.

We have not made the necessary payments to our prime contractor,  Alcatel,  and,
as a result,  Alcatel is not obligated to honor the contract and it could cancel
it at any time. The agreement with Alcatel required a payment at the end of 1999
of approximately $9.1 million in cash and the equivalent of $5 million shares of
our Common Stock. This payment was necessary for Alcatel to continue work and to
trigger  an  effective  date for the full  system  development  schedule.  As of
December 31, 2001,  this payment has not been made and Alcatel,  therefore,  has
the right to cancel the contract.  Although Alcatel has verbally  indicated that
it does  not  intend  to  terminate  the  contract,  it has the  right to do so.
Although  we  have a  satellite  construction  contract  with  Surrey  Satellite
Technology  Limited,  any cancellation of our prime contractor's  contract could
cause delay in construction of the E-SAT system that could result in the loss of
the FCC license. (See also "Risk Factor--The E-SAT system has experienced delays
that could lead to the loss of the E-SAT FCC license.")

The  technology,  design and  construction  of our E-SAT  system are  subject to
numerous risks.

The design and construction of the E-SAT system are subject to a number of risks
associated with space-based communications systems. Although we believe that the
E-SAT  system is based on sound  technology,  its design  will  contain  certain
technology  that has not been  used in a  commercial  application.  Although  we
intend  to  engage  contractors  that  are  experienced  in  the  satellite  and
communications industry, we have no experience in developing,  constructing, and
operating a satellite based data communications system. The failure of the E-SAT
system to be constructed,  or 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 E-SAT  system  unable to  perform  at the  quality  and  capacity  levels we
anticipate.

The E-SAT system has experienced delays that could lead to the loss of the E-SAT
FCC license.

Our business is subject to both United States and international  regulations and
licensing. The E-SAT license has several FCC milestones, including:

     *    the  completion of  construction  of the first two satellites by March
          2002,

     *    the launch of those satellites by September 2002, and

     *    the  construction and launch of the remaining four satellites by March
          2004.

We failed to meet the milestone for completion of the  construction of the first
two  satellites  and, given the delays in  construction  due to our inability to
obtain sufficient  financing,  the other milestones will be extremely difficult,
if not impossible,  for us to meet. The failure to meet milestones could lead to
a loss of the license.  On March 29, 2002 E-SAT filed a request for an extension
of  milestones  with the FCC and is  awaiting a reply.  Based on advice from our
regulatory  counsel,  we  believe  it is  likely  that we will  be  granted  the

<PAGE> 24

extension.  However, we have very little control over whether any extension will
be granted and the failure to obtain an extension or meet the  milestones  would
likely  result in the loss of E-SAT's  FCC  license  which would have a material
adverse effect on our business financial condition and results of operations.

We  will  face  many  risks  associated  with  the   construction,   launch  and
implementation of E-SAT satellites.

Once  construction is fully commenced,  delays and related increases in costs in
the  construction,  launch and  implementation  of the E-SAT system could result
from a variety of causes, including:

     *    delays encountered in the construction, integration and testing of the
          E-SAT system;

     *    launch delays or failures;

     *    delays  caused by  design  reviews  in the  event of a launch  vehicle
          failure or a loss of satellites or other events beyond our control;

     *    further  modification  of the  design of all or a portion of the E-SAT
          system in the event of, among other things,  technical difficulties or
          changes in regulatory requirements;

     *    our failure to enter into agreements with marketing providers on terms
          acceptable to us; and

     *    the failure to develop or acquire effective  applications for use with
          the E-SAT system.

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.  Each launch is
expected to carry three little low earth orbiting satellites.  Consequently,  an
unsuccessful  launch could adversely  affect  one-half of our planned  satellite
constellation.  We intend to obtain a certain  amount of insurance to cover some
of our potential  losses in this area,  but we cannot assure you that we will be
able to obtain  adequate  insurance  to cover all  incidents  or in a sufficient
amount to cover the losses.

We have entered into a launch  services  agreement with Eurockot Launch Services
GmbH,  headquartered in Bremen, Germany to provide 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.
We do not know whether the launches  will be approved by the Russian  Federation
or if the launches  will take place as planned.  Various  political and military
considerations,  including as yet unknown  factors  resulting from the September
2001 terrorist  attacks on the United States,  could impact these launches.  The
failure of the launches or the occurrence of any significant  problems generally
associated  with  satellite  launches would have an adverse effect on us and our
ability to provide the services contemplated.

We will only be able to obtain a limited  amount of satellite  insurance for our
E-SAT system.

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. to provide risk management counsel in obtaining  insurance coverage for our
planned little low earth orbiting 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,

<PAGE> 25

which we hope will provide sufficient funds for rebuilding satellites damaged in
construction,  shipment or launch.  In the event a covered loss occurs,  we will
need to satisfy  the  insurance  underwriters  that the  technological  or other
problems  associated  with  the  covered  loss  have  been  addressed  prior  to
continuing the launch process. The launch and replacement  insurance marketplace
is volatile and we do not know whether 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 as well as the amount
of risk we may be able to transfer to third parties.

Our E-SAT system is subject to governmental  regulation that can be difficult to
satisfy.

We will need to secure "landing rights" in various countries where we hope to do
business.  Failure to secure  foreign  landing  rights  would  preclude  us from
offering our full services in such countries,  which would adversely  affect our
anticipated  results of  operation.  In  addition,  our  international  license,
LEOTELCOM-2,  is sponsored by the United States,  and should we fail to maintain
our FCC license,  our international  license rights may be subject to challenge.
Further,  we will be  subject to varying  export and  communications  regulatory
requirements  for the U.S. and  internationally,  not only for  construction and
launch of the E-SAT system, but also for the continuing operation of the system.

The services we intend to provide must be acceptable to the energy industry.

Our success is largely  dependent on whether  governments,  utilities  and other
related  entities will contract for services  utilizing the Iridium and/or E-SAT
systems.  We cannot  assure you that we will be  successful  in  completing  the
development  and  commercial  implementation  of our services.  Governments  and
utility  companies  typically  go through  numerous  steps  before  making final
decisions.  This process can be time  consuming  and take up to several years to
complete.

Further,  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.  There are a number of competing products from
entities  providing  various  types of  communication  technologies.  The use of
low-earth-orbiting  satellites  provides only one of many possible solutions for
data  communications with remote sites, and potential customers may choose other
competing solutions. In the event that customers 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.

Future advances in the industry could make our services obsolete.

Future   advances  in  the   telecommunications   industry  could  lead  to  new
technologies,  products or services  competitive  or superior to the products or
services we intend to provide. Such technological  advances could also lower the
costs of other products or services that may compete with our systems, resulting
in  pricing  pressures  on our  proposed  products  and  services,  which  could
adversely affect our business and results of operations.

Intense  competition  from existing and new entities could adversely  affect our
business.

We will encounter  competition  from other  satellite  systems,  as well as from
competitive terrestrial-based communication companies. The market for collection
and  transmission of data from fixed devices and the potential  market for other
applications  of data messaging  services have led to substantial and increasing

<PAGE> 26

competition. Many of our present and future competitors using low earth orbiting
satellites  have begun to address the collecting and  transmitting  of data from
fixed devices and at least one of these  competitors has  substantially  greater
marketing,   technical  and  manufacturing  resources,  name  recognition,   and
experience.

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.  Our  technology  must be
competitive so that the systems can provide the data  transmission  service at a
cost lower than most of our competitors' systems. We cannot assure you that such
competitors will not succeed in developing  better or more  cost-effective  data
transmission systems.

We face  increased  competition  as a result of  strategic  alliances  and other
consolidation in the industry.

Our  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 already  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. We cannot assure
you that we will be able to compete  successfully against our current and future
competitors,  and our failure to do so would have a material  adverse  effect on
our business.

The price of ground transceivers will affect the success of our service.

The  development of low-cost  ground  transceivers  to collect and transmit data
from fixed  devices will be important in the  development  of a broad market for
our services.  Ground  transceivers  must be manufactured  and operated at a low
cost in order  to make  our data  messaging  services  attractive  to  potential
commercial  customers.  It is expected that the cost of ground transceivers will
decline as the volume of units  produced  increases.  We must develop a low-cost
ground  transceiver  which requires less power to operate and will be attractive
to utility  and other  companies.  However,  we cannot  assure  you 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 receive significant
revenues or achieve profitability.

We are dependent on third party 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
ours  services,  to  market  and  deploy  our data  messaging  services  and for
representation on regulatory issues. These vendors and consultants must continue
to provide the expertise  necessary.  We cannot assure you that suitable vendors
and  consultants  will be available  in the future,  and if  available,  will be
available on terms deemed acceptable to us.

We cannot  assure you that these  manufacturers  of parts and  equipment for our
systems such as transceivers,  antennas,  load  curtailment  equipment and other
devices,  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 and
adverse  effect on our ability to  successfully  provide our proposed  services.
Further,  the  failure of third  parties to deliver  the  products,  components,
necessary  parts or equipment on  schedule,  or the failure of third  parties to

<PAGE> 27

perform at expected levels, could delay our deployment of our services. Any such
delay or increased  costs could  significantly  harm our business and  operating
results.

Our key engineering  subcontractor is emerging from a bankruptcy proceeding that
could harm our completion of the Iridium based system.

In April 2002, Arthur D. Little, the engineering firm that we contract with, was
liquidated  and  portions  transferred  to  five  different  companies  in  U.S.
Bankruptcy Court in Massachusetts. The division that is providing services to us
was sold to a company called TIAX LLC for approximately $16.5 million.  TIAX has
continued to develop the Iridium-based  system.  However,  TIAX may be unable to
retain the necessary  personnel to properly develop the system, or they may lack
resources to devote to the engineering of the system,  or they may be delayed by
circumstances  surrounding the bankruptcy and  acquisition.  Any such failure or
delay could significantly harm our ability to complete our Iridium-based  system
and would therefore harm our business and operating results.

Failure to effectively manage our growth would harm our future business results.

As we seek  to  proceed  from a  development  stage  company  to an  operational
company,  we may  experience  significant  and  rapid  growth  in the  scope and
complexity  of our  business.  We may need to  rapidly  engineer  and deploy new
services  across wide  geographic  areas and engage in  significant  and complex
business  development  and strategic  alliance  efforts.  We will likely have an
increased  need and  opportunity  to market  our  services,  manage  operations,
control the  operations  of our proposed  systems,  handle  sales and  marketing
efforts and perform finance and accounting  functions.  This growth is likely to
place a strain on our small management team and limited  operational  resources,
and there is a risk that we may not  effectively  manage this growth.  To lessen
this  requirement,  and assist us in executing  our business  plan,  we recently
signed  agreements  with Arthur D. Little,  Inc. (now TIAX LLC) for  engineering
services,  and with Bechtel  Corporation to provide program management  services
for  the  installation  and  deployment  of  the  proposed   Voluntary   Command
Conservation System.  However, these organizations may terminate their contracts
with  us on  short  notice,  and  further  there  is no  assurance  that we will
effectively  manage the  subcontractors.  The failure to develop  and  implement
effective  systems,  or the failure to hire or subcontract and train  sufficient
personnel for the  performance of all of the functions  necessary to effectively
grow and manage our  potential  customer  base and  business,  or the failure to
manage growth effectively,  could have a material adverse effect on our business
and financial condition.

We are dependent on key personnel.

Our success is  substantially  dependent  on the  performance  of our  executive
officers  and key  personnel  and on our  ability  to retain  and  motivate  our
personnel. The loss of any of our key personnel,  particularly Fred W. Thompson,
our president,  would harm our ability to manage  operations and  development of
our  systems,  and could have a material  and  adverse  effect on our  business,
financial condition, and operating results.

Substantially   all  of  our  assets  consist  of  our   capitalized   satellite
construction  costs ($12.2 million or 83% of total assets) and acquisition costs
relating to the E-SAT  license  ($2.4  million or 16% of total assets) and these
assets may be  significantly  impaired if we are unable to obtain the  necessary
financing or to maintain our FCC license.

<PAGE> 28

We cannot  assure you that we will be able to obtain  financing  in a sufficient
amount for the construction and deployment of our satellite  constellation.  Our
failure to obtain sufficient and timely financing or to maintain our FCC license
could  result in our  conclusion  that the carrying  amounts of the  capitalized
satellite  construction  costs and the investment in E-SAT are not  recoverable.
Under generally  accepted  accounting  principles  relating to the impairment of
assets,  we  would  then  be  required  to  write  off all or a  portion  of the
capitalized  satellite  construction costs and our acquisition costs relating to
the  E-SAT  license  which  would  have a  material  and  adverse  effect on our
business, results of operations and financial position.

Our certificate of  incorporation  and Delaware law contain  certain  provisions
that could deter  takeovers  which may prevent you from  receiving a premium for
your shares.

Provisions of our  certificate  of  incorporation  and Delaware law could delay,
defer or  prevent a change in our  control.  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 members who serve
staggered three-year terms so that only a portion of our board can be removed at
the annual meeting of  stockholders.  Further,  the board is authorized to issue
preferred  stock, the classes and terms of which may be determined by the board.
We are also  subject  to the  anti-takeover  provisions  of  Section  203 of the
Delaware  General  Corporation  law,  which  prohibits  us  from  engaging  in a
"business  combination"  with an "interested  stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner,
under Delaware law. These  provisions in our  certificate of  incorporation  and
Delaware law could have the effect of delaying, deferring or preventing a change
in control, even if doing so would be beneficial to our stockholders.

We have not paid  dividends  and are not likely to pay  dividends  on our Common
Stock in the future.

We have not  declared  or paid any  dividends  on our Common  Stock,  and do not
anticipate  paying any dividends for the foreseeable  future.  In addition,  the
holders of our shares of series A preferred  stock and series B preferred  stock
are entitled to receive,  out of any legally available funds,  annual cumulative
dividends  equal  to  five  percent  and  ten  percent,   respectively,  of  the
liquidation preference of their shares. All dividends must be paid on the series
A  preferred  stock and series B preferred  stock  before any may be declared or
paid  on the  Common  Stock.  It is also  anticipated  that  if we  obtain  bond
financing or other financing facilities, we will be restricted in our ability to
declare future  dividends on our Common Stock. We have not paid any dividends on
Common Stock and do not have any accrued  dividends  for Common  Stock.  Accrued
dividends for preferred stock total $111,218 as of December 31, 2001.

Our stock price is volatile.

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.  In
addition,  the OTC Bulletin  Board is not an exchange  and,  because  trading of
securities on the OTC Bulletin  Board is often more sporadic than the trading of
securities  listed  on an  exchange,  such as  NASDAQ,  you may have  difficulty
reselling any of the shares that you purchase.

The exercise of outstanding  options,  warrants and  convertible  securities may
adversely affect our Common Stock price and your percentage of ownership.

<PAGE> 29

As of April 30, 2002, there were outstanding warrants and options to purchase an
aggregate of  approximately  31.4 million  shares of our Common Stock.  Of these
outstanding  warrants and options,  approximately  30.3 million are vested,  and
approximately  26.6  million  have  exercise  prices  of  $1.00  or  less,  with
approximately 17.3 million having exercise prices ranging from $0.10 to $0.13.

In addition to our outstanding  warrants and options, we have outstanding shares
of  preferred  stock that are  convertible  into shares of our Common Stock and,
subsequent to April 30, 2002, a convertible  debenture has been  converted  into
approximately 1.2 million shares of our Common Stock.

The  outstanding  shares of our Series A preferred  stock may be converted  into
415,600  shares of Common Stock and the 296  outstanding  shares of our Series B
preferred stock may be converted based on the liquidation  preference  amount of
$1,000 per share,  at 80% of the then current  market price of our Common Stock.
You should also be aware that:

     >>   Assuming  all  of  our   outstanding   warrants,   options  and  other
          convertible  securities  were  converted,  as of April 30,  2002 these
          securities would convert into approximately 34.5 million shares of our
          Common  Stock,  representing  approximately  54% of our  total  shares
          outstanding  following such conversions.  Of that amount approximately
          22.1 million  shares of our Common Stock,  representing  approximately
          43% of our total shares  outstanding  following such conversions,  are
          vested and have conversion  prices at or below the market price of our
          common  stock as of  April  30,  2002.  However,  due to the  floating
          conversion   rates  of  our  Series  B  preferred  stock  and  certain
          outstanding  warrants,  we do not know the exact number of shares that
          will be issued when they are actually converted.

     >>   Because  our  Series  B  preferred  stock  and  certain  warrants  are
          convertible at floating  rates,  the lower the market price for shares
          of our Common  Stock,  the greater the number of shares the holders of
          these outstanding convertible securities will receive upon conversion.

     >>   To the extent  that the holders of these  securities  convert and then
          sell the shares of Common Stock they  receive  after  converting,  the
          market  price for shares of our Common  Stock may  decrease due to the
          additional  shares in the  market.  This  could  allow the  holders to
          receive even greater  amounts of our Common  Stock,  the sale of which
          would further depress the market price for our Common Stock.

     >>   To the extent that the holders of these securities continue to convert
          and then sell material  amounts of our Common  Stock,  this may create
          significant  downward pressure on the market price of our Common Stock
          and could encourage short selling by the holders or others. This could
          place even further downward pressure on the market price of our Common
          Stock.

     >>   Under  circumstances  in which the price of our Common Stock decreases
          to a level  below  $0.02 per share,  assuming  the  conversion  of the
          Series B convertible  preferred  stock at that time, this could result
          in a  change  in  control  of the  Company,  if the  Company  has  not
          previously issued additional shares.

In  addition,  the  conversion  of our  Series A and B  preferred  stock and the
exercise of the outstanding  warrants and options 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 an

<PAGE> 30

attractive  market price. For these reasons,  any evaluation of the favorability
of market  conditions for a subsequent stock offering must take into account our
outstanding convertible securities.

Our  failure to timely  register  shares of our  Common  Stock has  resulted  in
liquidated damages and will continue to do so.

We  have  incurred  liquidated  damages  related  to our  Series  B  convertible
preferred stock in the amount equal to 5% of the purchase price for each 30 days
we have failed to effectively  register the  underlying  shares of Common Stock.
The liquidated damages may be demanded by the holder in cash or as an accrual to
the  liquidation   preference  associated  with  each  share  of  the  Series  B
convertible  preferred  stock. As of December 31, 2001, we have incurred $87,267
in liquidated damages.

We have also incurred liquidated damages related to our Convertible  Debenture F
in the amount equal to 3% of the purchase price for each month we have failed to
effectively  register the underlying  shares of Common Stock. As of December 31,
2001, we have incurred $1,000 in liquidated damages.

We have also incurred  liquidated  damages  related to three issuances of Common
Stock and warrants to purchase Common Stock.

With respect to two of these  issuances,  for each month that the effective date
of registration is delayed beyond May 1, 2001,  liquidated  damages have accrued
at the rate of 10% of securities  purchased.  As of December 31, 2001, the total
liquidated  damages amount to 976,000 shares of our Common Stock and warrants to
purchase 244,000 shares of our Common Stock at an exercise price of $0.50.

With respect to the third  issuance,  for each month that the effective  date of
registration is delayed beyond November 1, 2001, liquidated damages have accrued
at the rate of 10% of securities  purchased.  As of December 31, 2001, the total
liquidated  damages amount to 160,000 shares of our Common Stock and warrants to
purchase 40,000 shares of our Common Stock at an exercise price of $0.50.

Until we have an effective  registration  statement  registering  the underlying
shares of common  stock,  we will  continue to incur these  liquidated  damages,
which will further increase our liabilities and dilute our common stockholders.

We may be forced to redeem shares as a result of our failure to timely  register
shares of our Common Stock.

As a result of our failure to register the underlying  shares of Common Stock by
August 4, 2001, the holders of the Series B convertible preferred stock have the
right to  require  us to redeem  all or a portion  of the  Series B  convertible
preferred  stock  in an  amount  equal  to at  least  125%  of  the  liquidation
preference amount.

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,"

<PAGE> 31

"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 2.  PROPERTIES

     We have  leased  3,550  square feet at a monthly  rate of $12,353,  for our
principal offices at 100 Shoreline Highway, Suite 190A, Mill Valley, California,
on a three-year lease which expires on July 31, 2003.

ITEM 3.  LEGAL PROCEEDINGS

We are not a party to any legal proceedings.

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

None.

<PAGE> 32

                                 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 quoted for our common stock
during  each  quarter  for the past two fiscal  year ends and until the  quarter
ended December 31, 2001, as quoted on the OTC Bulletin Board.  Effective May 20,
2002, due to late filings of our periodic reports with the SEC, our common stock
is no  longer  quoted  on the  OTCBB,  but is  quoted on the Other OTC under the
symbol  "DBSS".  The Company  intends to seek  quotation on the OTCBB as soon as
practicable after filing all of its reports with the SEC.


                                    Common Stock

Quarter Ended                   High           Low
                               ------         -----
December 31, 2001              $0.25          $0.22
September 30, 2001              1.07           0.38
June 30, 2001                   0.63           0.20
March 31, 2001                  0.80           0.31

December 30, 2000               1.06           0.31
September 30, 2000              1.69           0.81
June 30, 2000                   3.06           1.09
March 31, 2000                  5.45           1.66


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

     As of  December  31,  2001,  we  had  24,734,420  shares  of  common  stock
outstanding and 429 stockholders of record.  The number of stockholders does not
include those who hold our securities in street name.

DIVIDEND POLICY

     We have not  declared or paid any cash  dividends on our Common Stock since
our inception.  The holders of our shares of Series A Preferred Stock and Series
B Preferred Stock are entitled to receive,  out of any legally  available funds,
annual cumulative dividends equal to five percent and ten percent, respectively,
of the liquidation preference of their shares. All dividends must be paid on the
Series A Preferred Stock and Series B Preferred Stock before any may be declared
or paid on the Common Stock. We currently intend to retain any additional future

<PAGE> 33

earnings  for use in the  operation  and  expansion of our  business.  We do not
intend to pay any cash dividends on our Common Stock in the foreseeable future.

SALES OF UNREGISTERED SECURITIES

Preferred Stock Transactions

The Company issued warrants to purchase  500,000 shares of the Company's  Common
Stock at an exercise  price of $0.17 per share in exchange  for an  agreement of
the Series B preferred  holders to delay the  Company's  obligation  to register
shares of their underlying Common Stock, for a total fair value of $98,850 using
the  Black-Scholes  option pricing  model.  The warrants were issued in reliance
upon the exemption from registration provided by Section 4(2) or Regulation S of
the Securities Act.

Common Stock Transactions

On November  12,  2001,  the Company  issued  1,000  shares of Common Stock to a
consultant for services rendered for a total fair value of $390. The transaction
was performed by the Company in reliance upon the  exemption  from  registration
provided by Section 4(2) of the Securities Act.

On November 19, 2001,  the Company  issued  150,000  shares of Common Stock to a
terminated  employee in accordance with his  termination  settlement for a total
fair value of $46,800.

On November 19, 2001,  the Company  issued 172,414 shares of its Common Stock to
an  accredited  investor.  The stock was sold for $0.29 per share  resulting  in
gross  proceeds to the Company of $50,000.  In  addition,  the Company  issued a
warrant to purchase  17,241  shares of its Common Stock at $0.29 per share.  The
transaction  was performed by the Company in reliance  upon the  exemption  from
registration provided by Section 4(2) of the Securities Act.

On November 30, 2001 the Company  issued  441,176  shares of Common Stock to two
investors  upon  conversion  of an aggregate of 120 shares of series B preferred
stock based upon $0.272 per Common Share. Additionally, a total of 50,498 shares
of Common  Stock were  issued to  investors  in lieu of accrued  and unpaid cash
dividends at the same  conversion  price.  The  transaction was performed by the
Company in reliance upon the  exemption  from  registration  provided by Section
4(2) or Regulation S of the Securities Act.

On December 13, 2001,  the Company  issued  166,667 shares of Common Stock to an
accredited  investor.  The stock was sold for $0.30 per share resulting in gross
proceeds to the Company of $50,000. In addition, the Company issued a warrant to
purchase  83,333 shares of its Common Stock at $0.30 per share.  The transaction
was performed by the Company in reliance upon the  exemption  from  registration
provided by Section 4(2) of the Securities Act.

<PAGE> 34


                        MANAGEMENT'S DISCUSSION AND ANALYSIS
                               OR PLAN OF OPERATION

This discussion, other than the historical financial information, may consist of
forward-looking  statements  that  involve  risks and  uncertainties,  including
quarterly and yearly  fluctuations  in results,  the timely  availability of new
communication products, the impact of competitive products and services, and the
other risks described in the Company's SEC reports, including this report. These
forward-looking  statements  speak only as of the date  hereof and should not be
given  undue  reliance.   Actual  results  may  vary  significantly  from  those
projected.

The  Company   undertakes  no  obligation  to  publicly  update  or  revise  any
forward-looking  statements,  whether  as a result  of new  information,  future
events, or otherwise.

General

We were  formed in  Delaware  in 1989 and our  principal  executive  offices are
located in Mill Valley, California. We completed 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. During 1997, we
sold our last indirect interest in a direct broadcast satellite license.

We formed E-SAT,  Inc., a Colorado  corporation,  in  partnership  with EchoStar
Communications  Corp. in November 1994 for purposes of applying for a Little LEO
FCC license.  On March 31, 1998, the FCC issued a license to E-SAT to launch and
operate a Little LEO satellite  system.  Pursuant to the agreement  entered into
with  EchoStar in July 1999, we now hold 80.1% of the capital stock of E-SAT and
EchoStar holds the remaining 19.9%.

During the intervening years, we raised financing and began the development of a
Little LEO  satellite  system (the "E-SAT  system") to provide  automated  meter
reading and short messaging services. We signed a contract with Eurockot for the
launch of the satellites,  a contract with Surrey  Satellite for the development
of ground  stations and the  satellite  bus and a contract  with Alcatel for the
engineering  and  production  of the  satellites  (this  work  was  subsequently
transferred  to  Surrey  Satellite).  However,  we have  been  unable  to secure
financing to complete the launch and commercialization of the satellite system

On June 2,  2001 we  signed a  seven-year  operator-to-operator  agreement  with
Iridium  Satellite LLC to provide remote  monitoring and control services to the
energy industry.  Through this agreement, we hope to begin providing specialized
satellite-based data services using Iridium's  commercially  available satellite
network during fiscal 2002.

On  June  14,  2001  we  demonstrated  to  California   state  officials  how  a
satellite-based  energy control system could curtail electricity  consumption by
temporarily  deactivating  air  conditioning  units  located on the  rooftops of
California shopping malls.  Shortly thereafter,  we commenced  negotiations with
the State of California to provide  satellite-based  energy management services.
On April 12, 2002, the California  Power  Authority  approved a Demand  Reserves
Program that was essentially based on our proposals and authorized negotiations.
Effective  May 23, 2002 we entered into a five-year,  Demand  Reserves  Provider
Agreement with the California  Power  Authority.  Under the agreement,  we shall
provide a minimum  of 200  megawatts  and a maximum  of 360  megawatts  of daily
available demand reduction from qualified end users. This minimum and maximum of
daily available demand  reduction  increases to 400 megawatts and 560 megawatts,
respectively,  effective  June 1, 2003.  We are currently  seeking  financing to
implement and complete the  engineering  and  deployment  of the automated  load
curtailment  system which is estimated to cost  approximately $15 to $20 million
over the next two  years.  In  addition,  we are in the  process  of  signing up

<PAGE> 35

customers to participate in the program.

We hope to begin  generating  revenues  as early as the third  quarter of fiscal
2002. Successful implementation and completion of the California Power Authority
contract  would also offer us a basis for  offering  similar  services  to other
entities worldwide.  Additionally,  cash flow from such  satellite-based  energy
management  services would provide us with funds to continue the  development of
the  E-SAT  system.  Until  then,  and  on a  continuing  basis  if we  are  not
successful,  we will seek to satisfy our short-term cash requirements by raising
new equity and debt capital.

Plan of Operation

Bankruptcies  in the satellite  sector and sharp declines in  telecommunications
and technology  sectors have impeded our financing  efforts and have required us
to modify our business  strategy.  Our current  strategy is to take advantage of
the  telecommunications   downturn  to  secure  low-cost  capacity  on  existing
satellite systems and combine it with the energy communications  technologies we
have developed over the past ten years, with an objective of generating  revenue
and proving our market potential in fiscal 2002.

Throughout  the year,  we have  focused  on this  strategy,  reducing  operating
expenses  and  concentrating  our efforts on raising  short-term  and  strategic
financing,  while  establishing  a  current  operating  business  utilizing  the
existing satellite capacity held by Iridium.

At the same time,  we have  continued  our efforts to reduce the overall cost of
the E-SAT  system and to  identify  and  commence  negotiations  with  strategic
partners who may serve as both customers and financial partners for our proposed
satellite-based  energy management systems. The Company currently lacks adequate
financing  and time to build and launch  two Low earth  orbiting  satellites  in
advance of the  required  FCC  construction  and  launch  date of March 2002 and
September 2002, which could result in the loss of our FCC license. We have filed
with the FCC to extend these milestones and we continue to plan to construct and
deploy  a  low-cost  global   satellite  system  utilizing  our  E-SAT  FCC  and
international licenses. (See "Risks and Uncertainties Affecting Future Operating
Results").

The current circumstances in the satellite and  telecommunications  industry, as
well as in the financial markets, particularly in relation to technology stocks,
have led to delays in our ability to raise  short-term  operating  capital.  Our
right to raise  capital by selling  common  shares to the Torneaux Fund has been
limited by our stock price,  which,  during 2001 has been below the  contractual
minimum  threshold price of $1.00 per share.  Any sale of shares to the Torneaux
Fund at prices below that threshold  price requires  Torneaux's  approval.  As a
result of deficiencies in short-term capital raising, we have delayed payment to
many of our vendors, and certain of our employees.  As of December 31, 2001, our
cash and cash  equivalents  amounted to $20,494  while our current  liabilities,
including  amounts owed to employees,  amounted to  $3,730,277.  Throughout  the
year,  we  have  continued  to  focus  on  reducing   operating  expenses  while
concentrating  our efforts on raising  short-term  and  strategic  financing and
establishing  a current  operating  business  utilizing  the existing  satellite
capacity held by Iridium.

Until we begin to generate  positive cash flow through our  operations,  we will
continue to seek to satisfy our 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.  The issuance of additional  equity securities by us
will  result in  significant  dilution  of the equity  interests  of the current
stockholders.

Critical Accounting Policy

During the  construction of its E-SAT system,  the Company is  capitalizing  all

<PAGE> 36

design,  engineering,  launch and  construction  costs.  Such costs  amounted to
approximately   $12.2  million  as  of  September  30,  2001.   Because  of  our
difficulties  in  financing  construction  of the  E-SAT  system  and  resulting
inability to meet required FCC  milestones,  the Company reviews its capitalized
satellite  construction and FCC license costs for impairment  whenever events or
changes in circumstances  indicate that the carrying amounts of these assets may
not be  recoverable.  The Company's  management and Audit Committee of the Board
concluded no such event or changes in circumstances exist and,  accordingly,  it
would be  inappropriate  to write down the  capitalized  satellite  construction
costs as impaired as of December 31, 2001.

In  reaching  this  conclusion,  the  Company  applied  Statement  of  Financial
Accounting  Standards ("SFAS") No. 121,  Accounting for Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed of. Under this standard, the Company
periodically  reviews whether there have been events or changes in circumstances
that indicate that the carrying amount of the satellite  construction  costs may
not be recoverable.  If an impairment event exists, the amount of the impairment
loss, if any,  would be calculated  based on the excess of the carried amount of
the assets over their fair value.

Of the capitalized  amounts,  approximately $2 million was paid to Alcatel Space
Industries  ("Alcatel")  for  preliminary  engineering  design  review  for  the
Company's system, including the payload design and designs for the gateway earth
station and tracking  facilities,  as well as the satellite orbital analysis and
communications  link margins to and from space.  On October 8, 1999, the Company
signed a contract with Alcatel for the final design,  construction  and delivery
to the launch site of six Little Low earth orbiting  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 E-SAT 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.  As noted  above,  the Company paid $2
million in construction payments to Alcatel for engineering specifications.  The
Company has not made a further  payment  required by the agreement with Alcatel,
due at the end of 1999, of approximately $9.1 million in cash and the equivalent
of $5 million  in Common  Stock.  This  payment  was  necessary  for  Alcatel to
continue  work and to trigger an effective  date for the  Company's  full system
development  schedule.  As of December 31, 2001, this payment has not been made,
and Alcatel therefore has the right to consider this contract void as to further
work, and that the contract is therefore not currently in effect. If the Alcatel
contract is never  brought  into  effect,  the Company  retains the  engineering
specifications  provided by Alcatel,  which would still be used by the Company's
other contractors in the construction of the Company's satellite network.

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.  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.

Surrey's construction contract, which was to build the satellite infrastructures
that would house the telecommunications payload, was to be managed by Alcatel as
prime contractor,  if and when the Company paid Alcatel $14.1 million to trigger
the Alcatel  contract  effective  date.  As this payment has not been made,  the
Alcatel contract is not in effect and Surrey remains a direct  contractor of the
Company.

The  Company  evaluated a number of factors in its  consideration  of whether an
impairment event has incurred,  including:  (1) whether the Company's failure to
meet its FCC milestone  requirements would result in termination of the license;
(2) whether the assets  continue to have value  notwithstanding  the delay since
contracting;  (3)  whether  the  Company's  failure to bring the  Alcatel  prime

<PAGE> 37

contract  into effect  prevents the Company from  constructing  its system;  (4)
whether the state of  difficulties  in the satellite  financing  capital markets
were likely to prevent the Company from financing its system in the future;  (5)
whether the  telecommunications  industry had overcapacity such that there would
be no business  opportunity for the E-SAT system;  and (6) whether the Company's
implementation of an Iridium-based system effectively replaced the E-SAT system.
In more detail, the Company  concluded,  subject to the Risk Factors detailed in
this Annual Report, these points as detailed below:

     1.   The Company  believes that its failure to meet its  milestones are not
          likely to result in termination of the license. The Company recognizes
          that the loss of the FCC license held by its  subsidiary  E-SAT,  Inc.
          would be a change in circumstance and that the failure to meet certain
          milestones could lead to a loss of the license.  The Company currently
          lacks  adequate  financing  and time to build and launch two Low earth
          orbiting  satellites in advance of the required FCC  construction  and
          launch date of March 2002 and September 2002, respectively. As part of
          the Company's impairment  analysis,  the Company received a report and
          opinion from Leslie Taylor Associates,  its regulatory  counsel,  that
          the license was likely to be  extended.  This opinion was based on the
          satellite  construction  progress to date, including the launch of one
          satellite,  and the fact that there were no other  pending  applicants
          for the spectrum covered by E-SAT's license.  As recommended by Leslie
          Taylor  Associates,  on March 29,  2002 E-SAT filed the request for an
          extension of milestones with the FCC and is awaiting a reply. Based on
          these facts, the Company  believes,  while there is no guarantee,  the
          FCC will grant the  extension and that it is therefore not in imminent
          danger of losing its FCC  license,  but will  continue  to monitor the
          situation for any changes.

     2.   The Company believes that its satellite  construction  assets continue
          to have value notwithstanding the delay since contracting. Included in
          the capitalized  satellite  construction costs are payments to Alcatel
          Space  Industries,  Eurockot  and Surrey  Satellite.  The Company paid
          Alcatel for the production of engineering  specifications and analysis
          which  information   remains  the  property  of  the  Company.   These
          specifications  are an integral  part of E-SAT's  ability to construct
          the satellites and were transferred by the Company to Surrey Satellite
          in  2001,  and  will be  used  by  Surrey  in  satellite  construction
          regardless  of whether  the  Alcatel  contract  is ever  brought  into
          effect.  Surrey  Satellite  was paid for the  design of the  satellite
          ground station,  among other things, which is crucial to the design of
          the  system and  remains  an  important  element  to  completion  of a
          complete satellite  communication  network.  Eurockot was paid for the
          launch  of the  satellites  and  although  the  launch  date  has been
          extended  past  2002,  E-SAT's  right to  Eurockot's  launch  services
          remains intact.

     3.   The  Company  believes  that its  failure to bring the  Alcatel  prime
          contract  into effect does not prevent the Company  from  constructing
          its system.  The Company's  contract with Alcatel called for a payment
          by the  Company at the end of 1999 that has not been paid to date and,
          as a result,  Alcatel  has the  option to  termination  the  contract.
          Alcatel has not  indicated to the Company that it intends to terminate
          the  contract,  and the Company  believes  that Alcatel  would seek to
          bring the contract into effect when the Company receives financing. In
          addition,  the Company  believes that currently  alternative  suitable
          prime  contractors  are  available  to  manage  construction  as prime
          contractor, including Surrey Satellite, for a significantly lower cost
          than  negotiated  with  Alcatel,  and so the Company may not choose to
          reinstate  the  Alcatel  contract.  As noted  above,  the  Company has
          received viable assets  consisting of engineering  specifications  and
          analysis in return for the $2.1 million paid to Alcatel.

     4.   The Company  believes that the state of  difficulties in the satellite
          financing  capital  markets is not likely to prevent the Company  from
          financing  its  system  in  the  future.  The  Company  believes  that
          satellite  financing  is cyclical and further that the low cost of its
          system,   approximately   $60   million,   compared  to  other  global
          telecommunications  system,  allows it to be  financed  through a wide
          variety of sources,  including customers and strategic  partners.  The
          Company believes that the primary impediment to financing is therefore

<PAGE> 38
          a demonstration of market viability of  low-earth-orbiting  satellites
          for data communications to remote infrastructure.

     5.   The  Company   believes  that  current   telecommunications   industry
          overcapacity  does not  obviate the market  opportunity  for the E-SAT
          system.  The Company  believes  that the E-SAT system will have unique
          competitive  advantages  even  if  the   telecommunications   industry
          maintains  a  position  of low per minute  costs due to  overcapacity.
          These  advantages  are primarily low terminal cost due to usage of low
          power-spread spectrum transceivers permitted by the E-SAT license, and
          high penetration of buildings, remote terrain and poor weather because
          the E-SAT license uses VHF frequencies.

     6.   The  Company  believes  that  the  Company's   implementation   of  an
          Iridium-based  system is not a substitute  for the E-SAT  system.  The
          Company  believes that the  Iridium-based  system,  which has a higher
          transceiver  cost and  operates on the L-Band which  requires  line of
          sight,  is  potentially  complementary  to the E-SAT system with lower
          transceiver  cost and  operates on VHF  frequencies  which have strong
          building, terrain and weather penetration.

The Company  believes  that if the funding  necessary to complete the  satellite
network and to remain a going  concern is obtained,  the  capitalized  satellite
construction  costs will be recoverable from future operating cash flows. On May
23,  2002,  the  Company  entered  into a  Demand  Reserves  Authority  Provider
Agreement with the  California  Power  Authority to implement a  satellite-based
(using  Iridium  capacity)  automated  conservation  system  design to  conserve
significant  electrical  usage on demand at peak or emergency times. The Company
believes that implementation of this program, if successful,  would provide some
of the funding for the further  development of the E-SAT system.  Should the FCC
extension  request  be  denied,  or any of the other  above  factors  materially
change,  the Company may be required to record an impairment of the  capitalized
satellite construction costs.

Revenues

The Company  remains in the development  stage and did not generate  revenues in
the years ended December 31, 2001 and 2000.

Operating Expenses

Total  operating  expenses for fiscal 2001 and fiscal 2000,  were $4,776,671 and
$6,496,009  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 are  primarily  the costs of personnel  (including
non-cash  stock  compensation),  consulting  and  travel.  Marketing  and  sales
expenses totaled $186,043 (3.9% of operating  expenses) and $1,721,725 (26.5% of
operating expenses) in fiscal 2001 and fiscal 2000, respectively. This reduction
in expenses is due to the termination of our dedicated marketing and sales group
in the fourth quarter of fiscal 2000 in order to reduce our cash expenditures.

         General and Administrative Expenses

General  and  administrative  expenses  include  the  costs of  finance,  legal,
administrative and general management  functions of DBS Industries.  General and
administrative  expenses  for  fiscal  2001 and 2000 were  $2,990,808  (62.6% of
operating expenses),  and $4,037,509 (62.2% of operating expenses) respectively.
The  reduction  of  $1,046,700  was due to a  reduction  in  consulting  fees of

<PAGE> 39

$574,200,  reduced personnel costs of $184,900, a reduction of legal expenses of
$124,000,  a  reduction  of third  party  services  for  investor  relations  of
$115,100, and a reduction in office supplies of $41,700.

         Research and Development Expenses

Research and development  expenses represent  non-capitalized  costs incurred to
develop our system. Research and development expenses for fiscal 2001 and fiscal
2000 were  $1,599,820  (33.5% of operating  expenses),  and  $736,775  (11.3% of
operating expenses),  respectively.  During the fourth quarter of fiscal 2000 we
terminated our research and development  office in Toulouse,  France in order to
reduce  our  operating  expenses.  During  the second  half of fiscal  2001,  we
utilized  the  expertise  of  a  third-party  consulting  firm  to  develop  the
Iridium-based energy management system,  incurring during that period $1,588,179
in  consulting  fees,  compared  with  consulting  fees of $33,013  incurred for
research and development of our E-SAT system during fiscal 2000.

         Non-Cash Stock Compensation

In order to attract and retain qualified  personnel,  we have granted options to
purchase  Common Stock to several  employees.  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.  The deferred stock  compensation was amortized
over the vesting  periods of the granted  options and as of December 31, 2001 is
fully  amortized.  The Company  recognized a total of $450,129 as non-cash stock
compensation expense in fiscal 2001 compared to $1,078,857 in fiscal 2000. As of
December 31, 2001,  the entire amount of deferred  stock  compensation  has been
fully amortized.

         Other Income (Expense)

The Company experienced  non-operating  income of $258,144 during fiscal 2001 as
compared to a loss of $59,940  during  fiscal  2000.  The income in 2001 was the
result of an  approximately  $384,000 gain from  remeasurement  of the values of
certain  warrants  recorded as  liabilities,  offset by an  interest  expense of
approximately  $126,000.  The  loss in 2000  was a result  of  interest  expense
incurred.

         Net Loss

The Company's net loss for fiscal 2001 was $4,520,127 compared to $6,557,549 for
fiscal 2000.

Liquidity and Capital Resources

The Company has been in the  development  stage since its  inception and has not
recognized any significant revenues. Our monthly expenditures excluding non-cash
items  averaged  approximately  $309,000 per month during fiscal 2001.  However,
expenses will increase during fiscal 2002 with the demands of increased  efforts
in both systems and business  development.  Additional capital will be necessary
to expand  operations  or  continue  current  operations,  which will  result in
further  dilution  to our  stockholders.  We cannot be certain  that  additional
funding will be available on acceptable terms or at all.

<PAGE> 40

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.

During fiscal 2001,  we received  proceeds from the sale of common and preferred
stock totaling  $2,002,874  before stock issuance costs of $88,200.  We had cash
and cash  equivalents  of $20,494  and  $389,319  as of  December  31,  2001 and
December 31, 2000 respectively. We had negative working capital of $3,657,802 as
of December 31, 2001, compared to a negative working capital of $2,216,321 as of
December 31, 2000.

Until we are able to either:  1)  successfully  implement  our program  with the
California  Power  Authority  to  provide   satellite-based   energy  management
services,  or 2) develop,  construct  and  operate  the E-SAT  system and derive
revenues therefrom,  we must continue to rely solely on outside sources to raise
cash for our operations.

Net cash used in operating  activities  during  fiscal 2001 was  $2,858,390,  as
compared to $2,385,941 for fiscal 2000.  The $2,858,390  results from a net loss
of $4,520,127 offset primarily by:

     -    non-cash stock compensation of $450,129;

     -    non-cash warrants issues and other non-cash charges of $555,960; and

     -    an increase in accounts  payable and accrued  liabilities  of $649,375
          due primarily to difficulties in raising capital financing;


Net cash used in investing  activities  for fiscal 2001 was $30,109  compared to
$96,552 for fiscal 2000.

Net cash  provided by  financing  activities  for fiscal  2001,  was  $2,520,674
compared  to  $2,588,866  for  fiscal  2000.  Net  cash  provided  by  financing
activities during fiscal 2001 was related primarily to the net proceeds from the
sale  of  common  stock  and  the  exercise  of  options  and  warrants  by  our
stockholders and to the issuance of convertible debt in the amount of $501,000.

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.

A number of  factors  could  cause  future  results  to differ  materially  from
historic  results.  We are a  development  stage  company and as of December 31,
2001,  we had no  customers.  Given our  limited  operating  history and lack of
revenues,  we cannot  assure you that we will be able to construct and implement
our system,  and, if implemented,  to develop a sufficiently large customer base
to be profitable.

While we continue the strategic  fund-raising  efforts (see "Plan of Operation")
that are necessary to our ultimate  success,  our  continued  cost of operations
significantly exceeds our short-term capital. In addition, we currently estimate
for the first two years that we will require approximately $15 to $20 million of
working   capital  to  develop,   install,   and  operate  the   equipment   for
satellite-based  energy  management  services for the California Power Authority
and $60  million  in  capital  related  to the  construction  and  launch  costs
associated with the E-SAT system. No assurance can be given that capital will be
available to us on commercially acceptable terms to meet development costs or on

<PAGE> 41
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.  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.  All of these contracts require that we have available capital,  which
is not  currently  available.

Potential impact on our liquidity and capital resources of our failure to timely
register certain shares of our Common Stock and resulting liquidated damages.

We have also  incurred  liquidated  damages  related to our Series B convertible
preferred stock in the amount equal to 5% of the purchase price for each 30 days
we have failed to effectively  register the  underlying  shares of Common Stock.
The liquidated damages may be demanded by the holder in cash or as an accrual to
the  liquidation   preference  associated  with  each  share  of  the  Series  B
convertible  preferred  stock. As of December 31, 2001, we have incurred $87,267
in liquidated damages.

We have also incurred liquidated damages related to our Convertible  Debenture F
in the amount equal to 3% of the purchase price for each month we have failed to
effectively  register the underlying  shares of Common Stock. As of December 31,
2001, we have incurred $1,000 in liquidated damages.

We have also incurred  liquidated  damages  related to three issuances of Common
Stock and warrants to purchase Common Stock.

With respect to two of these  issuances,  for each month that the effective date
of registration is delayed beyond May 1, 2001,  liquidated  damages have accrued
at the rate of 10% of securities  purchased.  As of December 31, 2001, the total
liquidated  damages amount to 976,000 shares of our Common Stock and warrants to
purchase 244,000 shares of our Common Stock at an exercise price of $0.50.

With respect to the third  issuance,  for each month that the effective  date of
registration is delayed beyond November 1, 2001, liquidated damages have accrued
at the rate of 10% of securities  purchased.  As of December 31, 2001, the total
liquidated  damages amount to 160,000 shares of our Common Stock and warrants to
purchase 40,000 shares of our Common Stock at an exercise price of $0.50.

Until we have an effective  registration  statement  registering  the underlying
shares of common  stock,  we will  continue to incur these  liquidated  damages,
which will further increase our liabilities and dilute our common stockholders.

As a result of our failure to register the underlying  shares of Common Stock by
August 4, 2001, the holders of the Series B convertible preferred stock have the
right to  require  us to redeem  all or a portion  of the  Series B  convertible
preferred  stock  in an  amount  equal  to at  least  125%  of  the  liquidation
preference amount.

Other Risks and Uncertainties Affecting Future Operating Results

Other  factors,  in addition to those  identified  in this  filing,  which could
affect future results would include 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 E-SAT  system,  satisfying  the  milestones of E-SAT's FCC
license and construction  contracts,  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

<PAGE> 42

the Company's  activities in the Little LEO  satellite  technology,  unscheduled
delays  or  technological   difficulties,   satellite  launch  risks,  potential
satellite  malfunction,  limited  availability  of  insurance,  results  of  the
Company's  financing efforts and marketing  conditions,  competition,  and other
risk  factors  related to the  Company's  business.  Readers of this  filing are
cautioned not to put undue reliance on "forward looking" statements that are, by
their nature, uncertain as reliable indicators of future performance.

ITEM 7.  FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

The  response  to this item is being  submitted  in a  separate  section of this
report beginning on page 61.

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

None.

<PAGE> 43

                                PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH SECTION 16(a) OF THE EXCHANGE ACT

Directors, Executive Officers and Key Employees of the Company

The present  directors,  executive  officers,  and key employees of the Company,
their ages, positions held in the Company, and duration as such, are as follows:

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

Name                          Position                                    Age                 Period
----------------------------- ------------------------------------------- ---------- -------------------------------


Fred W. Thompson              Chairman of the Board, President, Chief     59         December 1992 - present
                              Executive Officer, and                                 November 1993 - present
                              Chief Financial Officer                                February 2002 - present
----------------------------- ------------------------------------------- ---------- -------------------------------
Randy Stratt                  Director, Chief Operating Officer,          45         February 2002 - present
                              General Counsel and Secretary                          November 1999 - present
----------------------------- ------------------------------------------- ---------- -------------------------------

Michael T. Schieber           Director                                    62         December 1992 - present
----------------------------- ------------------------------------------- ---------- -------------------------------

Jerome W. Carlson             Director                                    65         May 1997 - present
----------------------------- ------------------------------------------- ---------- -------------------------------

Roy T. Grant                  Director                                    45         August 1999 - present
----------------------------- ------------------------------------------- ---------- -------------------------------

Jessie J. Knight, Jr.         Director                                    51         February 1999 - present
----------------------------- ------------------------------------------- ---------- -------------------------------

Michael J. Apatoff            Director                                    47         February 2002 - present
----------------------------- ------------------------------------------- ---------- -------------------------------
</TABLE>


The  Company  adopted  staggered  terms for its Board of  Directors  at its 1996
Annual Stockholders  Meeting.  Messrs.  Thompson and Knight will serve until the
2002 annual meeting of stockholders or until their successors have been elected;
Messrs.  Carlson  and  Grant  will  serve  until  the  2003  Annual  Meeting  of
stockholders or until their successors have been elected;  and Mr. Schieber will
serve until the 2004 Annual Meeting of  stockholders  or until his successor has
been elected.  Messrs.  Apatoff and Stratt were appointed on February 5, 2002 to
serve on the Board of Directors on an interim basis until their  election at the
2002 Annual Stockholders Meeting.

<PAGE> 44

Business Experience

The following is a brief account of the education and business experience during
at least  the past  five  years of each  director,  executive  officer,  and key
employee, indicating the principal occupation and employment during that period,
and the name and principal business of the organization in which such occupation
and employment were carried out.

Fred W.  Thompson has served as Chairman of the Board,  President  and CEO since
1992. Mr. Thompson was appointed to serve as Chief Financial Officer in February
2002.  Mr.  Thompson has over 30 years of senior  management  experience  in the
telecommunications  industry,  including more than 20 years with AT&T Bell Labs,
Western  Electric  Co. and the Long Lines Dept.  As founder and Chief  Executive
Officer of Inter Exchange  Consultants,  Inc., Mr.  Thompson was responsible for
the successful  management,  design and  engineering of the pioneering  cellular
telephone operations in major world markets,  including New York, San Francisco,
London and Tokyo.  Mr.  Thompson  utilized his skills and experience in bringing
new communications  technologies to market by founding DBS Industries,  Inc. and
steering it through the FCC licensing process toward the operational  phase. Mr.
Thompson  received  a  BS  degree  in  Electrical  Engineering  from  California
Polytechnic.

Randy Stratt, Chief Operating Officer, General Counsel and Secretary, joined the
Company in November  1999 and was appointed to the Board in February  2002.  Mr.
Stratt   has  over  20   years  of   management,   business   development,   and
corporate/securities  counsel  experience  with both public and private firms in
the finance and high technology  industries.  Prior to joining the Company,  Mr.
Stratt was Director of Strategic  Development and  Communications  with Dresdner
RCM Global  Investors,  an  international  investment firm that at the time held
over $65 billion of assets under  management.  From 1987 to 1993, Mr. Stratt was
Senior Vice President and General Counsel of Spear Financial  Services,  Inc., a
California-based NASDAQ NMS financial services firm with traditional and on-line
broker-dealer operations. Prior to that, Mr. Stratt was an executive with Source
Telecomputing Corporation, one of the first on-line consumer services, which was
eventually  acquired by CompuServe and ultimately  acquired by America  On-line.
Mr. Stratt is a licensed attorney in California and three other states. He holds
a BA from Cornell University and received a JD from George Washington University
law school and an MS in Information  Systems from George  Washington  University
Business School.

Jessie J. Knight,  Jr., a Director  appointed in February 1999, is President and
Chief Executive Officer of the San Diego Regional Chamber of Commerce.  He was a
Commissioner  of the California  Public  Utilities  Commission from 1993 through
December 1998.  Appointed by former  Governor  Peter Wilson,  he was one of five
individuals  responsible  for economic and regulatory  oversight of California's
telecommunications,   utility,   trucking  and  rail   industries.   Before  his
appointment  to the  Commission,  he was  Executive  Vice  President  of the San
Francisco  Chamber  of  Commerce,   responsible  for  international  operations,
economic development and attracting businesses to San Francisco.  He also served
as  Vice  President,  Marketing  for  the  San  Francisco  Newspaper  Agency,  a
publishing  operation  encompassing  the  San  Francisco  Chronicle  and the San
Francisco Examiner.  Mr. Knight serves on the board of directors of Avista, Inc.
Mr.  Knight  holds a BA degree  from St.  Louis  University  and an MBA from the
University of Wisconsin.

Roy T. Grant has served as a Director  since August 1999. Mr. Grant is currently
an independent consultant.  From January 2000 to April 2001, Mr. Grant was Chief
Financial  Officer of Wayport,  Inc.  Prior  thereto from  November 1996 through
April  1999,  Mr.  Grant was  employed by Iridium,  LLC,  most  recently as Vice
President and Chief  Financial  Officer.  Subsequent to Mr.  Grant's  departure,
Iridium,  LLC filed for protection  under the bankruptcy laws in 1999. From 1992
to 1996,  Mr. Grant served as Finance  Director for Edison Mission  Energy,  the
largest  independent  power  developer  in the  United  States.  Mr.  Grant is a

<PAGE> 45

director  of  e-tel   Corporation   and  Pritest.   Mr.  Grant  holds  a  BS  in
Administration and Management  Science,  Mathematics and Economics from Carnegie
Mellon University and an MBA in Finance from the University of Chicago.

Michael J. Apatoff,  Director,  was appointed to the Board in February 2002. Mr.
Apatoff is currently an independent  consultant.  From 1991 to 1998, Mr. Apatoff
was employed by Dresdner RCM Global  Investors,  most recently as its President.
Previously from 1986 to 1990, Mr. Apatoff was Executive Vice President and Chief
Operating Officer of the Chicago  Mercantile  Exchange and was closely tied into
institutional  investors and venture and private equity community.  From 1981 to
1985, he was Special  Assistant to  Congressman  Tom Foley,  Speaker of the U.S.
House of Representatives. Mr. Apatoff earned his BA from Reed College.

Jerome W. Carlson, a Director  appointed in May 1997, is currently  President of
Raljer,  Inc., a management  consulting  firm,  and has held that position since
January 1995. Previously, from 1984 to 1995, Mr. Carlson was the Chief Financial
Officer,  Vice  President of Finance and  Corporate  Secretary for Triad Systems
Corporation  in  Livermore,  California.  Mr.  Carlson  has  over  twenty  years
experience  in both  finance  and  general  management  positions  with  Hewlett
Packard.  Since 1995 he has assisted a number of businesses  in  developing  and
achieving certain strategic and tactical goals in their industries.  Mr. Carlson
is a director of Valley Community Bank. He holds a BS degree from the University
of California at Davis and an MBA from the Stanford Graduate School of Business.

Michael T. Schieber has served as a Director of the Company since December 1992.
From 1987 to December  1992,  Mr.  Schieber was the  Managing  Partner of Amador
Telecommunications and since 1990 has been a partner in Columbia Communications,
both investors in nation-wide paging licenses. He retired from the Department of
Fisheries  with the State of  Washington  in May 1993  where he had  served as a
civil  engineer  since  1984.  He is also a retired  Air Force Major and Command
Pilot with  service in Vietnam  where he was  awarded the  Distinguished  Flying
Cross,  Air Medal with 2 oak leaves and the Vietnamese  Cross of Gallantry.  Mr.
Schieber  received an MA degree in  International  Relations and Government from
the  University of Notre Dame, a BS in  Engineering  from the Air Force Academy,
and a BA in Business from The Evergreen State College.

Section  145  of the  General  Corporation  Law of  Delaware  provides  for  the
indemnification  of officers and directors under certain  circumstances  against
expenses incurred successfully defending against a claim and authorizes Delaware
corporations   to  indemnify   their   officers  and  directors   under  certain
circumstances  against  expenses and liabilities  incurred in legal  proceedings
involving  such  persons  because  of their  being or having  been an officer or
director.   Our   certificate   of   incorporation   and  bylaws   provide   for
indemnification  of our officers and directors to the fullest extent  authorized
by law.

Insofar as indemnification  for liabilities arising under the Securities Act may
be permitted to our directors,  officers and controlling persons pursuant to the
foregoing provisions,  or otherwise, we have been advised that in the opinion of
the Securities and Exchange  Commission,  such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.

Family Relationships

There are no family relationships between any director and executive officer.

Section 16(a) Beneficial Ownership Reporting Compliance

<PAGE> 46

Section 16(a) of the Securities  Exchange Act of 1934, as amended,  requires the
Company's executive officers and directors, and persons who own more than 10% of
the Company's  Common Stock,  to file reports of ownership on Form 3 and changes
in ownership on Form 4 or 5 with the  Securities  and Exchange  Commission  (the
"SEC").  Such  executive  officers,  directors  and 10%  stockholders  are  also
required by SEC rules to furnish the  Company  with copies of all Section  16(a)
forms they file.

Based  solely  upon its  review of copies of such  forms  received  by it, or on
written  representations  from certain  reporting  persons that no other filings
were required for such persons, the Company believes that, during the year ended
December  31, 2001,  its  executive  officers,  directors  and 10%  stockholders
complied  with  all  applicable  Section  16(a)  filing  requirements.

<PAGE> 47
ITEM 10.

EXECUTIVE COMPENSATION

Executive Compensation

The following table provides certain summary information concerning compensation
of our Chief  Executive  Officer and each of our  employees or the  employees of
subsidiaries  who earned in excess of $100,000  for the year ended  December 31,
2001.

Columns  regarding "Other Annual  Compensation",  "Restricted  Stock Awards" and
"Long-Term  Incentive  Plan (LTIP)  Payouts" are excluded  because no reportable
payments  were  made  to  such  executive   officers  for  the  relevant  years.



                                                SUMMARY COMPENSATION TABLE
<TABLE>
<S>                              <C>    <C>       <C>               <C>             <C>                     <C>

                                          Annual Compensation                             Long-Term
                                                                                       Compensation
--------------------------------- -------------- ----------------- -------------- ---- ----------------- ------------------
                                                                                          Securities
            Name and                                                                     Underlying          All Other
       Principal Position         Year             Salary(1)         Bonus                  Options        Compensation
--------------------------------- -------------- ----------------- -------------- ---- ----------------- ------------------
Fred W. Thompson                  2001           $262,501              - 0 -            1,250,005        $    7,755(2)
President, CEO                    2000           $250,000              - 0 -              - 0 -          $    7,386(3)
                                  1999           $215,000          $45,000              1,000,000         $  16,761(4)

Randy Stratt                      2001           $190,000            - 0 -                515,625        $    3,997(5)
Chief Operating Officer           2000           $165,000            - 0 -                - 0 -          $    1,017(6)
General Counsel                   1999           $  24,433           - 0 -                160,000               - 0 -

James Stoutenberg                 2001           $120,000            - 0 -                212,500        $    8,250(7)
Vice President                    2000           $  80,000           - 0 -                120,000               - 0 -

Stanton C. Lawson*                2001           $190,417            - 0 -                562,500        $    4,410(8)
Former Chief Financial Officer    2000           $180,000            - 0 -                - 0 -          $    1,485(9)
                                  1999           $  37,500           - 0 -                180,000               - 0 -
Frederick R. Skillman*
Former Vice President             2001           $147,500            - 0 -                421,875        $   13,857(10)
                                  2000           $135,000            - 0                   -0-           $    5,044(11)
                                  1999           $120,415          -$54,500               150,000        $    4,911(12)

--------------------------------- -------------- ----------------- -------------- ---- ----------------- ------------------
</TABLE>

* Both Mr.  Lawson and Mr.  Skillman  resigned  from the Company  because of the
Company's  inability  to pay  ongoing  salary  obligations.  Pursuant  to  their
employment  agreements,  these  terminations  were deemed  terminations  without
cause.  Mr.  Lawson's  termination  from the Company was effective  February 11,
2002, and Mr.  Skillman's  termination  from the Company was effective  April 1,
2002.

(1)  In order to support the Company's financing efforts,  executives elected to
     defer payment of salary earned in 2001 as follows:  Mr. Thompson - $95,834;
     Mr. Stratt - $80,000;  Mr. Stoutenberg - $30,000; Mr. Lawson - $70,417; Mr.
     Skillman - $57,500. Executives received during 2001 salaries which had been
     deferred  from 2000 as  follows:  Mr.  Thompson -  $125,000;  Mr.  Stratt -
     $41,250;  Mr. Stoutenberg - $25,000;  Mr. Lawson - $45,000;  Mr. Skillman -
     $33,750.
(2)  Includes  payment  of life  insurance  premium  of $4,005  and  payment  of
     contribution to IRA Retirement Plan of $3,750.
(3)  Includes  payment  of life  insurance  premium  of $2,586  and  payment  of
     contribution to IRA Retirement Plan of $4,800.
<PAGE> 48

(4)  Includes  payment  of life  insurance  premium  of $9,972  and  payment  of
     contribution to IRA Retirement Plan of $6,789.
(5)  Includes  payment  of  life  insurance  premium  of  $360  and  payment  of
     contribution to IRA Retirement Plan of $1,125.
(6)  Includes  payment  of  life  insurance  premium  of  $284  and  payment  of
     contribution to IRA Retirement Plan of $733.
(7)  Payment of contribution to IRA Retirement Plan.
(8)  Includes  payment  of  life  insurance  premium  of  $360  and  payment  of
     contribution to IRA Retirement Plan of $4,050.
(9)  Includes  payment  of  life  insurance  premium  of  $360  and  payment  of
     contribution to IRA Retirement Plan of $1,125.
(10) Includes  payment  of  life  insurance  premium  of  $244  and  payment  of
     contribution to IRA Retirement Plan of $13,613.
(11) Includes  payment  of  life  insurance  premium  of  $244  and  payment  of
     contribution to IRA Retirement Plan of $4,800.
(12) Includes  payment  of  life  insurance  premium  of  $244  and  payment  of
     contribution to IRA Retirement Plan of $4,667.

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

                                  OPTION GRANTS IN THE YEAR ENDED DECEMBER 31, 2001
                                                  INDIVIDUAL GRANTS
--------------------------- ----------------------- ------------------------ -------------------------- -------------
                             Number of Securities   % of Total Options
                              Underlying Options    Granted to Employees
                                 Granted 2001       in Fiscal Year 2001       Exercise or Base Price     Expiration
Name                                                                                 ($/SHARE)              Date
--------------------------- ----------------------- ------------------------ -------------------------- -------------

Fred W. Thompson                   312,500                  10.4%                      $0.49            February 6, 2011
President, Chief Executive         937,505                  31.1%                      $0.77            August 7, 2011
Officer, Chief Financial
Officer

Randy Stratt                       103,125                   3.4%                      $0.49            February 6, 2011
Chief Operating Officer,           412,500                  13.7%                      $0.77            August 7, 2011
General Counsel

James Stoutenberg                   62,500                   2.9%                      $0.49            February 6, 2011
Vice President                     150,000                   4.1%                      $0.77            August 7, 2011

Stanton C. Lawson*                 112,500                   3.7%                      $0.49            February 6, 2011
Former Chief Financial             450,000                  15.0%                      $0.77            August 7, 2011
 Officer

Frederick R. Skillman*              84,375                   2.8%                      $0.49            February 6, 2011
Former Vice President              337,500                  11.2%                      $0.77            August 7, 2011
---------------------------------------------------------------------------------------------------------------------
</TABLE>

* Both Mr.  Lawson and Mr.  Skillman  resigned  from the Company  because of the
Company's  inability  to pay  ongoing  salary  obligations.  Pursuant  to  their
employment  agreements,  these  terminations  were deemed  terminations  without
cause.  Mr.  Lawson's  employment  was  terminated  from the  Company  effective
February 11, 2002, and Mr. Skillman's employment was terminated from the Company
effective April 1, 2002.

<PAGE> 49

     Aggregated  Option Exercises in Last Fiscal Year and Fiscal Year-End Option
     Values

     There were no options  exercised during the year ended December 31, 2001 by
     executive officers.

                         Ten-Year Options/SAR Repricings

     There was no  repricing  of options for the fiscal year ended  December 31,
     2001.

             Long-Term Incentive Plans - Awards in Last Fiscal Year

There were no awards made to the named  executive  officers  under any long-term
incentive plan during the year ended December 31, 2001.




Compensation of Directors

On September 1, 1999, our Board of Directors  adopted a directors'  compensation
plan. Under the compensation  plan, each non-employee  director shall receive an
annual  retainer of $12,000 plus a fee of $1,000 and reasonable  travel expenses
for  attendance at each Board  meeting.  Each  committee  chairman shall receive
$2,500  annually  for each  year of  service  as  committee  chairman,  and each
committee member shall receive $500 for attendance at each committee meeting. In
lieu of cash  compensation,  non-employee  directors may elect to receive either
the Company's  Common Stock or stock options to purchase Common Stock, the value
of which under either  election,  shall not exceed $20,000  annually.  If either
Common Stock or stock  options are elected,  the price will be determined by the
average  closing  price for the five  trading  days of the  Common  Stock at the
beginning of a six-month  period ending either June 30 or December 31.  Further,
with  respect to stock  options  elected as  compensation,  the cash  equivalent
number of stock  options  will be  determined  based  upon a number of  factors,
including  but not limited  to,  vesting  periods,  estimated  growth  rates and
risk-free rates.

In  addition,  each  non-employee  director  shall  receive  an annual  grant of
non-qualified  options to purchase  10,000  shares of Common Stock in accordance
with the  Company's  current  Stock  Option Plan.  The  exercise  price shall be
determined  by the closing price of the Common Stock of the five trading days up
to and  including  the  date of the  Annual  Stockholders  Meeting,  subject  to
discounting pursuant to a formula adopted by the Board. These options shall vest
one year from date of grant. Further, upon either the first-time  appointment or
election to the Board,  a new  non-employee  director  shall receive  options to
acquire  10,000  shares of Common  Stock,  the  exercise  price of which will be
determined  by a  formula  adopted  by  the  Board.  These  options  shall  vest
immediately.

In 2001,  Michael T. Schieber was awarded  options to purchase  10,000 shares of
Common  Stock at $0.22 per share,  options to purchase  71,202  shares of Common
Stock at $0.4156  per share,  and options to  purchase  30,974  shares of Common
Stock at $0.46 per share;  Jerome W.  Carlson  was  awarded  options to purchase
10,000  shares of Common  Stock at $0.22 per share,  options to purchase  73,840
shares of Common  Stock at $0.4156 per share,  and  options to  purchase  28,591
shares of Common Stock at $0.46 per share;  Jessie J.  Knight,  Jr., was awarded
options to purchase 10,000 shares of Common Stock at $0.22 per share, options to
purchase  68,565  shares of Common  Stock at  $0.4156,  and  options to purchase
33,365  shares of Common Stock at $0.46 per share;  and Roy T. Grant was awarded
options to purchase  10,000 shares of Common Stock at $0.22 per share and 32,843
shares of Common Stock.

The  directors'  compensation  plan  was  prepared  following  a  report  by  an
independent  compensation firm. It was recommended by the compensation committee
and adopted by the Board.

<PAGE> 50

Employment Agreements

Mr.  Thompson  entered into an employment  agreement  with us on April 18, 1996,
effective  January 1, 1996.  His annual salary under the agreement was $180,000,
and  included  non-qualified  stock  options to purchase  312,500  shares of our
Common  Stock.  In October  1998,  we paid Mr.  Thompson  the amount of $208,000
related to his  previously  deferred  compensation  through  December  31, 1997.
Effective July 1, 1999, Mr. Thompson's  employment  agreement was extended until
July 1, 2004. In connection with the extension, Mr. Thompson's annual salary was
increased  to  $250,000,  and he was granted  non-qualified  options to purchase
1,000,000  shares of Common  Stock at an  exercise  price of $1.3496  based on a
formula. Options to purchase 250,000 shares of Common Stock vest immediately and
the remaining options to purchase 750,000 shares of Common Stock vest in 250,000
increments  beginning on January 1, 2000,  and each year  thereafter.  Effective
August 1, 2001, Mr. Thompson's  annual salary was increased to $280,000.  If Mr.
Thompson  is  terminated  without  cause  during  the  term  of  his  employment
agreement,  his salary will continue for 12 months following termination so long
as he does not compete with us. Upon  termination  without cause or in the event
of a change of control,  all options  granted to Mr. Thompson in connection with
his employment agreement will vest immediately.  We maintained during 2001 a key
person insurance policy on Mr. Thompson's life in the face amount of $2,000,000,
for  which we were the sole  beneficiary  of such  policy,  and we will  seek to
reinstate this policy during 2002.

Effective November 18, 1999, we entered into a three-year  employment  agreement
with Mr.  Randy  Stratt  to serve as a Senior  Vice  President  and our  General
Counsel.  Mr.  Stratt's  starting  annual salary was  $165,000.  Mr. Stratt also
received a non-qualified option to purchase 160,000 shares of Common Stock at an
exercise price equal to $1.0797 per share based upon a formula. Effective August
1, 2001, Mr.  Stratt's  annual salary was increased to $225,000.  Also, upon his
appointment as Chief Operating  Officer  effective  February 5, 2002, Mr. Stratt
received a non-plan,  non-qualified  option to purchase 450,000 shares of Common
Stock of the Company exercisable for ten years at $0.12 per share. If Mr. Stratt
is terminated  without cause during the term of his  employment  agreement,  his
salary will continue for 12 months following  termination so long as he does not
compete with us. Upon  termination  without  cause,  all options  granted to Mr.
Stratt in connection with his employment agreement will vest immediately.

Effective  October 18, 1999, we entered into a three-year  employment  agreement
with Mr. Stanton C. Lawson to serve as our Senior Vice President of Finance. Mr.
Lawson's  starting  annual  salary was  $180,000.  Mr.  Lawson  also  received a
non-qualified  option to purchase  180,000 shares of Common Stock at an exercise
price equal to $1.0952 per share based upon a formula. Effective August 1, 2001,
Mr.  Lawson's  annual  salary  was  increased  to  $205,000.  If Mr.  Lawson  is
terminated  without cause during the term of his employment  agreement,  he will
receive a lump sum cash payment of 12 months'  salary  following  termination so
long as he does not compete with us. Upon termination without cause, all options
granted to Mr.  Lawson in connection  with his  employment  agreement  will vest
immediately.  Mr.  Lawson  resigned  from the Company  because of the  Company's
inability  to  pay  ongoing  salary  obligations.  Pursuant  to  his  employment
agreement,  this  termination  was  deemed  termination  without  cause  and was
effective February 11, 2002.

Effective July 28, 1999, DBSI entered into a one-year employment  agreement with
Mr.  Frederick R.  Skillman,  Jr., to serve as our Vice  President,  Operations.
Under this employment agreement, Mr. Skillman's annual salary was established at
$135,000.  He also  received  $13,500 upon the execution of the agreement and an
additional  $13,500 in November  1999 as a bonus.  Mr.  Skillman also received a
non-qualified  option to purchase  150,000 shares of Common Stock at an exercise
price equal to $0.7573 per share based upon a formula.  Mr. Skillman's agreement
was  subsequently  extended one year to July 28, 2001 and,  effective  August 1,
2001,  extended two years to July 28, 2003 with an increase in annual  salary to
$165,000.  If Mr.  Skillman is  terminated  without cause during the term of his
employment  agreement,  he will  receive a lump sum cash  payment  of 12 months'
salary  following  termination  so long as he does not  compete  with  us.  Upon
termination  without cause,  all options  granted to Mr.  Skillman in connection
with his employment agreement will vest immediately.  Mr. Skillman resigned from
the  Company   because  of  the  Company's   inability  to  pay  ongoing  salary
obligations.  Pursuant to his employment agreement,  this termination was deemed

<PAGE> 51

termination without cause and was effective April 1, 2002.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Principal Stockholders

The  following  table sets forth  certain  information  as of May 6, 2002,  with
respect to the beneficial  ownership of our Common Stock for each director,  all
directors and officers of the Company as a group, and each person known to us to
own  beneficially  five  percent (5%) or more of the  outstanding  shares of our
Common Stock.

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

              Name and Address of                          Beneficially and
               Beneficial Owner                            Record Owned (1)                   Percent of Class

Fred W. Thompson (2)                                         6,599,487 (3)                          19.1%


Randy Stratt (2)                                              956,250 (4)                           3.1%


Michael T. Schieber (2)                                       520,147 (5)                           1.7%


 Jerome W. Carlson(2)                                         387,207 (6)                           1.3%


Jessie J. Knight, Jr. (2)                                     256,960 (7)                             *


Roy T. Grant (2)                                              552,336 (8)                           1.8%

Michael J. Apatoff (2)                                      18,323,386 (9)                         41.5%

Officers and Directors as a Group                           27,595,773                             52.2%
(7 Persons)

Bradley N. Rotter                                            2,272,754                              7.5%
 1700 Montgomery Street #250
 San Francisco, CA 94111

Astoria Capital Partners, L.P.                               1,480,000                              5.0%
6600 Southwest 92nd St., Suite 370
Portland, Oregon  97223

</TABLE>

* Less than 1%.

(1)  The persons  named in the table have sole voting or  investment  power with
     respect to all of the Common  Stock  shown as  beneficially  owned by them,
     subject to community  property laws where  applicable  and the  information
     contained in the footnotes to this table.

(2)  The address for each of these  persons is: c/o DBS  Industries,  Inc.,  100
     Shoreline Highway #190A, Mill Valley CA 94941.

(3)  Includes  (i)  31,593  shares of Common  Stock held by Mr.  Thompson;  (ii)

<PAGE> 52

     174,558 shares of Common Stock held in Thompson 1996 Revocable Trust; (iii)
     1,249,999  shares  held by Mr.  Thompson  through  an  affiliated  business
     entity;  (iv) options to purchase  312,500 shares of Common Stock at $0.531
     per share  expiring  January  1,  2006,  185,000  shares  of  Common  Stock
     exercisable at $0.584 per share and expiring  December 31, 2002,  1,000,000
     shares of Common Stock exercisable at $1.3496 per share expiring  September
     1, 2009,  208,332  shares of Common  Stock  exercisable  at $0.49 per share
     expiring  February 6, 2011, and 937,505 shares of Common Stock  exercisable
     at $0.77 per share  expiring  August 7, 2011;  and (v) warrants to purchase
     416,667 shares of Common Stock exercisable at $0.12 per share expiring July
     4, 2002, warrants to purchase 416,667 shares of Common Stock exercisable at
     $0.12 per share  expiring  August 3, 2002,  warrants  to  purchase  416,667
     shares of Common Stock exercisable at $0.12 per share expiring September 4,
     2002,  warrants to purchase  416,666 shares of Common Stock  exercisable at
     $0.12 per share expiring  September 4, 2002,  warrants to purchase  166,667
     shares of Common Stock exercisable at $0.12 per share expiring September 4,
     2002,  warrants to purchase  249,999 shares of Common Stock  exercisable at
     $0.12 per share expiring October 15, 2002, and warrants to purchase 416,667
     shares of Common Stock  exercisable at $0.12 per share expiring October 15,
     2002.

(4)  Includes  (i) 15,000  shares of Common Stock held by Mr.  Stratt;  and (ii)
     options to purchase  160,000 shares of Common Stock  exercisable at $1.0797
     per share  expiring  October  18,  2009,  68,750  shares  of  Common  Stock
     exercisable at $0.49 per share expiring February 6, 2011, 412,500 shares of
     Common Stock  exercisable at $0.77 per share  expiring  August 7, 2011, and
     300,000  shares of Common  Stock  exercisable  at $0.12 per share  expiring
     February 5, 2012.

(5)  Includes (i) 220,000  shares of Common Stock held by Mr.  Schieber  jointly
     with  spouse,  Arlene  Schieber,  (ii) 10,005  shares of Common  Stock held
     solely by Mr.  Schieber,  (iii) 4,075 shares of Common Stock held solely by
     Ms. Schieber,  of which shares Mr. Schieber disclaims beneficial ownership,
     (iv) options to purchase  13,750,  12,534 and 37,500 shares of Common Stock
     all  exercisable  at $1.4375 per share which  expire on February  15, 2005,
     February 15, 2006 and April 30, 2006, respectively, 22,500 shares of Common
     Stock exercisable at $2.1875 per share which expire on May 12, 2008, 10,000
     shares of Common Stock exercisable at $0.7235 per share expiring  September
     1, 2009,  4,391  shares of Common  Stock  exercisable  at $2.8625 per share
     expiring  December 31, 2009,  10,000 shares of Common Stock  exercisable at
     $1.1953 per share  expiring  May 22,  2010,  5,625  shares of Common  Stock
     exercisable  at $2.5875 per share  expiring June 30, 2010,  7,591 shares of
     Common Stock  exercisable  at $1.5687  expiring  December 31, 2010,  10,000
     shares of Common  Stock  exercisable  at $0.22 per share  expiring  June 5,
     2011,  71,202  shares of Common  Stock  exercisable  at  $0.4156  per share
     expiring June 30, 2011,  30,974 shares of Common Stock exercisable at $0.46
     per share expiring  December 31, 2011; and (v) a warrant to purchase 50,000
     shares of Common Stock exercisable at $0.25 per share expiring May 1, 2003.

(6)  Includes  (i)  85,000  shares of Common  Stock  held by Mr.  Carlson,  (ii)
     options to  purchase  37,500  shares of Common  Stock at $2.1875  per share
     which expire May 12, 2008,  4,391  shares of Common  Stock  exercisable  at
     $2.8625 per share expiring December 31, 2009, 10,000 shares of Common Stock
     exercisable  at $1.1953 per share  expiring May 22,  2010,  6,137 shares of
     Common Stock exercisable at $2.5875 expiring June 30, 2010, 6,748 shares of
     Common Stock  exercisable at $1.5687 per share expiring  December 31, 2010,
     10,000 shares of Common Stock  exercisable at $0.22 per share expiring June
     5, 2011,  73,840  shares of Common Stock  exercisable  at $0.4156 per share
     expiring June 30, 2011,  28,591 shares of Common Stock exercisable at $0.46
     per share  expiring  December  31,  2011;  and (iii) a warrant to  purchase
     125,000 shares of Common Stock exercisable at $0.45 per share expiring June
     29, 2003.

(7)  Includes (i) 53,191 shares of Common Stock held by Mr. Knight, (ii) options
     to purchase  37,500 shares of Common Stock  exercisable  at $5.50 per share
     which expire February 19, 2009,  12,500 shares of Common Stock  exercisable
     at $2.8125 per share expiring August 25, 2009, 4,160 shares of Common Stock
     exercisable at $2.8625 expiring  December 31, 2009, 10,000 shares of Common
     Stock  exercisable at $0.7235 per share expiring  September 1, 2009, 10,000
     shares of Common Stock  exercisable  at $1.1953 per share  expiring May 22,
     2010, 4,347 shares of Common Stock exercisable at $2.5875 expiring June 30,
     2010,  8,013  shares of  Common  Stock  exercisable  at  $1.5687  per share
     expiring  December 31, 2010,  10,000 shares of Common Stock  exercisable at
     $0.22  per share  expiring  June 5,  2011,  68,565  shares of Common  Stock
     exercisable at $0.4156 per share  expiring June 30, 2011,  33,365 shares of
     Common Stock exercisable at $0.46 per share expiring December 31, 2011; and
     (iii) a warrant to purchase  5,319  shares of Common Stock  exercisable  at
     $0.47 per share expiring August 16, 2005.

(8)  Includes  (i) 60,767  shares of Common  Stock held by Mr.  Grant,  and (ii)
     options to  purchase  10,000  shares of Common  Stock at $0.3897  per share
     expiring  September 1, 2009,  3,236 shares of Common Stock  exercisable  at

<PAGE> 53

     $2.8625  which  expire  December  31,  2009,  8,333  shares of Common Stock
     exercisable at $0.7235 per share expiring  September 1, 2009, 10,000 shares
     of Common  Stock  exercisable  at $1.1953 per share  expiring  December 31,
     2010, 10,000 shares of Common Stock exercisable at $0.22 per share expiring
     June 5, 2011, and 450,000  shares of Common Stock  exercisable at $0.12 per
     share expiring March 1, 2012.

(9)  Includes (i) 3,678,371 shares of Common Stock held by Mr. Apatoff, and (ii)
     options  to  purchase  36,250  shares  of  Common  Stock at $0.70 per share
     expiring  January 18, 2005,  25,000 shares of Common Stock  exercisable  at
     $0.60 per share  expiring  July 27,  2005,  50,000  shares of Common  Stock
     exercisable at $0.62 per share expiring September 9, 2005, 53,191 shares of
     Common  Stock  exercisable  at $0.47 per share  expiring  August 16,  2005,
     50,000  shares  of Common  Stock  exercisable  at $0.50 per share  expiring
     August 20, 2005,  250,000  shares of Common Stock  exercisable at $0.50 per
     share expiring August 20, 2005,  17,241 shares of Common Stock  exercisable
     at $0.29 per share expiring  November 19, 2005,  1,100,000 shares of Common
     Stock at $0.10 per share expiring May 15, 2002,  1,100,000 shares of Common
     Stock  exercisable  at $0.10 per share  expiring  June 15, 2002,  1,100,000
     shares of Common Stock  exercisable  at $0.10 per share  expiring  July 15,
     2002,  1,150,000  shares of  Common  Stock  exercisable  at $0.10 per share
     expiring August 15, 2002,  1,250,000 shares of Common Stock  exercisable at
     $0.12 per share  expiring  September 15, 2002,  1,250,000  shares of Common
     Stock  exercisable at $0.12 per share expiring October 15, 2002,  1,250,000
     shares of Common Stock exercisable at $0.12 per share expiring November 15,
     2002,  1,250,000  shares of  Common  Stock  exercisable  at $0.12 per share
     expiring December 15, 2002, 1,250,000 shares of Common Stock exercisable at
     $0.12 per share expiring January 15, 2003, 1,250,000 shares of Common Stock
     exercisable at $0.12 per share expiring February 15, 2003, 1,100,000 shares
     of Common Stock exercisable at $0.10 per share expiring  September 7, 2002,
     50,000  shares  of Common  Stock  exercisable  at $0.10 per share  expiring
     September 25, 2002,  1,050,000 shares of Common Stock  exercisable at $0.10
     per share  expiring  October 15,  2002,  and 13,333  shares of Common Stock
     exercisable at $0.10 per share expiring February 5, 2012.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Except as otherwise noted below,  during 2000 and 2001, the Company has not been
a party to any transaction,  proposed transaction,  or series of transactions in
which the amount involved exceeds $60,000, and in which, to the knowledge of the
Company any  director or executive  officer,  nominee,  five percent  beneficial
security holder,  or any member of the immediate family of the foregoing persons
have or will have a direct or indirect material interest.

During fiscal year 2001,  several of our  executives  deferred  receipt of their
salaries due. This includes our president, Fred W. Thompson ($95,834), our Chief
Operating  Officer & General  Counsel,  Randy  Stratt  ($80,000),  former  Chief
Financial  Officer  Stanton C. Lawson  ($70,417),  and former Vice  President of
Operations Frederick R. Skillman, Jr. ($57,500).

In June 2001, the Company  received a six-month  loan from Jerome W. Carlson,  a
director of the Company in the amount of $25,000. In consideration for the loan,
the  Company  will pay  interest  at the rate of 6.5% per annum and has issued a
warrant to the  director  to  purchase a total of 125,000  shares of  restricted
Common Stock exercisable at $0.45 per share.

In May 2001, the Company  received a six-month loan from Michael T. Schieber,  a
director of the Company, and certain affiliates of Mr. Schieber in the amount of
$30,000.  In  consideration  for the loan,  the Company will pay interest at the
rate of 6.5% per annum and has issued  warrants  to the  director  to purchase a
total of 50,000  shares of  restricted  Common  Stock  exercisable  at $0.25 per
share.

In  November  2001,  the  Company  received a loan from  Michael J.  Apatoff,  a
director of the Company, in the amount of $50,000 at no interest.

<PAGE> 54

During fiscal year 2000,  several of our  executives  deferred  receipt of their
salaries due.  This includes our  President,  Fred W. Thompson  ($125,000),  our
Chief Operating Officer & General Counsel, Randy Stratt ($41,250),  former Chief
Financial  Officer,  Stanton C. Lawson  ($45,000),  and former Vice President of
Operations, Frederick R. Skillman, Jr. ($33,750).

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

Financial Statements

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

Report of Independent Accountants                                       61

Consolidated Balance Sheets                                             62

Consolidated Statements of Operations                                   63

Consolidated Statements of Stockholders' Equity                         64

Consolidated Statements of Cash Flows                                   76

Notes to Consolidated Financial Statements                              77

<PAGE> 55

Exhibits

     (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, 1991.(1)

     (3.0) Restated Certificate of Incorporation, effective May 28, 1997.(1)

     (3.1) Bylaws, effective February 19, 1999.(1)

     (3.2)Certificate of Amendment of Certificate  of  Incorporation,  effective
          April 28, 1999.(1)

     (3.3)Certificate  of  Designations,   creating  the  Series  A  Convertible
          Preferred Stock effective January 25, 2000.(8)

     (3.4)Certificate  of  Designations,   creating  the  Series  B  Convertible
          Preferred Stock effective September 25, 2000. (10)

     (3.5)Certificate of Correction to Certificate of  Designations  of Series B
          Convertible Preferred Stock, effective October 10, 2000. (11)

     (3.6)Certificate of Amendment to the  Certificate of Designations of Series
          A Convertible  Preferred  Stock  effective  March 6, 2001.  (11)

     (3.7)Certificate  of Amendment to the Articles of  Incorporation  of E-SAT,
          Inc. dated December 29, 2000. (11)

     (3.8)Certificate of Amendment of Certificate  of  Incorporation,  effective
          September 4, 2001. (15)

     (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.(1)

     (4.2) Specimen Stock Certificate.(1)

     (4.3) Form of Warrant issued to SJ Capital.(8)

     (10.6)1993 Incentive Stock Option Plan for DBS Industries, Inc.(1)

     (10.7)1993 Non-Qualified  Stock Option Plan for Non-Employee  Directors of
           DBS Industries, Inc.(1)

     (10.8)1993  Non-Qualified  Stock  Option  Plan  for  Consultants  of  DBS
           Industries, Inc.(1)

<PAGE> 56

     (10.9) Commercial Lease and Sublease and Consent pertaining to Mill Valley,
          CA office space.(1)

     (10.20) AXION Royalty Agreement  incorporated by reference to the Company's
          Current Report on Form 8-K dated May 16, 1994.(1)

     (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.(1)

     (10.25) Memorandum of Understanding between ABB Power T&D Company, Inc. and
          Global Energy Metering Service, Inc. dated February 9, 1996.(1)

     (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.(1)

     (10.30) DBS Industries,  Inc., $640,000 Three-Year  Convertible  Debenture,
          Series C. due December 31, 1999.(1)

     (10.31)  Employment  Agreement  between  Fred W.  Thompson and the Company,
          dated April 18, 1996.(1)

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

     (10.33)  Employment  Agreement  between  E.A.  James  Peretti and GEMS (the
          Company's subsidiary) dated April 18, 1996.(1)

     (10.34) 1996 Stock Option Plan.(1)

     (10.36) 1998 Stock Option Plan.(1)

     (10.37) Memorandum of Understanding Between DBS Industries,  Inc. and Matra
          Marconi Space.(2)

     (10.38) Letter of Intent with SAIT-Radio Holland SA.(2)

     (10.39)  Purchase  Agreement  with  Astoria  Capital,   L.P.  and  Microcap
          Partners, L.P.(2)

     (10.40) Warrant Agreement with Astoria Capital, L.P. and Microcap Partners,
          L.P.(2)

     (10.41) Employment  Agreement  between Gregory T. Leger and DBS Industries,
          Inc. dated March 1, 1998.(3)

     (10.42) Unit Purchase Agreement with Michael Associates.(4)

<PAGE> 57

     (10.43) Unit Purchase  Agreement with Lodestone  Capital Fund LLC, Fourteen
          Hill Capital, LP, High Peak Limited and Michael Fitzsimmons.(3)

     (10.44) Launch Services  Agreement with Eurockot Launch Services GmbH dated
          March 31, 1999.(4) (Redacted per Confidential Treatment Request)

     (10.45) Satellite  Construction  Agreement with Surrey Satellite Technology
          Limited dated March 31, 1999.(4) (Redacted per Confidential  Treatment
          Request)

     (10.46) Amendment to Employment  Agreement between Fred W. Thompson and DBS
          Industries, Inc. dated September 1, 1999.(6)

     (10.47) Amendment to Employment  Agreement between Gregory T. Leger and DBS
          Industries, Inc., dated September 1, 1999.(6)

     (10.48) Employment  Agreement between  Frederick R. Skillman,  Jr., and DBS
          Industries, Inc., dated July 28, 1999.(6)

     (10.49) Amendment to Employment  Agreement  between  Frederick R. Skillman,
          Jr., and DBS Industries, Inc. dated September 1, 1999.(6)

     (10.50) Employment Agreement between H. Tate Holt and DBS Industries,  Inc.
          dated June 1, 1999. (6)

     (10.51) Employment  Agreement between Stanton C. Lawson and DBS Industries,
          Inc. dated October 18, 1999. (6)

     (10.52) Employment Agreement between Randy Stratt and DBS Industries,  Inc.
          dated November 8, 1999. (6)

     (10.53)  Prime  Contract  for  E-SAT  Communications   System  between  DBS
          Industries,  Inc. and Alcatel Space  Industries dated October 8, 1999,
          and as amended on December 22, 1999.  (6) (Redacted  per  Confidential
          Treatment Request)

     (10.54) Share Purchase  Agreement  between EchoStar DBS Corporation and DBS
          Industries,  Inc. dated July 30, 1999. (6) (Redacted per  Confidential
          Treatment Request)

     (10.55) 2000 Stock Option Plan. (7)

     (10.56) Common  Stock  Purchase  Agreement  between  Torneaux  Ltd. and DBS
          Industries, Inc. dated June 2, 2000. (8)

     (10.57) Amendment to Common Stock purchase  Agreement between Torneaux Ltd.
          and DBS Industries, Inc. dated June 30, 2000. (10)

     (10.58)  Stock  Purchase   Agreement   between   Courtney  Benham  and  DBS
          Industries, Inc. dated June 2, 2000. (11)

     (10.59) Stock Purchase Agreement between Codera Wine Group Pension Plan and
          DBS Industries, Inc. dated June 2, 2000. (11)

<PAGE> 58

     (10.60) Stock Purchase  Agreement  between  Patrick Watt House Living Trust
          and DBS Industries, Inc. dated June 2, 2000. (11)

     (10.61)  Stock  Purchase   Agreement   between  Barbara  J.  Drew  and  DBS
          Industries, Inc. dated July 25, 2000. (11)

     (10.62) Registration  Rights Agreement between EchoStar DBS Corporation and
          DBS Industries, Inc. dated December 29, 2000. (12)

     (10.63)  Voting   Agreement   between  EchoStar  DBS  Corporation  and  DBS
          Industries, Inc. dated December 29, 2000. (12)

     (10.64)  Operator-to-Operator  Agreement  between Iridium Satellite LLC and
          DBS Industries dated May 24, 2001. (13)

     (10.65) Amendment to Series B Preferred  Stockholder  Agreement  dated June
          26, 2001. (13)

     (10.66) 1999 Employee Stock Purchase Plan (5)

     (10.67) Securities  Purchase  Agreement  between Azure Capital Holdings LLC
          and DBS Industries dated August 31, 2001. (14)

     (10.68) 6% Convertible Debenture between Azure Capital Holdings LLC and DBS
          Industries dated August 31, 2001. (14)

     (10.69) Series B Convertible  Preferred  Stock Purchase  Agreement  between
          Magellan   International   Ltd.,  Aspen  International  Ltd.  and  DBS
          Industries dated October 6, 2000. (15)

     (10.70) Demand Reserves  Provider  Agreement  between  California  Consumer
          Power and Conservation  Financing  Authority and DBS Industries,  Inc.
          (16)

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

     (23.1) Consent of Leslie Taylor Associates.

     (23.2) Consent of PricewaterhouseCoopers, LLP

     (1)  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, December 31, 1996, December 31, 1997, December 31, 1998, and
          December 31, 1999 or Form 8-K where indicated.
     (2)  Previously  filed with  Registration  Statement  on Form SB-2 filed on
          September 16, 1998.
     (3)  Previously  filed with  Registration  Statement  on Form SB-2 filed on
          November 30, 1998.
     (4)  Previously filed with Registration Statement on Form SB-2 filed on May
          3, 1999.
     (5)  Previously  filed in the Proxy  Statement on Schedule 14A filed on May
          4, 1999.
     (6)  Previously filed in the Form 10-KSB for the Fiscal Year ended December
          31, 1999.
     (7)  Previously filed in the Proxy Statement on Schedule 14A filed on April
          11, 2000.
     (8)  Previously  filed  in the  Form  8-K  filed  on  June  15,  2000.
     (9)  Previously  filed with  Registration  Statement  on Form SB-2 filed on
          August 11, 2000.
     (10) Previously filed with Form 10-Q for period ended June 30, 2000.
     (11) Previously filed with Form 10-Q for period ended September 30, 2000.
     (12) Previously  filed with Form 10-KSB for the Fiscal Year ended  December
          31, 2000.
     (13) Previously filed with Form 10-Q for period ended June 30, 2001.
     (14) Previously filed with Form 10-Q for period ended September 30, 2001.
     (15) Previously  filed with  Registration  Statement  on Form SB-2 filed on
          January 11, 2002.
     (16) Incorporated by reference to Form 8-K filed with the Commission on May
          30, 2002.

<PAGE> 59

Reports on Form 8-K

None.

                                  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.


DBS INDUSTRIES, INC.                            Dated:   May 19, 2002

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.

   /S/ FRED W. THOMPSON                                 May 19, 2002
--------------------------------
       Fred W. Thompson
President, Chairman, Principal Officer
   & Principal Financial Officer

   /S/ MICHAEL T. SCHIEBER                              May 19, 2002
--------------------------------
       Michael T. Schieber
            Director

   /S/ JEROME W. CARLSON                                May 19, 2002
--------------------------------
       Jerome W. Carlson
           Director

   /S/ MICHAEL J. APATOFF                               May 19, 2002
--------------------------------
       Michael J. Apatoff
           Director

   /S/ JESSIE J. KNIGHT, JR.                            May 19, 2002
--------------------------------
       Jessie J. Knight, Jr.
            Director

   /S/ RANDY STRATT                                     May 19, 2002
--------------------------------
       Randy Stratt
Director, Chief Operating Officer, Secretary

<PAGE> 60


   /S/ ROY T. GRANT                                     May 19, 2002
----------------------------
       Roy T. Grant
         Director

<PAGE> 61

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, 2001 and 2000, and the results of their  operations and their cash flows for
the three years ended  December  31, 2001 and for the period from April 25, 1990
(date of  inception)  to  December  31,  2001,  in  conformity  with  accounting
principles  generally accepted in the United States of America.  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 of America  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.

The accompanying  consolidated  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  consolidated  financial  statements do not include any
adjustments that might result from the outcome of this uncertainty.



/s/ PricewaterhouseCoopers LLP


San Francisco, California
May 24, 2002


<PAGE> 62

DBS Industries, Inc. and Subsidiaries
(A Development Stage Company)
Consolidated Balance Sheets

The accompanying notes are an integral part of these consolidated financial
statements.
-
<TABLE>
<S>                                                                            <C>
                                                                                         December 31,
                                                                                -----------------------------
                                                                                    2001              2000

                                                     Assets
Current assets
  Cash and cash equivalents                                                     $  20,494         $ 389,319
  Prepaid and other current assets                                                 51,981            57,378
                                                                               -----------       -----------
    Total current assets                                                           72,475           446,697
                                                                               -----------       -----------
Furniture and equipment, net                                                       27,999            32,393
Licensed and Satellite Construction Costs                                      14,623,873        14,598,995
                                                                               -----------       -----------
    Total other assets                                                         14,651,872        14,631,388
                                                                               -----------       -----------
      Total assets                                                           $ 14,724,347      $ 15,078,085
                                                                               -----------       -----------

                 Liabilities, Mandatorily Redeemable Preferred Stock, and Stockholders' Equity
Current liabilities
  Accounts payable                                                             $2,253,859        $1,482,476
  Customer advances                                                               400,000           400,000
  Accrued compensation                                                            563,710           601,132
  Related party loans                                                             105,000                 -
  Warrants                                                                        342,956                 -
  Other liabilities                                                                94,825           179,410
                                                                                -----------       -----------
    Total current liabilities                                                   3,760,350         2,663,018
                                                                                -----------       -----------
Non-current liabilities:
  Convertible debentures                                                          167,429                 -
                                                                                -----------       -----------
    Total liabilities                                                           3,927,779         2,663,018
                                                                                -----------       -----------
Series B mandatorily redeemable convertible
  preferred stock, $0.0004 par value; 550 shares
  authorized; 320 shares and 440 shares issued and outstanding
  at December 31, 2001 and December 31, 2000
  respectively (liquidation preference $447,587 as of
  December 31, 2001)                                                              447,587           347,971
                                                                                 -----------       -----------
Stockholders' equity:

Series A convertible preferred stock, $0.0004 par value; 35,897
  shares authorized; 25,899 issued and outstanding at
  December 31, 2001 and 2000 (liquidation
  preference $ 625,059 as of December 31, 2001)                                        10                11
Common stock, $0.0004 par value; 100,000,000 shares authorized;
  24,734,420 and 15,601,143 issued and outstanding at
  December 31, 2001 and 2000, respectively                                          9,913             6,260
Capital in excess of par value                                                 30,776,417        29,126,919
Warrants                                                                        3,688,432         2,989,698
Deferred stock-based compensation                                                       -          (450,129)
Deficit accumulated during the development stage                              (24,125,791)      (19,605,664)
                                                                               -----------       -----------
    Total stockholders' equity                                                 10,348,982        12,067,095
                                                                               -----------       -----------
      Total liabilities, mandatorily redeemable preferred stock,
        and stockholders' equity                                             $ 14,724,347      $ 15,078,085

                                                                               -----------       -----------
</TABLE>

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

<PAGE> 63


DBS Industries, Inc. and Subsidiaries
(A Development Stage Company)
Consolidated Statements of Operations
<TABLE>
<S>                                                <C>                   <C>              <C>               <C>
                                                                                                             April 25, 1990
                                                                                                             (Inception) to
                                                                            December 31,                       December 31,
                                                      -----------------------------------------------------
                                                               2001            2000              1999              2001
                                                     ------------------------------------------------------  ------------------
Revenue                                                  $          -     $         -        $         -     $   161,420

Cost and operating expenses
    Cost of revenue                                                 -               -                  -          127,580
    Marketing and sales                                       186,043       1,721,725            922,623        2,830,391
    General and administrative                              2,990,808       4,037,509          4,059,310       19,749,316
    Research and development                                1,599,820         736,775          1,045,296        6,348,609
                                                          ------------    ------------       ------------    ------------
                                                            4,776,671       6,496,009          6,027,229       29,055,896
                                                          ------------    ------------       ------------    ------------
      Loss from operations                                 (4,776,671)     (6,496,009)        (6,027,229)     (28,894,476)
                                                          ------------    ------------       ------------    ------------
Other income (expense)
    Interest, net                                            (125,629)        (59,940)           113,336         (781,692)
    Equity in loss of investees, net                                -               -                  -         (512,920)
    Gain on sale of investments                                     -               -                  -        5,829,218
    Other, net                                                383,773               -                  -          327,139
                                                          ------------    ------------       ------------    ------------
                                                              258,144         (59,940)           113,336        4,861,745
                                                          ------------    ------------       ------------    ------------
Loss before provision for income taxes
    and minority interest                                  (4,518,527)     (6,555,949)        (5,913,893)     (24,034,331)
Minority interest in income of consolidated
    subsidiaries                                                    -               -                  -            8,575
Provision for income taxes                                     (1,600)         (1,600)            (1,600)        (100,035)
                                                          ------------    ------------       ------------    ------------

        Net loss                                         $ (4,520,127)   $ (6,557,549)     $  (5,915,493)    $(24,125,791)
                                                          ------------    ------------       ------------    ------------
Preferred Stock dividends associated with
    late registration penalties, issued warrants,
    and accretions                                           (365,200)        (42,020)                 -
                                                          ------------    ------------       ------------
      Net loss attributable
       to Common Stockholders                             $(4,885,327)    $(6,599,569)      $ (5,915,493)
                                                          ------------    ------------       ------------

Basic and diluted net loss per share                      $     (0.23)    $     (0.44)      $      (0.45)
                                                          ------------    ------------       ------------
Weighted average number of shares of common
    stock, basic and diluted                               21,088,762      14,832,155         13,088,723
                                                          ------------    ------------       ------------
</TABLE>

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

<PAGE> 64

DBS Industries, Inc.
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity

<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
                                                                                                           Deficit
                        Preferred Stock   Common Stock                                                   Accumulated
                        ---------------   -------------   Capital in                        Deferred     During the       Total
                                    Par             Par   Excess of             Notes      Stock-Based   Development   Stockholders'
                        Shares    Value   Shares  Value   Par Value  Warrants Receivable  Compensation     Stage          Equity

Balance at December
 31, 1990, of DBSN
 as restated pursuant
 to the merger on
 December 2, 1992                      301,000      120     46,375                                       (219,990)      (173,495)

Issuance of common
 stock for
 professional
 services at $1.01
 to $2.14 per share                    520,000      208     47,542                                                        47,750

Issuance of common
 stock for cash  at
 $.01 to $1.00 per
 share                                 244,500       98    124,507                                                       124,605

Stock issue costs
 for the twelve months
  ended December 31,
  1991                                                     (15,774)                                                      (15,774)

Net loss for the
 twelve months ended
 December 31, 1991                                               -                                       (115,339)      (115,339)
------------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1991                    1,065,500      426    202,650          -        -           -       (335,329)      (132,253)
------------------------------------------------------------------------------------------------------------------------------------

Issuance of common
 stock for cash
 at $.01 to $1.00
 - per share                         1,317,290      527    538,998                                                       539,525

Issuance of common
 stock for
 professional services
 at $.01 to $.10
 - per share                           214,240       86     12,338                                                        12,424

Issuance of common
 stock in payment
 of stockholder loans:
 June 1992 at $.01
 per share                             230,000       92      2,208                                                         2,300

Net loss for the
 seven months ended
 July 31, 1992                                                                                            (90,750)       (90,750)
------------------------------------------------------------------------------------------------------------------------------------
Balance at
 July 31, 1992                       2,827,030    1,131     56,194         -         -           -       (426,079)       331,246
------------------------------------------------------------------------------------------------------------------------------------
Shares of Fi-Tek
 IV, Inc.from
 August 3, 1989
 (inception)through
 December 2, 1992                      817,540      327    155,450                                                       155,777

Issuance of common
 stock for cash
 at $.01 to $3.20
 per share                           1,313,926      527    998,088                                                       998,615

Issuance of common
 stock for interest
 at $5.00 per share                     10,000        4      4,996                                                         5,000

Issuance of common
 stock for JPS
 common stock on
 September 11,
 1992 at $.80 per share                61,447        24     49,134                                                        49,158

</TABLE>

<PAGE> 65

DBS Industries, Inc.
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity

<TABLE>
<S>                     <C>              <C>            <C>           <C>    <C>        <C>             <C>             <C>
                                                                                                           Deficit
                        Preferred Stock   Common Stock                                                   Accumulated
                        ---------------   -------------   Capital in                        Deferred     During the       Total
                                    Par             Par   Excess of             Notes      Stock-Based   Development   Stockholders'
                        Shares    Value   Shares  Value   Par Value  Warrants Receivable  Compensation     Stage          Equity
Issuance of common
 stock for professional
 services on September 11,
 1992 at $.10 per share                 6,679        3          665                                                          668

Issuance of common
 stock in exchange
 for DBSC common on
 October 9,1992,
 at $2.00 per share                     6,375        2       12,748                                                       12,750

Redemption of 97,450
 common stock warrants
 on October 2, 1992,
 at $8.00 per share                                         (19,490)                                                     (19,490)

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            -                                                           10

Issuance of common
 stock for Axion
 common stock during
 March 1993 at
 $1.60 per share                       50,000       20       79,980                                                       80,000

Issuance of common
 stock for DBSC
 common stock on
 July 2, 1993,
 at $1.60 per share                   133,306       53      213,238                                                      213,291

Stock issue costs
 for the period
 from August 1,
 1992 through
 July 31, 1993                                               (6,374)                                                      (6,374)

Net loss for the
 twelve months
 ended July 31, 1993                                       (755,040)                                                    (755,040)
------------------------------------------------------------------------------------------------------------------------------------
Balance at
 July 31, 1993                     5,251,303     2,101    2,244,629       -          -           -        (1,181,119)  1,065,611
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

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

<PAGE> 66

DBS Industries, Inc.
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity
<TABLE>
<S>                    <C>             <C>             <C>             <C>    <C>      <C>             <C>             <C>

                                                                                                           Deficit
                        Preferred Stock   Common Stock                                                   Accumulated
                        ---------------   -------------   Capital in                        Deferred     During the       Total
                                    Par             Par   Excess of             Notes      Stock-Based   Development   Stockholders'
                      Shares    Value   Shares     Value   Par Value  Warrants Receivable  Compensation     Stage          Equity
------------------------------------------------------------------------------------------------------------------------------------
July 31, 1993               -       -   5,251,303  2,101   2,244,629         -         -             -    (1,181,119)    1,065,611
------------------------------------------------------------------------------------------------------------------------------------
Issuance of common
 stock for cash at
 $4.00 per share
 (August 1993
  through April
  1994)                                   102,256     41     411,943                                                      411,984
Stock issued in
 exchange for 46%
 of JPS stock on
 November 19,
 1993                                       3,379      1      10,137                                                       10,138

Stock issued for
 professional
 services: January
 28, 1994, at $3.60
 per share                                  5,331      2      19,188                                                       19,190
 July 29, 1994,
 at $2.00 per share                         3,833      2       7,663                                                        7,665

Stock issued due
 to exercise of
 warrants, at $2.00
 per share (March
 and April 1994)                            2,500      1       4,999                                                        5,000

Stock issued for
 interest on July
 31, 1994, at $2.00
 per share                                  1,000              2,000                                                        2,000

Purchase of shares
 of common stock
 on January 28, 1994,
 at $3.20 per share                        (1,563)            (5,000)                                                      (5,000)

Reacquisition of
 common stock
 pursuant to
 sale of investment
 in Axion in May
 1994, at $1.60
 per share                                (50,000)           (80,000)                                                     (80,000)

Net loss for
 the twelve months
 ended July 31, 1994                                                                                         (26,909)     (26,909)
------------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1994                5,318,039   2,148  2,615,559        -           -            -    (1,208,028)   1,409,679
-----------------------------------------------------------------------------------------------------------------------------------

Stock issued
 for services:
 November 30,
  1994, at $1.88
  per share                               10,000        4     18,796                                                       18,800
 May 15, 1995,
  at $2.00 per share                      10,724        4     21,443                                                       21,447
 July 15, 1995, at
  $1.60 per share                         11,373        5     18,192                                                       18,197

Net loss for the
 twelve months ended
 July 31, 1995                                                                                            (1,284,558)  (1,284,558)
------------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1995               5,350,136    2,161  2,673,990        -           -           -     (2,492,586)     183,565
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE> 67
DBS Industries, Inc.
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity
<TABLE>
<S>                    <C>             <C>             <C>             <C>    <C>      <C>             <C>             <C>

                                                                                                           Deficit
                        Preferred Stock   Common Stock                                                   Accumulated
                        ---------------   -------------   Capital in                        Deferred     During the       Total
                                    Par             Par   Excess of             Notes      Stock-Based   Development   Stockholders'
                      Shares    Value   Shares     Value   Par Value  Warrants Receivable  Compensation     Stage          Equity


Issuance of common
 stock for 1% JPS
 common stock on
 September 21,
 1995 at $1.20 per
 share                                    9,450         4     11,336                                                     11,340

Issuance of common
 stock for 20%
 Seimac Limited
 common stock on
 December 13, 1995
 at $4.00 per share                     165,519        66    662,010                                                    662,076

Issuance of common
 stock for professional
 services at $5.60
 per share                                2,934         1     16,427                                                     16,428

Net loss for the
 twelve months ended
 December 31, 1995                                                                                            (662,877) (662,877)
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995          5,528,039     2,232  3,363,763        -           -           -       (3,155,463)  210,532
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
<PAGE> 68

DBS Industries, Inc.
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity
<TABLE>
<S>                    <C>              <C>             <C>           <C>       <C>         <C>         <C>             <C>

                                                                                                           Deficit
                        Preferred Stock   Common Stock                                                   Accumulated
                        ---------------   -------------    Capital in                        Deferred     During the       Total
                                   Par             Par     Excess of             Notes      Stock-Based   Development  Stockholders'
                        Shares    Value   Shares   Value   Par Value  Warrants Receivable  Compensation     Stage          Equity
------------------------------------------------------------------------------------------------------------------------------------
Balance at
 December 31, 1995        -         -   5,528,039  2,232   3,363,763     -              -            -    (3,155,463)     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                                           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                                                      736,100
 February 15, 1996,
 at $5.20 per share,
 less noncash
 issuance cost
 of $19,999                                38,462     15     179,988                                                      180,003

Stock issued for services
 January 1 - June
 30, 1996, at $3.75
  per share                                22,743      9      85,277                                                       85,286
 August 15, 1996, at $4.80
  per share                                 6,018      2      28,884                                                       28,886
 September 21, 1996,
  at $5.60 per share                        4,821      2      26,996                                                       26,998
 July 1 - December 31, 1996,
  at $2.00 per share                        7,605      3      15,207                                                       15,210
 Placement fee associated
  with January 15 and February
  15, 1996, issuances settled
  through issuance
  of common stock                          19,821      8      83,891                                                       83,899

Net loss for the twelve months
 ended December 31, 1996                                                                                  (3,752,583)  (3,752,583)

------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996            5,827,509  2,351   4,520,026     112,500       -           -      (6,908,046)  (2,273,169)
------------------------------------------------------------------------------------------------------------------------------------

Stock issued for services
 January 31, 1997, at $1.69
  per share                                 5,088      2       8,586                                                        8,588
 February 14, 1997, at $1.75
  per share                                 4,701      2       8,225                                                        8,227
 February 28, 1997, at $2.00
  per share                                 7,918      3      15,834                                                       15,837
 March 31, 1997, at $1.63
  per share                                   302      -         491                                                          491
 April 10, 1997, at $2.00
  per share                                 7,500      3      14,997                                                       15,000
 April 30, 1997, at $1.50
  per share                                   332      -         498                                                          498
 June 30, 1997, at $1.13
  per share                                14,578      6      16,394                                                       16,400
 July 9, 1997, at $0.75
  per share                                15,000      6      11,244                                                       11,250

Net income for the twelve
 months ended December 31, 1997                                                                              3,068,917  3,068,917

------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997            5,882,928  2,373   4,596,295    112,500        -           -        (3,839,129)   872,039
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
<PAGE> 69

DBS Industries, Inc.
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity

<TABLE>
<S>                     <C>             <C>             <C>          <C>       <C>          <C>         <C>
                                                                                                           Deficit
                        Preferred Stock   Common Stock                                                   Accumulated
                        ---------------   -------------    Capital in                        Deferred     During the       Total
                                   Par             Par     Excess of             Notes      Stock-Based   Development  Stockholders'
                       Shares    Value   Shares   Value   Par Value  Warrants Receivable  Compensation     Stage          Equity
------------------------------------------------------------------------------------------------------------------------------------
Balance at
 December 31, 1997         -        -   5,882,928  2,373  4,596,295     112,500         -            -    (3,839,129)     872,039
------------------------------------------------------------------------------------------------------------------------------------

Common stock issued for
 cash, on April 16, 1998,
 at $2.00 per share                       102,000     41    203,959                                                       204,000

Common stock issued upon
 exercise of options, on
 June 11, 1998, at $1.44
 per share                                 12,500      5     17,964                                                        17,969

Common stock issued
 (voided) in connection
 with services rendered
 February 12, 1998, at
  $0.53 per share                          26,209     10     13,906                                                        13,916
 April 1, 1998, at $3.25
  per share                                10,000      4     32,496                                                        32,500
 May 14, 1998, at $3.75
  per share                                13,646      6     51,168                                                        51,174
 May 14, 1998, at $3.75
  per share                               (22,743)    (9)   (85,277)                                                      (85,286)

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                                                     5,114,174

Common stock issued upon
 exercise of options at $0.53
 per share                                 17,202      6      9,128                                                         9,134

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                                                       159,000

Common stock issued for
 exercise of options $0.60
 per share 10/1/98                         37,500     15     22,485                                                        22,500

Common stock returned to
 investees at $2.00 per share
 in October 1998                         (400,000)  (160)  (799,840)                                                     (800,000)

Common stock issued upon
 exercise of options $0.531 per
 share in October 1998                     94,375     38     50,075                                                        50,113

Common stock issued
 representing stock issuance
 costs                                      7,500      3     14,997                                                        15,000

Net loss for the year
 ended December 31, 1998                                                                                  (3,293,493)  (3,293,493)
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998            8,581,117  3,452  8,426,410   1,085,500          -            -   (7,132,622)   2,382,740
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
<PAGE> 70
DBS Industries, Inc.
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity
<TABLE>
<S>                     <C>             <C>             <C>             <C>    <C>         <C>           <C>            <C>
                                                                                                           Deficit
                        Preferred Stock   Common Stock                                                   Accumulated
                        ---------------   -------------    Capital in                        Deferred     During the       Total
                                   Par             Par     Excess of             Notes      Stock-Based   Development  Stockholders'
                        Shares    Value   Shares   Value   Par Value  Warrants Receivable  Compensation     Stage          Equity
------------------------------------------------------------------------------------------------------------------------------------
Balance at
 December 31, 1998        -        -   8,581,117  3,452    8,426,410   1,085,500        -            -     (7,132,622)   2,382,740
------------------------------------------------------------------------------------------------------------------------------------
Common stock issued
 for cash February
 1999 at $2.50, net of
 issuance costs of
 $2,104                                   50,000     20     122,876                                                        122,896

February 1999 at $3.00,
 net of issuance
 costs of $25,246                        500,000    200   1,474,554                                                      1,474,754
 April 1999 at $3.00
 per share                             1,666,667    667   4,999,333                                                      5,000,000

Common stock issued
 upon exercise of options
January, March, August,
 and December 1999 at
 $0.53 per share                         195,227     78     103,557                                                        103,635
February 1999 at $0.58                    12,625      5       7,368                                                          7,373
January and February
 1999 at $0.60                            26,667     11      15,990                                                         16,001
February 1999 at $1.44                    37,500     15      53,891                                                         53,906
February and March 1999
 at $1.45                                200,000     80     289,920                                                        290,000
January, February, and
 March 1999 at $1.50                     195,084     78     292,548                                                        292,626
January 1999 at $2.80                      8,125      3      22,747                                                         22,750
Common stock issued upon
 exercise of warrants
January 1999 at $0.50
 per share                               200,000     80      99,920                                                        100,000
January 1999 at $1.44
 per share                                11,080      4      15,923                                                         15,927
January and February 1999
 at $1.50 per share                       64,380     26     183,251     (86,707)                                            96,570
March 1999 at $2.00
 per share                                 7,500      2      24,673      (9,675)                                            15,000
February and March 1999 at
 $2.10 per share                          33,700     13     111,534     (40,777)                                            70,770
January - March 1999 at
 $3.00 per share, net of
 issuance costs of
 $123,805                              2,452,000    983   7,239,689      (8,475)                                         7,232,197
March 1999 at $3.50
 per share net of issuance
 costs of $3,344                          50,000     20     172,035                                                        172,055

Expiration of warrants                                       15,730     (15,730)
Deferred stock compensation                               2,490,337                          (2,490,337)                         -
Options issued in connection
 with services rendered                                     751,497                                                        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                                             22,800
Issuance of common stock in
 connection with
Litigation settlement in March
 1999 at $5.00 per share                  63,239     25     324,391                                                        324,416
Fair value of Common Stock
 warrants committed to
 representing deferred stock
 issuance costs                                                         673,500                                            673,500
in December 1999                                                                                                                 -
Warrant issued in connection
  with stock issuance costs                                (270,000)    270,000                                                  -
Note Receivable from Stockholder                                                 (60,000)                                  (60,000)
Retirement of Treasury Stock                                                                                                     -
Net loss for the year ended
 December 31, 1999                                                                                          (5,915,493) (5,915,493)
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999          14,354,911  5,762  26,968,174   1,890,436  (60,000)    (1,532,582)   (13,048,115) 14,223,675
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
<PAGE> 71
DBS Industries, Inc.
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity
<TABLE>
<S>                     <C>             <C>                <C>      <C>     <C>             <C>         <C>



                                                                                                          Deficit
                        Preferred Stock   Common Stock                          Notes                    Accumulated
                        ---------------   -------------    Capital in         Receivable    Deferred     During the       Total
                                   Par             Par     Excess of             from      Stock-Based   Development  Stockholders'
                        Shares    Value   Shares   Value   Par Value  Warrants Stockholder Compensation     Stage          Equity
------------------------------------------------------------------------------------------------------------------------------------
Balance at
 December 31, 1999        -         -   14,354,911  5,762  26,968,174  1,890,436  (60,000)  (1,532,582)  (13,048,115)    14,223,675
------------------------------------------------------------------------------------------------------------------------------------

Common stock issued
 for cash
 January 2000 under
 Employee Stock
 Purchase Plan                                 490                900                                                           900
  at $1.83
 July 2000 under
  Employee Stock
  Option Plan at $1.43                       6,961      3       9,951                                                         9,954
 June 2000 at $1.00                        166,298     67     166,231                                                       166,298
 July 2000 at $.75                         133,333     53      99,946                                                       100,000
 September 2000
  at $.9863                                 84,490     34      83,299                                                        83,333
 October 2000 at
  $.8805                                    63,092     25      55,531                                                        55,556

Common stock issued
 upon exercise of options
  February 2000 at
    $2.1875                                 15,000      6      32,807                                                        32,813
  March 2000 at $.531                       15,000      6       7,959                                                         7,965
  March 2000 at $1.45                       50,000     20      72,480                                                        72,500
  March 2000 at $1.50                       10,000      4      14,996                                                        15,000
  April 2000 at $.5840                       5,500      2       3,210                                                         3,212
  June 2000 at $.60                         37,500     15      22,485                                                        22,500
  June and August
   2000 at $.7235                           10,000      4       7,231                                                         7,235
  December 2000 at $.584                     1,375      1         802                                                           803

Cash received for common
 stock to be issued                                           600,000                                                       600,000

Common stock issued upon
 exercise of warrants
    March 2000 at $1.50                      2,495      1       5,001                                                         5,002
    September 2000 at $.70                 125,000     50      87,450                                                        87,500
Common stock issued in
 connection with services
 rendered January 2000 at
  $2.2937                                    4,687      2      10,748                                                        10,750
  June 2000 at $1.50                        66,667     26      99,974                                                       100,000
  September 2000 at $1.25                  200,000     80     249,920                                                       250,000
  December 2000 at $0.5625                  65,569     26      36,856                                                        36,883
   July 2000 at $2.5875                      3,672      1       9,500                                                         9,501

Series A Preferred
 Shares issued
  January - July 2000
  at $30.00              35,897   14                        1,076,896                                                     1,076,910

Series B Preferred
  Shares issued in
  October, 2000 as
  Stock Issuance Costs                                         40,000                                                        40,000

Preferred B Warrants                                                      78,044                                             78,044

Dividends to Preferred
 B Stockholders                                               (26,016)                                                     (26,016)

Stock issuance costs -
 January to December 2000                                    (636,576)                                                    (636,576)
</TABLE>

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

<PAGE> 72

DBS Industries, Inc.
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity
<TABLE>
<S>                     <C>             <C>             <C>           <C>    <C>            <C>         <C>             <C>

                                                                                                           Deficit
                        Preferred Stock   Common Stock                          Notes                    Accumulated
                        ---------------   -------------    Capital in         Receivable    Deferred     During the       Total
                                   Par             Par     Excess of             from      Stock-Based   Development  Stockholders'
                        Shares    Value   Shares   Value   Par Value  Warrants Stockholder Compensation     Stage          Equity

Series A Preferred
 Shares converted
 September 2000 at
  $1.6812             (1,666)   (1)      29,728     12         (11)                                                                -
Series A Preferred
 Shares converted
 October 2000 at
 $1.6812              (1,666)   (1)      29,728     12         (11)                                                                -
Series A Preferred
 Shares converted
 November 2000 at
 $1.70                (3,333)   (1)      58,817     24         (22)                                                                -
Series A Preferred
 Shares converted
 November 2000 at
 $1.6438              (3,333)   (1)      60,830     24         (23)                                                                -

Options and Warrants
 issued in connection
 with  services
 rendered                                                   30,828      693,919                                             724,747
Warrants issued in
 connection with
 stock issuance                                                                                                                   -
 costs                                                                  327,299                                             327,299

Amortization of
 deferred stock
 compensation                                                                                  1,078,856                  1,078,856

Cancellation of
 deferred stock
 compensation                                               (3,597)                                3,597

Repayment of Note
 Receivable from
 Stockholder                                                                     60,000                                      60,000

Net loss for the
 year ended December
 31, 2000                                                                                                   (6,557,549)  (6,557,549)
------------------------------------------------------------------------------------------------------------------------------------
Balance at
 December 31, 2000      25,899  10   15,601,143  6,260   29,126,919   2,989,698           -     (450,128)   (19,605,664) 12,067,096
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

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

<PAGE> 73
DBS Industries, Inc.
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity
<TABLE>
<S>                     <C>             <C>              <C>         <C>    <C>             <C>         <C>
                                                                                                           Deficit
                        Preferred Stock   Common Stock                           Note                    Accumulated
                        ---------------   -------------    Capital in         Receivable     Deferred     During the       Total
                                   Par             Par     Excess of             from      Stock-Based   Development  Stockholders'
                        Shares    Value   Shares   Value   Par Value  Warrants Stockholder Compensation     Stage          Equity
------------------------------------------------------------------------------------------------------------------------------------
Balance at
 December 31, 2000      25,899     10   15,601,143  6,260  29,126,919 2,989,698        -     (450,128)    (19,605,664)   12,067,096
------------------------------------------------------------------------------------------------------------------------------------

Series B Preferred
 Shares and dividends
 converted November
 2001 at $0.272                            491,674    197     133,538                                                       133,735

Common stock issued
 for cash January
 2001 under Employee
 Stock Purchase Plan
 at $0.32                                    9,844      4       3,146                                                         3,150
 January 2001 at
  $0.25 (cash
  received in Dec.
  2000)                                  2,000,000     800       (800)                                                            -
 January 2001 at
  $0.50 (cash
  received in Dec.
  2000)                                    200,000      80        (80)                                                            -
 January 2001 at
  $0.50                                    500,000     200    249,800                                                       250,000
 January 2001 at
  $0.3448                                  290,000     116     99,884                                                       100,000
 March 2001 at
  $0.44                                    568,182     227    249,773                                                       250,000
 July 2001 at
  $0.20                                  1,459,458     584    281,640    82,642                                             364,865
 July 2001 at
  $0.02                                    450,000     180      9,820                                                        10,000
 July 2001 at
  $0.60                                    600,000     240    330,195    29,565                                             360,000
 July 2001 under
 Employee Stock
  Purchase Plan                             12,083       5      4,345                                                         4,350
  at $0.36
 August 2001 at
  $0.47                                    478,722     191    197,529    27,280                                             225,000
 August 2001 at
  $0.50                                    500,000     200    162,245    87,555                                             250,000
 August 2001 at
  $0.69                                     94,203      38     59,614     5,348                                              65,000
 November 2001
  at $0.29                                 172,414      69     44,931     5,000                                              50,000
 December 2001
  at $0.30                                 166,667      67     23,756    26,177                                              50,000
</TABLE>
<PAGE> 74
DBS Industries, Inc.
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity
<TABLE>
<S>                     <C>             <C>              <C>         <C>    <C>             <C>         <C>
                                                                                                           Deficit
                        Preferred Stock   Common Stock                           Note                    Accumulated
                        ---------------   -------------    Capital in         Receivable     Deferred     During the       Total
                                   Par             Par     Excess of             from      Stock-Based   Development  Stockholders'
                        Shares    Value   Shares   Value   Par Value  Warrants Stockholder Compensation     Stage          Equity



Common stock issued
 upon exercise of
 options March 2001
 at prices ranging
 from $0.53 to $0.60                       118,875      48     64,955                                                        65,002

Cash received for
 stock issued in
 fiscal 2000                                                    3,207                                                         3,207

Warrants issued in
 connection with
 services rendered
 by third parties                                                       351,658                                             351,658

Common stock issued
 in connection with                                                                                                               -
 services rendered
 by third parties                          821,469     329    431,671                                                       432,000

Common stock issued
 in connection with
 services rendered
 by related parties                         49,686      20     27,980                                                        28,000

Common stock issued
 in connection with
 termination settlement                    150,000      60     46,740                                                        46,800

Warrants issued in
 connection with stock
 issuance costs                                               (83,509)   83,509                                                   -

</TABLE>

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

<PAGE> 75

DBS Industries, Inc.
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity
<TABLE>
<S>                     <C>             <C>             <C>          <C>        <C>         <C>           <C>             <C>
                                                                                                           Deficit
                        Preferred Stock   Common Stock                           Note                    Accumulated
                        ---------------   -------------    Capital in         Receivable     Deferred     During the       Total
                                   Par             Par     Excess of             from      Stock-Based   Development  Stockholders'
                        Shares    Value   Shares   Value   Par Value  Warrants Stockholder Compensation     Stage          Equity

Amortization of
 deferred stock
 compensation                                                                                  450,128                     450,128

Stock issuance costs
 - January to December
 2001                                                       (88,200)                                                       (88,200)

Beneficial conversion
 feature on
 Convertible Debentures                                     222,816                                                        222,816

Dividend relating to
 the issuance of
 warrants to Series B
 Preferred Stockholders                                     (98,850)                                                       (98,850)

Cumulative dividends
 and penalties relating
 to Preferred Stock                                        (233,350)                                                      (233,350)

Penalties in the form                                      (126,222)                                                      (126,222)
of warrants associatd
with issued common stock

Classification of
 warrant values due to
 change in accounting
 principle                                                 (367,076)                                                      (367,076)

Net loss for the year
 ended December 31, 2001                                                                                    (4,520,127) (4,520,127)
------------------------------------------------------------------------------------------------------------------------------------
Balance at December
 31, 2001                  25,899  10 24,734,420  9,913  30,776,417  3,688,432           -        -        (24,125,791) 10,348,982
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

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

<PAGE> 76
DBS Industries, Inc. and Subsidiaries
(A Development Stage Company)
Consolidated Statements of Cash Flows
<TABLE>
<S>                                                        <C>              <C>           <C>        <C>

                                                                                                      April 25, 1990
                                                                                                      (Inception) to
                                                                      Year Ended December 31,          December 31,
                                                            ----------------------------------------
                                                               2001          2000           1999           2001
Cash flows from operating activities
   Net loss                                                 $(4,520,127)  $(6,557,549)   $(5,915,493)   $(24,125,791)
   Adjustments to reconcile net loss to net cash
     used in operating activities:
     Depreciation and amortization                                9,749        16,866         15,719         473,590
     Minority interest's share of net loss                            -             -              -          (8,575)
     Noncash charges                                            578,326       673,500              -       2,336,371
     Amortization of deferred stock-based compensation          450,129     1,078,857        957,755       2,486,740
     Issuance of options and warrants for services rendered     351,658     1,021,218        774,298       2,147,174
     Effect of remeasurement of warrants                       (383,773)            -              -        (383,773)
     Issuance of common stock in connection
      with litigation settlement                                      -             -        324,391         324,391
     Equity in loss of investees, net                                 -             -              -         529,972
     Loss (gain) on sale of investments                            (124)            -              -      (5,829,342)
     Allowance for losses on advances                                 -             -              -         216,932
     Common stock issued as payment for interest                      -             -              -           7,000
     Decrease (increase) in accounts receivable and
      other assets                                                5,397        57,060        (43,301)        (32,778)
     Increase (decrease) in accounts payable and
      accrued liabilities                                       649,375     1,324,107        204,675       2,583,397
     Increase in customer advances                                    -             -              -         400,000
                                                              ---------     ---------      ---------      ----------
        Net cash used in operating activities                (2,859,390)   (2,385,941)    (3,681,956)    (18,874,691)
                                                              ---------     ---------      ---------      ----------
Cash flows from investing activities
   Proceeds from sale of investment                               2,546             -              -       1,102,486
   Proceeds from Loral settlement                                     -             -              -       3,573,677
   Purchase of fixed assets                                      (7,777)            -        (34,394)       (153,218)
   Satellite construction payments                                    -      (157,034)   (10,800,790)    (12,229,907)
   Organization costs                                                 -             -              -         (28,526)
   Repayment (issuance) of note receivable from stockholder           -        60,000        (60,000)        (31,187)
   Purchase of interest in Continental                                -             -              -      (2,292,409)
   Investments, license acquisition costs and other             (24,878)          482     (1,518,081)     (2,751,203)
   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
                                                              ---------      --------    -----------      ----------
        Net cash used in investing activities                   (30,109)      (96,552)   (12,413,265)    (12,367,166)
                                                              ---------      --------    -----------      ----------
Cash flows from financing activities
   Repayment of borrowing under credit line                           -             -              -        (300,000)
   Issuance of debentures                                       501,000             -              -       5,318,501
   Issuance of common and preferred stock                     2,002,874     3,225,442     15,240,555      27,402,644
   Redemption of common stock warrants                                -             -              -         (19,490)
   Stock issuance costs                                         (88,200)     (636,576)      (154,100)     (1,378,611)
   Purchase of shares                                                 -             -              -          (5,000)
   Payment of debentures                                              -             -              -      (1,168,445)
   Proceeds from stockholders' loans                            105,000             -              -         547,750
   Payment of stockholders' loans                                     -             -              -        (351,967)
                                                              ---------     ---------     ----------      ----------
        Net cash provided by financing activities             2,520,674     2,588,866     15,086,455      30,045,382
                                                              ---------     ---------     ----------      ----------
Net increase (decrease) in cash                                (368,824)      106,373     (1,008,766)         20,494
Cash and cash equivalents, beginning of period                  389,318       282,945      1,291,711               -

Cash and cash equivalents, end of period                      $  20,494     $ 389,318      $ 282,945      $   20,494
                                                              ---------     ---------      ---------       ---------
Supplemental disclosures of cash flow information
   Interest paid                                              $ 125,629     $  59,940      $   4,672      $  210,461
                                                              ---------     ---------      ---------       ---------
   Income taxes paid                                          $   1,600     $   1,600      $   1,600      $   25,020
                                                              ---------     ---------      ---------       ---------
</TABLE>

<PAGE> 77

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").
     The Company  consolidates the financial  statements of E-SAT Inc., in which
     the Company has an ownership interest of 80.1%.  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 2002  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. These financial
     statements  do not  reflect  any  adjustments  that might  result  from the
     outcome of the above uncertainty.

     During fiscal 2001, the Company raised  approximately $2.5 million,  net of
     stock issuance costs, from warrant exercises,  issuance of debentures,  and
     sale of shares of common and  preferred  stock.  However,  the Company will
     need substantial additional capital, at least $60 million, to construct its
     proposed E-SAT 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 be completed by March 2002 pursuant to the terms
     of the Federal  Communications  Commission  (the "FCC") license  granted to
     E-SAT.  (See Note 3 - "License  Costs".)  On March 29,  2002,  the  Company
     notified the FCC that it has not achieved  this  milestone  and requested a
     two-year  extension.  On May 23, 2002, the Company  entered into a contract
     with an  agency  of the  State of  California.  (See  Note 12-  "Subsequent
     Events".) The Company  believes the  implementation  of this  contract,  if
     successful,  would provide some of the funding for the further  development
     of  the  E-SAT  system.

     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 2001.

     In January 1998, the Company  created  NewStar,  a wholly-owned  subsidiary
     organized  under the Laws of the Republic of Bermuda to market and sell our
     service to international customers.

<PAGE> 78

          2. Summary of Significant Accounting Policies

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

     Use of estimates

     The  preparation  of financial  statements  in  conformity  with  generally
     accepted  accounting  principles in the United  States of America  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 ESAT. 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  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.  The amount of
     the impairment loss, if any, would be calculated based on the excess of the
     carrying amount of the assets over their fair value.

     Goodwill

     Goodwill  is  amortized  using the  straight-line  method  over five years.
     Amortization expense charged to operations for the years ended December 31,
     2001, 2000, and 1999, was $0, $1,047, and $2,515 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

<PAGE> 79

     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.

     Stock-Based Compensation

     The company accounts for stock-based  employee  compensation  agreements in
     accordance  with the  provisions  of  Accounting  Principles  Board Opinion
     No.25,  Accounting  for Stock Issued to Employees  (APB No.25) and complies
     with  the  disclosure  provisions  of  Statement  of  Financial  Accounting
     Standards No.123, Accounting for Stock-Based Compensation (SFAS 123). Under
     APB No.25, compensation expense is based on the difference, if any, between
     the fair value of the Company's  stock and the exercise price of the option
     on the measurement date, which is typically the date of grant.

     In March of 2000, the Financial  Accounting Standards Board ("FASB") issued
     FIN 44, Accounting for Certain  Transactions  Involving Stock Compensation,
     an  interpretation  of APB No.25.  Fin 44 was effective  July 1, 2000.  The
     implementation  of FIN 44 did not have a material  impact on the  Company's
     consolidated financial statements.

     The Company accounts for options granted to non-employees under SFAS No.123
     and Emerging  Issues Task Force  ("EITF") No. 96-18,  Accounting for Equity
     Instruments  that are Issued to Other Than Employees for  Acquiring,  or in
     Conjunction with, Selling Goods or Services. Under SFAS No.123 and EITF No.
     96-18,  options are recorded at their fair value on the  measurement  date,
     which is typically the date of grant.

     Net 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.  Diluted  net loss per  share  does not
     include the effect of the following potential common shares:


                                             Year Ended December 31,
                                        2001          2000           1999

     Shares issuable pursuant to
     options and warrants            13,204,724     8,103,582      6,150,994


     Recently issued accounting pronouncements

     In July 2002, the FASB issued SFAS 141, Business Combinations and SFAS 142,
     Goodwill  and  Other  Intangible   Assets.   SFAS  141  requires   business
     combinations  initiated  after June 30, 2001 to be accounted  for using the
     purchase  method of  accounting,  and  clarifies the criteria for recording
     intangible  assets  separate from goodwill.  SFAS 142 requires the use of a
     non-amortization  approach to account for  purchased  goodwill  and certain
     intangibles.  Under  a  non-amortization  approach,  goodwill  and  certain

<PAGE> 80

     intangibles  are not  amortized,  but instead  are  reviewed  annually  for
     impairment  and written down via a charge to results of  operations  in any
     periods in which the recorded value of goodwill and certain  intangibles is
     more than their fair value.  SFAS 142 is effective January 1, 2002 and such
     equities had no impact on the Company's unaudited financial statements.

     In October 2001, the FASB issued SFAS No. 144 ("SFAS 144"),  Accounting for
     the Impairment or Disposal of Long-Lived  Assets.  SFAS 144 supersedes SFAS
     121,  Accounting for the Impairment of Long-Lived Assets and for Long-Lived
     Assets to Be Disposed Of and applies to all  long-lived  assets  (including
     discounted  operations) and consequently amends Accounting Principles Board
     Opinion No. 30 ("APB 30"),  Reporting results of  Operations-Reporting  the
     Effects of  Disposal  of a Segment of a  Business.  SFAS 144  develops  one
     accounting  model  (based on the model in SFAS 121) for  long-lived  assets
     that are to be  disposed of by sale,  as well as  addresses  the  principal
     implementation  issues. SFAS 144 requires that long-lived assets that re to
     be disposed of by sale be measured at the lower of book value or fair value
     less cost to sell. That  requirement  eliminates APB 30's  requirement that
     discontinued  operations  be  measured  at net  realizable  value  or  that
     entities include under discontinued operations amounts for operating losses
     that have not yet  occurred.  Additionally,  SFAS 144  expands the scope of
     discontinued  operations  to  include  all  components  of an  entity  with
     operations  that (1) can be  distinguished  from the rest of the entity and
     (2) will be  eliminated  from the  ongoing  operations  of the  entity in a
     disposal transaction. SFAS 144 is effective for financial statements issued
     for fiscal years beginning after December 15, 2001. (See Note 4.)

     Reclassifications

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

     Segment reporting

     We have determined that we have a single  reportable  operating  segment as
     defined by SFAS No. 131  Disclosures  about  Segments of an Enterprise  and
     Related Information.

     Comprehensive income (loss)

     The  Company  had no other  comprehensive  income  or loss for all  periods
     presented.

          3. License Costs

     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 an
     80.1% interest in E-SAT.  The Company's total  investments in, and advances
     to,  E-SAT as of December  31, 2000 and 1999 were  $851,490 for both years.
     The investment is accounted for using the equity method.

     On March 31, 1998,  the FCC 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.

<PAGE> 81

     On July 30, 1999, the Company entered into an agreement with EchoStar under
     which it received  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 a result of this
     transaction,  which was  subsequently  approved by the FCC, the Company now
     owns 80.1% of the E-SAT shares.  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.

          4. Satellite Construction Costs

     During  the   construction  of  its  satellite   system,   the  Company  is
     capitalizing all design,  engineering,  launch and construction costs. Such
     costs amounted to approximately $12.2 million as of December 31, 2001.

     Of  that  amount,  approximately  $2  million  was  paid to  Alcatel  Space
     Industries  ("Alcatel") for preliminary  engineering  design review for the
     Company's system,  including the payload design and designs for the gateway
     earth station and tracking  facilities,  as well as the  satellite  orbital
     analysis and  communications  link margins to and from space. On October 8,
     1999,  the Company  signed a contract  with  Alcatel for the final  design,
     construction  and  delivery  to the  launch  site of six  little  low earth
     orbiting  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 E-SAT  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.  As noted above,  the Company
     paid $2  million  in  construction  payments  to  Alcatel  for  engineering
     specifications.  The Company has not made a further payment required by the
     agreement  with  Alcatel,  due at the end of 1999,  of  approximately  $9.1
     million in cash and the  equivalent  of $5 million  in Common  Stock.  This
     payment  was  necessary  for  Alcatel  to  continue  work and to trigger an
     effective date for the Company's full system  development  schedule.  As of
     December 31, 2001,  this payment has not been made,  and Alcatel  therefore
     has the right to consider this  contract void as to further work,  and that
     the contract is therefore not currently in effect.  If the Alcatel contract
     is  never  brought  into  effect,   the  Company  retains  the  engineering
     specifications  provided  by  Alcatel,  which  would  still  be used by the
     Company's other contractors in the construction of the Company's  satellite
     network.

     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. 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.

     Surrey's   construction   contract,   which  was  to  build  the  satellite
     infrastructures that would house the telecommunications  payload, was to be
     managed  by  Alcatel  as prime  contractor,  if and when the  Company  paid
     Alcatel $14.1 million to trigger the Alcatel  contract  effective  date. As
     this payment has not been made,  the Alcatel  contract is not in effect and
     Surrey remains a direct contractor of the Company.

     In  accordance  with SFAS 121, the Company  reviews  capitalized  satellite
     construction  and FCC  license  costs  for  impairment  whenever  events or
     changes in  circumstances  indicate that their carrying  amounts may not be

<PAGE> 82
     recoverable.  The Company's management and Audit Committee of the Board has
     concluded  that no such events or changes in  circumstances  have  occurred
     and,  accordingly,  it would be inappropriate to write down the capitalized
     satellite construction costs as impaired as of December 31, 2001.

     The  Company  evaluated  a  number  of  factors  in  its  consideration  of
     impairment events and changes in circumstances  including:  (1) whether the
     Company's  failure to meet its FCC milestone  requirements  would result in
     termination of the license;  (2) whether the assets  continue to have value
     notwithstanding  the delay since  contracting;  (3)  whether the  Company's
     failure to bring the  Alcatel  prime  contract  into  effect  prevents  the
     Company from constructing its system; (4) whether the state of difficulties
     in the  satellite  financing  capital  markets  were  likely to prevent the
     Company  from  financing  its  system  in  the  future;   (5)  whether  the
     telecommunications  industry had  overcapacity  such that there would be no
     business  opportunity  for the E-SAT system;  and (6) whether the Company's
     implementation of an Iridium-based  system  effectively  replaced the E-SAT
     system.  In more detail,  the Company concluded subject to the risk factors
     detailed in the Company's Form 10-KSB, these points as detailed below:

     a.   The Company  believes that its failure to meet its  milestones are not
          likely to result in termination of the license. The Company recognizes
          that the loss of the FCC license held by its  subsidiary  E-SAT,  Inc.
          would be a change in circumstance and that the failure to meet certain
          milestones could lead to a loss of the license.  The Company currently
          lacks  adequate  financing  and time to build and launch two low earth
          orbiting  satellites in advance of the required FCC  construction  and
          launch date of March 2002 and September 2002 respectively.  As part of
          the Company's impairment  analysis,  the Company received a report and
          opinion from Leslie Taylor Associates,  its regulatory  counsel,  that
          the license was likely to be  extended.  This opinion was based on the
          satellite  construction  progress to date, including the launch of one
          satellite,  and the fact that there were no other  pending  applicants
          for the spectrum covered by E-SAT's license.  As recommended by Leslie
          Taylor  Associates,  on March 29, 2002, E-SAT filed the request for an
          extension of milestones with the FCC and is awaiting a reply. Based on
          these facts, the Company  believes,  while there is no guarantee,  the
          FCC will grant the  extension and that it is therefore not in imminent
          danger of losing its FCC  license  but will  continue  to monitor  the
          situation for any changes.

     b.   The Company believes that its satellite  construction  assets continue
          to have value notwithstanding the delay since contracting. Included in
          the capitalized  satellite  construction costs are payments to Alcatel
          Space  Industries,  Eurockot  and Surrey  Satellite.  The Company paid
          Alcatel for the production of engineering  specifications and analysis
          which  information   remains  the  property  of  the  Company.   These
          specifications  are an integral  part of E-SAT's  ability to construct
          the satellites and were transferred by the Company to Surrey Satellite
          in  2001,  and  will be  used  by  Surrey  in  satellite  construction
          regardless  of whether  the  Alcatel  contract  is ever  brought  into
          effect.  Surrey  Satellite  was paid for the  design of the  satellite
          ground station,  among other things, which is crucial to the design of
          the  system and  remains  an  important  element  to  completion  of a
          complete satellite  communication  network.  Eurockot was paid for the
          launch  of the  satellites  and  although  the  launch  date  has been
          extended  past  2002,  E-SAT's  right to  Eurockot's  launch  services
          remains intact.

     c.   The  Company  believes  that its  failure to bring the  Alcatel  prime
          contract  into effect does not prevent the Company  from  constructing
          its system.  The Company's  contract with Alcatel called for a payment
          by the  Company at the end of 1999 that has not been paid to date and,
          as a result, Alcatel has the option to terminate the contract. Alcatel
          has not  indicated  to the Company  that it intends to  terminate  the
          contract,  and the Company  believes  that Alcatel would seek to bring
          the  contract  into  effect when the Company  receives  financing.  In
          addition,  the Company  believes that currently  alternative  suitable
          prime  contractors  are  available  to  manage  construction  as prime
          contractor, including Surrey Satellite, for a significantly lower cost
          than  negotiated  with  Alcatel,  and so the Company may not choose to

<PAGE> 83

          reinstate  the  Alcatel  contract.  As noted  above,  the  Company has
          received viable assets  consisting of engineering  specifications  and
          analysis in return for the $2.1 million paid to Alcatel.

     d.   The Company  believes that the state of  difficulties in the satellite
          financing  capital  markets is not likely to prevent the Company  from
          financing  its  system  in  the  future.  The  Company  believes  that
          satellite  financing  is cyclical and further that the low cost of its
          system,   approximately   $60   million,   compared  to  other  global
          telecommunications  systems,  allows it to be financed  through a wide
          variety of sources,  including customers and strategic  partners.  The
          Company believes that the primary impediment to financing is therefore
          a demonstration of market viability of  low-earth-orbiting  satellites
          for data communications to remote infrastructure.

     e.   The  Company   believes  that  current   telecommunications   industry
          overcapacity  does not  obviate the market  opportunity  for the E-SAT
          system.  The Company  believes  that the E-SAT system will have unique
          competitive  advantages  even  if  the   telecommunications   industry
          maintains  a  position  of low per minute  costs due to  overcapacity.
          These  advantages  are primarily low terminal cost due to usage of low
          power-spread spectrum transceivers permitted by the E-SAT license, and
          high penetration of buildings, remote terrain and poor weather because
          the E-SAT license uses VHF frequencies.

     f.   The  Company  believes  that  the  Company's   implementation   of  an
          Iridium-based  system is not a substitute  for the E-SAT  system.  The
          Company  believes that the  Iridium-based  system,  which has a higher
          transceiver  cost and  operates on the L-Band which  requires  line of
          sight,  is  potentially  complementary  to the E-SAT system with lower
          transceiver  cost and  operates on VHF  frequencies  which have strong
          building, terrain and weather penetration.

     The  Company  believes  that  if the  funding  necessary  to  complete  the
     satellite  network  and  to  remain  a  going  concern  is  obtained,   the
     capitalized  satellite  construction  costs will be recoverable from future
     operating cash flows.  On May 23, 2002,  the Company  entered into a Demand
     Reserves  Authority  Provider Agreement with the California Power Authority
     to  implement  a  satellite-based   (using  Iridium   capacity)   automated
     conservation  system  design to conserve  significant  electrical  usage on
     demand at peak or emergency times. The Company believes that implementation
     of this program,  if successful,  would provide some of the funding for the
     further  development of the E-SAT system.  Should the FCC extension request
     be denied, or any of the other above factors materially change, the Company
     may be  required  to  record an  impairment  of the  capitalized  satellite
     construction costs.

          5. Customer Advances

     The  Company's  wholly-owned  subsidiary,  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  is  reported  as customer
     advances on the accompanying  consolidated  balance sheets. These milestone
     payments could be subject to refund in whole or in part.

<PAGE> 84

          6. 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:

         Year Ending
         December 31,

           2002                                 148,234
           2003                                  86,470
                                            ----------------
                                               $234,704
                                            ----------------


     Total rent expense was $151,253, $226,268, and $150,084 for the years ended
     December 31, 2001, 2000, and 1999, respectively.

     Other

     Refer to Note 4 for certain contract commitments.

          7. Stockholders' Equity

     Preferred stock

     The Company's Certificate of Incorporation,  as amended in 2001, authorizes
     the  issuance of  10,000,000  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.

     Common stock

     The Company's Certificate of Incorporation,  as amended in 2001, authorizes
     the  issuance  of  100,000,000  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.

     Equity transactions with non-employees

     Preferred Stock Transactions

     During fiscal 2000,  the Company sold to accredited  investors an aggregate
     of 35,897  shares of its Series A  Convertible  Preferred  Stock at $30 per
     share,  for an aggregate  placement of $1,076,910.  The shares of preferred
     stock have a liquidation  preference of $30.00 per share and were initially
     convertible,  at the  option of the  holder,  into ten shares of our common
     stock,  or at a rate of $3.00 per common share.  Per the conversion  terms,

<PAGE> 85

     the  conversion  rate was adjusted to a range between  $1.6438 and $1.8625,
     based upon the 5-day average  closing  price of the Company's  common stock
     three  months after the shares were issued,  because the  Company's  common
     stock was  trading  below  $3.00 per  share.  Commissions  were paid to one
     placement agent in the aggregate  amount of  approximately  $7,000,  plus a
     warrant was issued in July 2000 to the placement  agent to purchase  57,586
     shares of common  stock at the  exercise  price of $3.00 per  share.  As of
     December  31,  2001,  25,899  shares of Series A  Preferred  Shares  remain
     outstanding.  Accreted  dividends totaled $70,898 based on 5% dividend rate
     per annum.

     On October 6, 2000, the Company received from accredited investors proceeds
     of  $400,000  from the sale in a  private  placement  of (1) 400  shares of
     Series B  Convertible  Preferred  Stock,  (2)  warrants to purchase  83,660
     shares of Common  Stock with an exercise  price of $1.052 per share and (3)
     warrants to purchase  83,660 shares of Common Stock with an exercise  price
     of $1.434 per share.  During the first 180 days following  October 6, 2000,
     the Series B Preferred Stock may not be converted;  and the Company has the
     right to redeem these shares if the Company  repays the purchase price plus
     an additional 5-7% depending on repayment date, plus dividends at a rate of
     10% per annum.  After 180 days  following  October  6,  2000,  the Series B
     Preferred  Stock are  convertible  into  Common  Stock at the lesser of (1)
     approximately $.96 per share which was the closing bid price at the time of
     the  purchase  or (2) 80% of the  average of the three  lowest  closing bid
     prices of the  Common  Stock for the  20-day  trading  period  prior to the
     conversion date. The Company also has the obligation to register the Common
     Stock underlying the warrants and, after 180 days,  Common Stock underlying
     any  redeemed  Series B Preferred  Stock.  For this  transaction,  an agent
     received a fee of 40 shares of Series B  Preferred  Stock and  warrants  to
     purchase  120,000  shares of Common  Stock of the Company  with an exercise
     price of $1.052 per share.  As of December 31, 2001, 320 shares of Series B
     Preferred Shares remain  outstanding,  and accreted  dividends  amounted to
     $40,320 based on a 10% dividend rate per annum.

     On June 26, 2001, the Company's Series B preferred  stockholders  agreed to
     modify their preferred stock agreement with the Company. As a result of the
     modification,  the Company's  requirement to file a registration  statement
     for the  Series B equity was  delayed  four  months to August 4, 2001.  The
     Company has not filed such  registration  statement as of December 31, 2001
     and  therefore  has  recorded  accretions  of 5%  monthly  of the  Series B
     Preferred Stock's liquidation amount of $440,000. These accretions amounted
     to $87,267 for the year ended December 31, 2001.

     The  preferred  stockholders  have the right to require  redemption  of the
     Series B Preferred Stock amounts,  including accretions, 90 days subsequent
     to  August  4, 2001 in the event  that the  registration  statement  is not
     declared effective at that time.

     In conjunction  with this  modification,  the Company agreed to reprice the
     existing  287,322  warrants  issued  on  October  6,  2000 to the  Series B
     preferred  stockholders  ranging in price from  $1.0126 to $1.1342 to $0.17
     per share.  In  addition,  the  Company  issued to the  Series B  preferred
     stockholders  warrants to purchase  500,000 shares of the Company's  Common
     Stock at an exercise price of $0.17 per share. The fair value of $98,850 of
     such warrants was calculated using the  Black-Scholes  option pricing model
     with the following variables:  exercise price of $0.17, closing stock price
     on June 26, 2001 of $0.44, life of warrants of 3 years,  volatility of 150%
     and risk free interest rate of 5.5%.  The value of such warrants was deemed
     to be analogous to a dividend to the preferred  stockholders  as prescribed
     under  the  provisions  of EITF  98-5  and was  recognized  at the  date of
     issuance as the warrants were immediately exercisable.

<PAGE> 86

     Common Stock Transactions

     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 to purchase
     100,000 shares of the Company's Common Stock at an exercise price of $1.44.
     These  warrants  were  issued for  services  rendered  and are  exercisable
     through  January 2006. As of December 31, 2001, 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.

     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 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.

<PAGE> 87
     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  originally
     recorded as a long term asset and  expensed in 2000.  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. On July
     21, 2000, 400,000 of these warrants were cancelled.

     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.

     On June 2, 2000,  the Company  entered  into an agreement to sell shares of
     its Common Stock, at the Company's  option, to Torneaux Ltd., a corporation
     organized in the Bahamas,  an  accredited  investor.  The Company  issued a
     Warrant to purchase 250,000 shares of its Common Stock at an exercise price
     of $1.01 per share as a finder's  fee.  In  September  2000,  warrants  for
     125,000  shares of Common Stock were exercised at the reduced price of $.70
     per share and a new  warrant to purchase an  additional  125,000  shares of
     Common  Stock at an exercise  price of $1.1875  per share was  issued.  The
     transaction  was exempt from  registration in reliance upon Section 4(2) of
     the  Securities  Act. In September  2000, the Company sold 84,490 shares of
     Common Stock to Torneaux Ltd. in accordance  with the agreement,  resulting
     in gross  proceeds  to the  Company  of  $83,333  and  issued a warrant  to
     purchase 42, 245 shares of Common Stock at an exercise price of $1.1342 per
     share.  In October 2000,  the Company sold 63,092 shares of Common Stock to
     Torneaux Ltd. in accordance with the agreement, resulting in gross proceeds
     to the Company of $55,556 and issued a warrant to purchase 31,546 shares of
     Common Stock at an exercise price of $1.0126 per share.

     On June 2, 2000,  the Company sold an  aggregate  of 166,298  shares of its
     Common Stock to three  accredited  investors.  The stock was sold for $1.00
     per share  resulting  in gross  proceeds  to the  Company  of  $166,298.  A
     finder's fee of  approximately  $11,641 was paid in  connection  with these
     transactions.

     In May 2000,  the Company  granted a warrant to purchase  300,000 shares of
     its Common Stock to a consultant  for past services.  No  commissions  were
     paid.  The  warrant has an  exercise  price of $0.6749 per share.  The fair
     value of such  warrants of $470,700 was charged to  consulting  expense and
     was  estimated  on the date of grant  using the Black  Scholes  model  with
     volatility of 150%, expected life of 3 years, risk free interest rate of 6%
     and a fair  market  value of the Common  Stock of $1.75 per share.

     In July 2000,  the Company  received from an accredited  investor  $100,000
     from a private  placement  of 133,333  shares of Common Stock and granted a
     warrant to purchase 10,000 shares of Common Stock exercisable  through July
     2004 at an exercise price of $0.75 per share. No commissions were paid.

<PAGE> 88

     In August 2000, the Company  granted  warrants to purchase 49,000 shares of
     Common  Stock to a  consultant  for  services  rendered.  The  warrants are
     exercisable  through August 2003 at an exercise price of $0.9062 per share.
     The fair value of such  warrants of $36,309 was expensed and was  estimated
     on the date of grant using the Black Scholes model with volatility of 150%,
     expected  life of 3 years,  risk free interest rate of 6% and a fair market
     value of the Common Stock of $0.90 per share.

     In September  2000, the Company issued 200,000 shares of Common Stock and a
     warrant to purchase  200,000  shares of Common  Stock to a  consultant  for
     services rendered.  The warrants are exercisable  through September 2003 at
     an exercise price ranging from $1.50 to $2.50 per share.  The fair value of
     such  warrants of $194,500 was  expensed  and was  estimated on the date of
     grant using the Black Scholes model with volatility of 150%,  expected life
     of 3 years,  risk free  interest  rate of 6% and a fair market value of the
     Common Stock of $1.25 per share.

     In October 2000, the Company  granted a warrant to purchase  500,000 shares
     of the Company's  Common Stock at an exercise price of $1.31 per share to a
     financial  institution  as  consideration  for its  efforts  to help  raise
     capital.  Warrants to purchase the first 50,000 vested as of the grant date
     and will expire in October 2003.  The fair value of the 50,000  warrants of
     $38,950 was charged to stock issuance cost and was estimated on the date of
     grant using the Black Scholes model with volatility of 150%,  expected life
     of 3 years,  risk free  interest  rate of 6% and a fair market value of the
     Common Stock of $1.00.  The remaining  warrants to purchase  450,000 shares
     were cancelled in April 2001.

     In December 2000, options to purchase 70,571 shares of the Company's Common
     Stock that were  previously  issued to a Director  at prices  ranging  from
     $0.060 to $2.19,  were  transferred  to his spouse in  connection  with his
     divorce  settlement.  These  warrants are fully vested and have  expiration
     dates ranging between December 18, 2004 and May 22, 2008.

     In December 2000, the Company received from accredited  investors  proceeds
     of $100,000 in exchange  for 100,000  units,  each unit  consisting  of two
     shares  of Common  Stock at a price of $0.50  per  share  and a warrant  to
     purchase  one-quarter  of one share of Common Stock at an exercise price of
     $1.00 per share.  In connection  with this  transaction,  a finder's fee of
     $7,000.00  was paid and a warrant was issued to purchase  10,000  shares of
     Common Stock  exercisable at $1.00 per share. The 200,000 shares of Commons
     Stock were issued in January 2001.

     In December  2000,  the Company  received from three  accredited  investors
     proceeds of $500,000 in exchange for 500,000 units, each unit consisting of
     four shares of Common  Stock at a price of $0.25 per share and a warrant to
     purchase  one  share of Common  Stock at an  exercise  price of  $0.50.  In
     connection with this transaction, a finder's fee of $35,000.00 was paid and
     a warrant was issued to purchase 100,000 shares of Common Stock exercisable
     at $0.50 per share.  For each month that the effective date of registration
     is delayed  beyond May 1,  2001,  liquidated  damages in the form of common
     stock and warrants have accrued at the rate of 10% of securities  purchased
     by two of the investors and beyond  November 1, 2001 by the third  investor
     for failure to effectively  register the purchased  Common Stock and Common
     Stock  underlying the warrants.  As of December 31, 2001, the total damages
     amount to 1,136,000 shares of Common Stock and warrants to purchase 284,000
     shares of Common  Stock at an  exercise  price of $0.50.  The fair value of
     such warrants  approximated  $126,000 and was recorded as a liability under
     the  provisions  of  EITF  00-19,   Accounting  for  Derivative   Financial
     Instruments  Indexed to, and Potentially Settled in, a Company's Own Stock.
     Such securities were committed to but not issued as of December 31, 2001.

<PAGE> 89

     During  fiscal  2000,  the Company  received  proceeds of $87,500  from the
     exercise  of options to  purchase  60,000  shares of the  Company's  Common
     Stock,  and  proceeds of $5,805  from the  exercise of warrants to purchase
     3,870 shares of the Company's Common Stock.

     During 1999,  for services  rendered,  three  consultants  who served in an
     advisory  capacity to NewStar  Ltd.  were issued  fully  vested  options to
     purchase 22,000 shares of Common Stock of the Company.

     During  2000,  a total of 136,923  shares of Common  Stock were  issued for
     services  rendered to three  consultants for a total fair value of $147,634
     which was expensed during the course of the year.

     In January 2001, the Company  received  proceeds in a private  placement of
     $100,000  from an  accredited  investor in exchange  for 290,000  shares of
     Common  Stock and a  warrant  to  purchase  36,250  shares of Common  Stock
     exercisable at $0.70 per share.

     In January 2001, the Company  received  proceeds in a private  placement of
     $200,000  from an  accredited  investor in exchange  for 400,000  shares of
     Common  Stock and a warrant  to  purchase  100,000  shares of Common  Stock
     exercisable  at $1.00 per share.  In connection  with this  transaction,  a
     finder's fee of $14,000 was paid and a warrant was issued for 40,000 shares
     of Common  Stock  exercisable  at $1.00 per  share.  The fair value of such
     warrants,  which amounted to approximately  $16,000,  was recorded as stock
     issuance  costs.  The following  variables  were used to determine the fair
     value of such  instruments  under the  Black-Scholes  option pricing model:
     volatility of 150%,  expected  life of 4 years,  risk free interest of 6.5%
     and  underlying  stock  prices  equal to fair  market  value at the time of
     grant.

     In January 2001, the Company  received  proceeds in a private  placement of
     $50,000 from three  accredited  investors in exchange for 100,000 shares of
     Common  Stock and  warrants  to  purchase  12,500  shares  of Common  Stock
     exercisable  at $1.00 per share.  In connection  with this  transaction,  a
     finder's  fee of $3,500 was paid and a warrant was issued for 5,000  shares
     of Common  Stock  exercisable  at $1.00 per  share.  The fair value of such
     warrants,  which amounted to  approximately  $2,000,  was recorded as stock
     issuance  costs.  The following  variables  were used to determine the fair
     value of such  instruments  under the  Black-Scholes  option pricing model:
     volatility of 150%,  expected  life of 4 years,  risk free interest of 6.5%
     and  underlying  stock  prices  equal to fair  market  value at the time of
     grant.

     In March 2001,  the Company  received  proceeds in a private  placement  of
     $250,000  from an  accredited  investor in exchange  for 568,182  shares of
     Common  Stock and a warrant  to  purchase  113,636  shares of Common  Stock
     exercisable at $0.90 per share. An additional  warrant to purchase  450,000
     shares of Common  Stock  exercisable  at $0.50 per share was  issued to the
     same accredited investor,  relative to the same transaction, in April 2001.
     In connection with this transaction, a finder's fee of $17,500 was paid and
     a warrant was issued for 56,818 shares of Common Stock exercisable at $0.90
     per share. The fair value of such warrants, which amounted to approximately
     $19,000, was recorded as stock issuance costs. The following variables were
     used  to  determine   the  fair  value  of  such   instruments   under  the
     Black-Scholes option pricing model:  volatility of 150%, expected life of 4
     years, risk free interest of 6.5% and underlying stock prices equal to fair
     market value at the time of grant.

     In March 2001,  the Company  issued  488,136  shares of Common Stock of the
     Company to a  consultant  for  services  rendered for a total fair value of
     $216,000. This amount was recorded as consulting expense.

<PAGE> 90

     On April 18, 2001, the Company granted to an accredited  investor a warrant
     to  purchase  5,000  shares of Common  Stock of the  Company at an exercise
     price of $0.50 per share in exchange for  extending the period during which
     the Company was required to file a  registration  statement  with regard to
     securities purchased by the investor on December 27, 2000.

     In May 2001,  the  Company  received  six-month  loans from  three  current
     stockholders  and a director of the  Company in the amount of  $30,000.  In
     consideration  for the loans,  the Company will pay interest at the rate of
     6.5% per annum,  and has issued warrants to said  stockholders and director
     to  purchase  a  total  of  150,000  shares  of  restricted   Common  Stock
     exercisable  at $0.25 per  share.  In June  2001,  the  Company  received a
     six-month loan from a director of the Company in the amount of $25,000.  In
     consideration  for the loan,  the Company  will pay interest at the rate of
     6.5% per  annum,  and has issued a warrant to the  director  to  purchase a
     total of 125,000 shares of restricted Common Stock exercisable at $0.45 per
     share.  The fair value of such warrants,  which  amounted to  approximately
     $41,000, is being amortized as interest expense over the term of the loans.
     The  following  variables  were used to  determine  the fair  value of such
     instruments  under the  Black-Scholes  option pricing model:  volatility of
     150%,  expected life of 6 months,  risk free interest of 6% and  underlying
     stock prices equal to fair market value at the time of grant.

     During July 2001, the Company issued a total of 1,909,458  shares of Common
     Stock and warrants to purchase a total of 1,086,486  shares of Common Stock
     as part of a private  placement  to five  accredited  investors,  including
     Torneaux Lt., for aggregate gross proceeds of  approximately  $375,000.  Of
     the shares  issued,  486,486  shares were  delivered upon the exercise of a
     portion  of the total  warrants  that were  issued in the  transaction.  In
     addition,  the Company  agreed to reprice  certain  existing  Torneaux Ltd.
     warrants to purchase an  aggregate  of 73,791  shares of Common  Stock from
     exercise prices ranging from $1.0126 to $1.1342 to $0.17 per share.

     On July 9, 2001, the Company  granted a warrant to purchase an aggregate of
     500,000  shares  of its  Common  Stock  to two  consultants  as part of two
     agreements dated July 9, 2001. The warrants have an exercise price of $0.38
     per share. Of these 500,000  warrants,  175,000 vested upon  performance of
     service during the quarter ended  September 30, 2001,  while the vesting of
     the remainder is contingent upon the occurrence of future events.  The fair
     value of such  warrants,  which  amounted  to  approximately  $54,250,  was
     recorded as an expense.  The following variables were used to determine the
     fair  value of such  instruments  under the  Black-Scholes  option  pricing
     model:  volatility of 150%, expected life of 3 years, risk free interest of
     6.5% and underlying  stock prices equal to fair market value at the time of
     grant.

     On July 27, 2001,  the Company  sold an aggregate of 600,000  shares of its
     Common Stock to three  accredited  investors.  The stock was sold for $0.60
     per share  resulting  in gross  proceeds  to the  Company of  $360,000.  In
     addition,  the Company  issued  warrants to purchase an aggregate of 59,999
     shares of its Common Stock at $0.60 per share.

     On August 1, 2001, the Company  granted a warrant to purchase 62,000 shares
     of its Common Stock to a consultant as part of an agreement dated August 1,
     2001. The warrant has an exercise price of $0.77 per share. Of these 62,000
     warrants,  25,000  vested upon  performance  of service  during the quarter
     ended September 30, 2001,  while the vesting of the remainder is contingent
     upon  the  occurrence  of a future  event.  The  fair  value of the  25,000
     warrants,  which  amounted to  approximately  $17,000,  was  recorded as an
     expense.  The following  variables were used to determine the fair value of
     such instruments under the Black-Scholes  option pricing model:  volatility
     of  150%,  expected  life of 4  years,  risk  free  interest  of  6.5%  and
     underlying stock prices equal to fair market value at the time of grant.

<PAGE> 91

     On August 9, 2001,  warrants to purchase  100,000 shares of Common Stock of
     the Company  exercisable at $0.62 per share were issued to two  consultants
     for services rendered.  The fair value of such warrants,  which amounted to
     approximately  $55,000, was recorded as an expense. The following variables
     were  used to  determine  the fair  value  of such  instruments  under  the
     Black-Scholes option pricing model:  volatility of 150%, expected life of 4
     years, risk free interest of 6.5% and underlying stock prices equal to fair
     market value at the time of grant.

     On August 10, 2001, warrants to purchase a total of 50,000 shares of Common
     Stock of the  Company  exercisable  at $0.67 per share  were  issued to two
     consultants for services rendered.  The fair value of such warrants,  which
     amounted  to  approximately  $29,500,  was  recorded  as  an  expense.  The
     following  variables  were  used  to  determine  the  fair  value  of  such
     instruments  under the  Black-Scholes  option pricing model:  volatility of
     150%,  expected life of 4 years,  risk free interest of 6.5% and underlying
     stock prices equal to fair market value at the time of grant.

     On August 16, 2001,  the Company sold an aggregate of 425,531 shares of its
     Common Stock to two accredited investors.  The stock was sold for $0.47 per
     share resulting in gross proceeds to the Company of $200,000.  In addition,
     the Company issued  warrants to purchase  69,148 shares of its Common Stock
     at $0.47 per share.

     On August 19, 2001,  a warrant to purchase  9,722 shares of Common Stock of
     the Company  exercisable  at $0.59 per share was issued to a consultant for
     services  rendered.  The fair value of such  warrants,  which  amounted  to
     approximately  $5,000, was recorded as an expense.  The following variables
     were  used to  determine  the fair  value  of such  instruments  under  the
     Black-Scholes option pricing model:  volatility of 150%, expected life of 4
     years, risk free interest of 6.5% and underlying stock prices equal to fair
     market value at the time of grant.

     On August 20,  2001,  the  Company  granted a warrant to  purchase  250,000
     shares of its Common  Stock to a  consultant  for  services  rendered.  The
     warrant  has an exercise  price of $0.50 per share.  The fair value of such
     warrants,  which  amounted to  approximately  $150,000,  was recorded as an
     expense.  The following  variables were used to determine the fair value of
     such instruments under the Black-Scholes  option pricing model:  volatility
     of  150%,  expected  life of 4  years,  risk  free  interest  of  6.5%  and
     underlying stock prices equal to fair market value at the time of grant.

     Also on August 20,  2001,  the Company  sold  500,000  shares of its Common
     Stock to an  accredited  investor.  The  stock was sold for $0.50 per share
     resulting in gross  proceeds to the Company of $250,000.  In addition,  the
     Company issued a warrant to purchase  300,000 shares of its Common Stock at
     $0.50 per share.  On August 29, 2001, the Company sold 94,203 shares of its
     Common Stock to an  accredited  investor.  The stock was sold for $0.69 per
     share  resulting in gross proceeds to the Company of $65,000.  In addition,
     the Company  issued a warrant to purchase  9,420 shares of its Common Stock
     at $0.69 per share.

     On August 31, 2001,  the Company  issued  500,000  units to one  accredited
     investor at a purchase  price equal to $1.00 per unit.  Each unit consisted
     of one convertible debenture,  with the principal amount of the convertible
     debenture due August 31, 2006, together with a warrant to purchase one-half
     (1/2)  share of  Common  Stock at an  exercise  price  of $1.06  per  share
     resulting  in gross  proceeds to the Company of $500,000.  The  convertible
     debentures accrue simple interest on the principal amount at the rate of 6%
     per annum.  The  convertible  debenture  principal and accrued  interest is
     convertible  into  shares  of  Common  Stock  at the  lower  of (i) a fixed
     conversion  price  equal  to $0.98  (maximum  conversion  price)  or (ii) a
     variable conversion price equal to 85% of the market price, but in no event

<PAGE> 92

     lower than $0.21 per share (minimum  conversion price). The warrants have a
     term of five years. A structuring  fee of $30,000 was paid to Azure Capital
     Holdings,  LLC and a  finder's  fee of  $15,000  was paid to Madison & Wall
     Worldwide, Inc.

     On September 7, 2001,  the Company issued 333,333 shares of Common Stock to
     a consultant for services rendered for a total fair value of $216,000.  The
     Company recorded this amount as consulting expense.

     On November 12, 2001,  the Company issued 1,000 shares of Common Stock to a
     consultant for services rendered for a total fair value of $390.

     On November 19, 2001,  the Company issued 150,000 shares of Common Stock to
     a terminated  employee in accordance with his termination  settlement for a
     total fair value of $46,800.

     On November 19, 2001,  the Company sold 172,414  shares of its Common Stock
     to an accredited investor. The stock was sold for $0.29 per share resulting
     in gross  proceeds  to the  Company of $50,000.  In  addition,  the Company
     issued a warrant to purchase 17,241 shares of its Common Stock at $0.29 per
     share.

     On November 30, 2001 the Company  issued  441,176 shares of Common Stock to
     two  investors  upon  conversion  of an aggregate of 120 shares of series B
     preferred stock based upon $0.272 per Common Share.  Additionally,  a total
     of 50,498  shares of  Common  Stock  were  issued to  investors  in lieu of
     accrued and unpaid cash dividends at the same conversion price.

     On December 13, 2001,  the Company issued 166,667 shares of Common Stock to
     an accredited investor. The stock was sold for $0.30 per share resulting in
     gross proceeds to the Company of $50,000. In addition, the Company issued a
     warrant to purchase 83,333 shares of its Common Stock at $0.30 per share.

     The  Company  has applied the  provisions  of EITF  00-19,  Accounting  for
     Derivative Financial  Instruments Indexed to, and Potentially Settled in, a
     Company's Own Stock during fiscal 2001. The Company is remeasuring  certain
     warrants as required  under the EITF and  recorded  an  associated  gain of
     $383,773 for the year ended December 31, 2001.

     Equity transactions with employees

     Employee Stock Purchase Plan

     The Company has  established  the 1999  Employee  Stock  Purchase Plan (the
     "1999 Plan"),  which was approved by the stockholders in June 1999 to serve
     as a vehicle to attract  and retain the  services of key  employees  and to
     help  such key  employees  realize  a direct  proprietary  interest  in the
     Company.  Under the 1999 Plan,  employees,  including officers,  who do not
     beneficially  own stock  and/or  options  totaling 5% or more of the voting
     power  of the  Company,  will  be  eligible  to  participate.  However,  no
     participant  may be granted  rights to purchase  more than $25,000 worth of
     Common Stock  (valued at the time the  purchase  right is granted) for each
     calendar year in which such purchase rights are outstanding under any other
     stock purchase  plans. An aggregate of 50,000 shares of Common Stock of the
     Company were reserved for issuance under the 1999 Plan of which 39,222 were
     issued and  outstanding  as of December  31,  2001.  Employees  electing to

<PAGE> 93

     participate  in the 1999 Plan are allowed to deduct from 1% to 10% of their
     compensation  to  purchase  shares  of  Common  Stock.  Twice a  year,  the
     employees'  accumulated  payroll deductions will be used to purchase shares
     of Common Stock at a price equal to 85% of the closing  price of the Common
     Stock on either the first business day or last business day of the offering
     period, whichever is lower.

     Employee Stock Option Plans

     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  provided for
     the issuance of a maximum of 500,000 shares of the Company's  Common Stock.
     In May 2000,  the  Company  adopted  the 2000 Stock  Option Plan (the "2000
     Plan"), which provides for the issuance of a maximum of 1,750,000 shares of
     the Company's  Common Stock.  Provisions of the 1996,  1998, and 2000 Plans
     are  substantially  similar  to those of the  earlier  plans.  The  overall
     purpose  of the 1996,  1998,  and 2000 Plans is to  advance  the  long-term
     interest  of the  Company  by  attracting,  motivating  and  retaining  its
     employees,  directors and  consultants  with the  opportunity  to obtain an
     equity interest in the Company.

     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,  1998 and 2000 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 (ii) up to a five-year period in the
     case of  employees.  Shares  sold  under the 1996,  1998 and 2000 Plans are
     subject to various restrictions as to resale.

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

<PAGE> 94

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

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

                                                                    Outstanding Options
--------------------------------------------------------------------------------------------------------------
                                                                                                      Weighted
                                                                                                       Average
                                                  Number of        Price per        Aggregate         Exercise
                                                   Shares            Share            Price            Price

Balance, December 31, 1998                       2,044,156      $0.40 - $5.60      $  1,741,255         0.85

    Granted                                      2,149,700      $0.39 - $5.50         2,759,768         1.28
    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      $0.40 - $5.60      $  4,291,837         1.10
                                                 ----------                           ----------
    Granted                                        218,461      $0.91 - $2.59           268,302         1.23
    Exercised                                      (83,000)     $0.60 - $2.19           (73,724)        0.89
    Terminated                                     (95,571)     $0.60 - $2.19          (145,065)        1.52
                                                 ----------                           -----------
Balance, December 31, 2000                       3,943,262       $0.40 - $5.60     $  4,341,350         1.10
                                                 ----------                           -----------
    Granted                                      3,505,355       $0.91 - $2.59        2,351,544         0.67
    Exercised                                     (118,875)      $0.60 - $2.19          (65,003)        0.55
    Terminated                                     (56,313)      $0.60 - $2.19          (29,902)        0.53
                                                 ----------                           -----------
Balance, December 31, 2001                       7,273,429                         $  6,597,989         0.91
                                                 ----------                           -----------
</TABLE>

The  following  table  summarizes  information  with  respect  to stock  options
outstanding at December 31, 2001:

<TABLE>
<S>                                             <C>                                     <C>
                                                        Outstanding Options             Options Exercisable
                                             -----------------------------------------------------------------------
                                                                Weighted
                                                                 Average
                                                                Remaining     Weighted                     Weighted
                                                               Contractual     Average                      Average
                   Range of                      Number           Life        Exercise        Number       Exercise
                Exercise Price                 Outstanding       (years)        Price      Exercisable       Price

                 $0.22 - $0.49                     1,106,537      9.25         $  0.46         574,869      $  0.46
                 $0.53 - $0.77                     3,788,872      7.86            0.69       3,776,372         0.69
                 $0.91 - $1.75                     2,174,449      7.56            1.29       1,884,449         1.29
                 $2.00 - $2.86                       147,287      6.27            2.40         147,287         2.40
                 $5.50 - $5.60                        56,284      6.12            5.51          56,284         5.51
                                             ----------------                             ---------------

                 Balance, December 31, 2001        7,273,429                                 6,439,261
                                             ----------------                             ---------------
</TABLE>

<PAGE> 95

The stock based compensation for the twelve months ended December 31, 2001, 2000
and 1999 has been allocated across the relevant  functional  expense  categories
within operating expense as follows:

                                                  Year Ended December 31,
                                       -----------------------------------------
                                           2001            2000            1999
Marketing and sales                    $       -      $  358,332       $153,324
General and administrative               450,129         593,871        756,035
Research and development                       -         126,654         48,396
                                       ----------     ----------       ---------
   Total stock based compensation      $ 450,129      $1,078,857       $957,755
                                       ----------     ----------       ---------
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 common
stock values. Consequently,  the Company recorded deferred stock compensation of
$0, $0 and $2,490,337  during the year ended  December 31, 2001,  2000 and 1999,
respectively.  Amortization  recognized  for the years ended  December 31, 2001,
2000 and 1999 totaled $450,129, $1,078,857 and $957,755, respectively.

The weighted average fair value of the options granted or modified for the years
ended  December  31,  2001,   2000  and  1999  were  $0.64,   $1.37  and  $0.90,
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:

                                         2001           2000           1999

Risk free interest rate                  5.5%           6.0%           5.5%
Expected life                        4 years         4 years        4 years
Volatility                               120%           150%           100%
Dividend yield                             -              -              -

<PAGE> 96

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

                                                December 31,
                             ------------------------------------------------
                                  2001              2000              1999

Net loss
    As reported              $ (4,520,127)     $ (6,557,549)     $ (5,915,493)
    Pro forma                $ (6,499,695)     $ (7,226,245)     $ (6,252,010)

Net loss per share
    As reported              $      (0.23)     $      (0.44)     $      (0.45)
    Pro forma                $      (0.31)     $      (0.49)     $      (0.48)



          8. Related Party Transactions

     In fiscal 2000, several executives of the Company deferred receipt of their
     salaries due. The executives included the President  ($125,000),  the Chief
     Financial  Officer  ($45,000),  the Legal  Counsel  ($41,250)  and the Vice
     President of Operations ($33,750).

     In fiscal 2001, certain executives of the Company deferred receipt of their
     salaries due. The executives  included the President  ($95,000),  the Chief
     Financial  Officer  ($70,000),   the  Legal  Counsel  ($80,000),  the  Vice
     President of  Operations  ($45,000),  and the Vice  President of Government
     Affairs ($30,000).

     In fiscal 2001, the Company borrowed funds from three of its Directors: one
     loan for $30,000 at 6.5% interest,  one loan for $25,000 at 5% interest and
     one loan for  $50,000  bearing  no  interest.  These  loans are  payable on
     demand.

          9. Income Taxes

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

     The  estimated  tax  effect  of  significant   temporary   differences  and
     carryforwards  that gave rise to deferred  income tax assets as of December
     31, 2001 and 2000, is as follows:

<PAGE> 97
<TABLE>
<S>                                         <C>         <C>    <C>              <C>     <C>    <C>

                                                        2001                             2000
                                         ----------------------------------------------------------------
                                               Federal          State          Federal          State

Deferred tax assets:
    Net operating loss carryforwards      $  7,277,000       1,290,000     $  5,325,000       $ 936,000
    Research and development credit
      carryforwards                            190,000               -          177,000               -


      Deferred compensation and other           40,000           7,000           35,000           6,000
                                             ---------      ----------        ---------         ---------
    Deferred tax assets                      7,507,000       1,297,000        5,537,000         942,000
    Valuation allowance                     (7,507,000)     (1,297,000)      (5,537,000)       (942,000)
                                         ----------------------------------------------------------------
        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 $2,318,000  and $2,215,000  during the years ended
     December 31, 2001 and 2000,  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, 2001, the Company has net operating  loss  carryforwards
     of  approximately  $21,403,000  and  $21,164,000  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 2002 and 2021.

     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.

          10. Concentration of Risks

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

          11.  Supplemental  Disclosures  of Non Cash  Investing  and  Financing
          Activities

     During  fiscal 2000 the Company  issued  132,236  shares of Common Stock in
     lieu of cash for services  rendered by two vendors.  The total value of the
     services provided was $ 138,882.

<PAGE> 98

     During  fiscal 2001 the Company  issued  821,469  shares of Common Stock in
     lieu of cash for  services  rendered  by a vendor.  The total  value of the
     services provided was $ 431,671.

     Also,  during fiscal 2001, the Company issued 49,686 shares of Common Stock
     in lieu of cash for services  rendered by two of its  Directors.  The total
     value of the services provided was $27,980.

     Further,  the Company  issued during  fiscal 2001 150,000  shares of Common
     Stock in lieu of cash for salary owed to a terminated employee with a value
     of $46,800.

         12.    Subsequent Events

     In January  2002,  the Company  issued  19,565  shares of Common Stock to a
     director for past services on the Board.

     On January  30,  2002,  the Company  granted a warrant to purchase  100,000
     shares of its Common  Stock to a  consultant  for  services  rendered.  The
     warrant  is  exercisable  for three  years  from date of grant at $0.10 per
     share.  10,000  shares  vested at the date of the  grant and the  remaining
     90,000 vest in increments of 15,000 each month for six months.

     On February 5, 2002, in exchange for  cancellation of loans and interest to
     the Company totaling $66,500,  6 warrants were granted to a director of the
     Company to purchase an aggregate of 6,650,000 shares of Common Stock of the
     Company at $0.10 per share.  Each warrant is exercisable for a short period
     of time as follows:  Warrant 1 for 1,100,000 shares  exercisable  March 15,
     2002;  Warrant 2 for 1,100,000 shares exercisable April 15, 2002; Warrant 3
     for 1,100,000 shares  exercisable to May 15, 2002;  Warrant 4 for 1,100,000
     shares  exercisable  to June  15,  2002;  Warrant  5 for  1,100,000  shares
     exercisable  to  July  15,  2002;  and  Warrant  6  for  1,150,000   shares
     exercisable to August 15, 2002. If Warrants Nos. 1, 2 and/or 3 or a portion
     thereof are exercised  prior to their  expiration  dates,  investor will be
     granted replacement warrants to purchase 1,100,000 shares exercisable for 6
     months from the date of each exercise at $0.10 per share.  On March 7, 2002
     investor  exercised Warrant 1. In accordance with the terms of the warrant,
     the Company issued the investor 1,100,000 restricted shares of Common Stock
     of the  Company,  and a  replacement  warrant  to  purchase  an  additional
     1,100,000  shares  of  Common  Stock  of the  Company  at $0.10  per  share
     exercisable for 6 months from date of grant. On March 25, 2002 a portion of
     Warrant 2 was exercised for 50,000 shares.  In accordance with the terms of
     the warrant,  the Company issued the investor 50,000  restricted  shares of
     Common  Stock of the  Company  and a  replacement  warrant to  purchase  an
     additional  50,000 shares of Common Stock of the Company at $0.10 per share
     exercisable  for 6 months  from date of grant.  Subsequently,  on April 15,
     2002,  investor  exercised the remainder of Warrant 2 for 1,050,000 shares.
     In  accordance  with the  terms of the  warrant,  the  Company  issued  the
     investor 1,050,000  restricted shares of Common Stock of the Company, and a
     replacement  warrant to purchase an additional  1,050,000  shares of Common
     Stock of the Company at $0.10 per share  exercisable for 6 months from date
     of  grant.  Further,  on May 15,  2002,  investor  exercised  Warrant 3 for
     1,100,000  shares.  In  accordance  with terms of the warrant,  the Company
     issued the  investor  1,100,000  restricted  shares of Common  Stock of the
     company  and a  replacement  warrant to purchase  an  additional  1,100,000
     shares of Common Stock of the Company at $0.10 per share  exercisable for 6
     months from date of grant.

     On February  1, 2002,  the  Company  granted a warrant to  purchase  12,000
     shares of its Common  Stock to a  consultant  for  services  rendered.  The
     warrant is  exercisable  for four years from the date of grant at $0.12 per
     share and vests at a rate of 2,000 shares per month for six months from the
     date of grant.

     On February 5, 2002, the Company granted to a newly appointed member of the

<PAGE> 99

     Board of Directors  non-qualified  options under the 2000 Stock Option Plan
     to purchase  13,333 shares of Common Stock of the Company  exercisable  for
     ten years at $0.10 per share.

     Also on February 5, 2002, a non-plan,  non-qualified  option was granted to
     an officer of the Company upon his appointment as Chief  Operating  Officer
     to purchase  450,000 shares of Common Stock of the Company  exercisable for
     ten years at $0.12 per share.

     On March 1, 2002,  the Company  granted an option to a director to purchase
     450,000  shares  of its  Common  Stock  for  financial  officer  consulting
     services  rendered.  The warrant is exercisable for ten years from the date
     of the grant at $0.12 per share.

     On March 4, 2002, the Company received  proceeds in a private  placement of
     $100,000 from its chief executive officer,  through an affiliated  business
     entity of that individual.  Of the $100,000 proceeds,  $30,000 was invested
     in exchange for  warrants to purchase an  aggregate of 2,250,000  shares of
     Common Stock of the Company at the then  current  market price of $0.12 per
     share;  and  $70,000  was  invested  as an  exercise  of  certain  of those
     warrants.  Each of the warrants purchased is exercisable for a short period
     of time as follows:  Warrant 1 for 416,666  shares  exercisable to April 4,
     2002;  Warrant 2 for 416,666 shares  exercisable to May 4, 2002;  Warrant 3
     for  416,667  shares  exercisable  to June 4, 2002;  Warrant 4 for  416,667
     shares   exercisable  to  July  4,  2002;  Warrant  5  for  416,667  shares
     exercisable to August 4, 2002; and Warrant 6 for 416,667 shares exercisable
     to September 4, 2002. If Warrants  Nos. 1, 2 and/or 3 or a portion  thereof
     are exercised  prior to their  expiration  dates,  investor will be granted
     replacement  warrants to purchase  416,666 shares  exercisable for 6 months
     from  the  date of each  exercise  at  $0.12  per  share.  Of the  $100,000
     proceeds,  $70,000 was  through the full  exercise of Warrant 1 for 416,666
     shares and partial exercise of Warrant 2 for 166,667 shares.  In accordance
     with the terms of each  warrant,  the Company  issued the investor  416,666
     plus 166,667  restricted  shares of Common  Stock of the  Company,  and two
     replacement  warrants to purchase an additional  416,666 and 166,667 shares
     of Common Stock of the Company at $0.12 per share, each warrant exercisable
     for 6 months  from  date of  grant.  Subsequently,  on April  15,  2002 the
     remainder of Warrant 2 was exercised  for 249,999  shares and Warrant 3 was
     exercised for 416,667 shares. In accordance with the terms of each warrant,
     the Company issued the investor 249,999 plus 416,667  restricted  shares of
     Common  Stock of the  Company and two  replacement  warrants to purchase an
     additional  249,999  and 416,667  shares of Common  Stock of the Company at
     $0.12 per share, each warrant  exercisable for 6 months from date of grant.
     Further,  on May 10, 2002, investor exercised Warrant 4 for 416,667 shares,
     Warrant 5 for 416,667  shares,  Warrant 6 for 416,667  shares and Warrant 7
     for 416,666 shares and, accordingly,  1,666,667 restricted shares of Common
     Stock were issued to investor.

     On March 7, 2002, the Company received  proceeds in a private  placement of
     $200,000 from a director. Of the $200,000 proceeds, $90,000 was invested in
     exchange  for  warrants to purchase an  aggregate  of  7,500,000  shares of
     Common Stock of the Company at the then  current  market price of $0.12 per
     share, and $110,000 was invested as an exercise of certain warrants granted
     on February 5, 2002.  Each of the warrants  purchased is exercisable  for a
     short period of time as follows: Warrant 1 for 1,250,000 shares exercisable
     to September  15,  2002;  Warrant 2 for  1,250,000  shares  exercisable  to
     October 15, 2002;  Warrant 3 for 1,250,000  shares  exercisable to November
     15, 2002;  Warrant 4 for 1,250,000 shares exercisable to December 15, 2002;
     Warrant 5 for 1,250,000 shares exercisable to January 15, 2003; and Warrant
     6 for 1,250,000  shares  exercisable to February 15, 2003. If Warrants Nos.
     1, 2 and/or 3 or a portion thereof are exercised prior to their  expiration
     dates,  investor will be granted replacement warrants to purchase 1,250,000
     shares exercisable for 6 months from the date of each exercise at $0.12 per
     share. Of the $200,000 proceeds,  $110,000 was through the full exercise of
     a warrant granted February 5, 2002 for 1,100,000 shares at $0.10 per share.
     In  accordance  with the  terms of the  warrant,  the  Company  issued  the
     investor 1,100,000  restricted common shares, and a replacement  warrant to
     purchase an additional  1,100,000  shares of Common Stock of the Company at
     $0.10 per share, such warrant exercisable for 6 months from date of grant.

<PAGE> 100

     On March 8, 2002, a Series A preferred shareholder converted 2,000 Series A
     preferred shares into 35,294 shares of Common Stock of the Company at $1.70
     per share.

     On March 8, 2002, the holder of Convertible  Debenture F converted $150,000
     into  714,286  shares of Common  Stock at $0.21  per share and  elected  to
     receive  22,381  shares of Common  Stock of the  Company in lieu of accrued
     cash dividends of $4,700.

     On March 18, 2002,  Series B preferred  shareholders  converted 24 Series B
     preferred  shares  into  375,000  shares of Common  Stock of the Company at
     $0.064 per share.  The  preferred  shareholders  elected to receive  54,286
     shares of Common  Stock of the  Company at $0.064 in lieu of  accrued  cash
     dividends of $3,474.24.

     On May 3,  2002,  the  holder of  Convertible  Debenture  F  converted  the
     remaining  balance of $350,000  into  1,169,787  shares of Common  Stock at
     $0.2992 per share and elected to receive  47,571  shares of Common Stock of
     the Company in lieu of accrued cash dividends of $14,233.

     On May 8, 2002, the Company  granted a warrant to purchase 50,000 shares of
     its Common Stock to a  consultant  for  services  rendered.  The warrant is
     exercisable  for three  years from the date of grant at $0.40 per share and
     vests immediately.

     On May 23,  2002,  the Company  entered  into a Demand  Reserves  Authority
     Provider  Agreement  with the California  Consumer  Power and  Conservation
     Authority to implement a satellite-based (using Iridium capacity) automated
     conservation  system designed to conserve  significant  electrical usage on
     demand at peak or emergency time.