10-Q 1 a4331037.txt MSU DEVICES 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-Q (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2002 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from ______________to___________________ Commission File Number: 33-28622-A MSU Devices Inc. (Exact name of registrant as specified in its charter) Delaware 22-2748288 (State or other jurisdiction of (I R S Employer I D No) incorporation or organization) 2901 North Dallas Parkway, Suite 460, Plano, Texas 75093 (Address of principal executive offices) 972-473-6915 (Registrant's telephone number, including area code) Indicate by check mark whether Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period as the Registrant 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes _____ No __X___ The number of shares of common stock of the Registrant outstanding as of December 31, 2002 was 66,270,754. 1

5 MSU DEVICES INC. Notes to Unaudited Condensed Consolidated Financial Statements NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all normal recurring adjustments necessary to present fairly the financial position of MSU Devices, Inc. and its subsidiaries (collectively the "Company") as of December 31, 2002, and the results of its operations for the three and six months ended December 31, 2002 and 2001, and its cash flows for the six months ended December 31, 2002 and 2001. The consolidated financial statements include the accounts of MSU Devices, Inc., MSU Devices Ltd. and Web 2 U Limited. All significant inter-company accounts and transactions have been eliminated in the consolidated financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted in accordance with instructions to Form 10-Q and interim reporting rules. These condensed financial statements should be read in conjunction with the Company's annual report on Form 10-K for the fiscal year ended June 30, 2002. The results of operations for the three and six months ended December 31, 2002 are not necessarily indicative of the operating results that may be expected for the fiscal year ending June 30, 2003. NOTE 2 - ACCOUNTING FOR IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144 (SFAS 144), Accounting for Impairment or Disposal of Long-Lived Assets. SFAS 144 is effective for fiscal years beginning after December 15, 2001. During the second quarter of fiscal year 2003, the Company recorded an approximate $55,000 charge related to asset impairment. Based on the Company's current business plan, the impairment charge related to assets which had no remaining useful life. NOTE 3 - SHAREHOLDERS' DEFICIT During the six months ended December 31, 2002, there was a decrease in shareholders' equity of approximately $1.0 million . Net loss for the six-month period was approximately $2.3 million. The cumulative other comprehensive income adjustment decreased by approximately $44 thousand due to the change in the foreign exchange rates. Common stock and additional paid-in capital increased by approximately $3.5 million due to the conversion of approximately $2.1 million of special warrants and a beneficial conversion feature of the convertible notes totaling approximately $1.3 million. During the six month period, the Company converted Canadian Special Warrants into 11.8 million shares of common stock, which included approximately 1.0 million shares issued as a penalty for the Company's failure to qualify such warrants and the underlying common stock for resale in Canada. The Company also issued approximately 1.0 million shares of common stock to non-Canadian former 10% note holders to compensate for the Company's failure to register such shares for resale in the United States. 6 NOTE 4 - LOSS PER COMMON SHARE AND POTENTIAL DILUTION The basic and diluted net losses per common share are computed based upon the weighted average of the shares outstanding during the period. Dilutive net loss per common share is the same as basic net loss per common share since the inclusion of all potentially dilutive common shares that would be issuable upon the exercise of outstanding stock options and warrants or upon the conversion of convertible debt would be anti-dilutive. Approximately 6 million shares of common stock are issuable upon the exercise of currently exercisable options. Approximately 78 million shares of common stock are issuable upon the exercise of currently outstanding warrants and approximately 114 million shares of common stock are issuable upon the conversion of currently outstanding convertible promissory notes. NOTE 5 - GOING CONCERN The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Since its inception, the Company has continued to incur losses from operations that, to date, total approximately $41 million. Net cash used in operating activities during the six month period was approximately $0.7 million. The shareholders' deficit at December 31, 2002 totals approximately $4.1 million. Promissory notes and accrued interest of approximately $2.3 million matured on December 31, 2002. Under the conditions described in Note 7, the notes can converted to common stock at the rate of 50 shares per dollar. The conditions were not met, so the holders of the notes can elect to exercise their first priority lien on the assets of the Company, including assets and intellectual property. These factors, among others, may indicate the Company will be unable to continue as a going concern for a reasonable period of time. The accompanying consolidated financial statements do not include any adjustments relating to the outcome of this uncertainty. There is no assurance that the Company will be able to continue to raise funding for operating activities in the future. Future liquidity will be provided by attempts at additional fund raising along with the generation of a steady revenue stream. NOTE 6 - CONVERTIBLE PROMISSORY NOTES In February 2002, the Company issued $637,500 10% convertible promissory notes ("10% Promissory Notes") to accredited investors, which were to mature on July 31, 2002. Of that total, $500,000 was issued to a related party. The 10% Promissory Notes were secured by all of the assets of the Company. In March 2002, the Company issued $838,500 of 11.5% convertible promissory notes ("11.5% Promissory Notes"), which were unsecured. Of the total amount, $637,500 of the 11.5% Promissory Notes were issued in exchange for the $637,500 of 10% Promissory Notes mentioned above, and the 10% Promissory Notes and related agreements were terminated. In addition, the Company issued approximately $49,000 in an 11.5% in a convertible promissory note to an individual for services rendered in the Company's financing. The covenants of the 10% Promissory Notes, were replaced by the 11.5% Promissory Notes. Under the original covenants of the 11.5% Promissory Notes, the Company was required to raise an additional $1.163 million under the following schedule: at least $250,000 not later than April 1, 2002; an additional $412,500 not later than April 15, 2002; and an additional $500,000 not later than May 10, 2002. On April 4, 2002, the Company received an extension of the dates by which it was required to obtain additional financing under the terms of the 11.5% Promissory Notes. Pursuant to an agreement with holders of a majority in principal amount of the notes issued under the unsecured financing, each of these dates was extended by 30 calendar days so that the additional $1,162,500 could be received by the Company as follows: at least $250,000 not later than May 1, 2002; $412,500 not later than May 15, 2002; and $500,000 not later than June 10, 2002. No other terms of the unsecured loan financing were affected by the extension. In the event the Company did not raise these additional funds it would be in default and the note holders could accelerate the maturity of the 11.5% Promissory Notes. If the Company did not raise the funds required to be received by May 15, 2002, the holders of the 11.5% Promissory Notes could elect to secure their notes by a first priority lien on the assets of the Company, including intangible assets and intellectual property. 7 On April 18, 2002, the Company and the holders of a majority of the outstanding 11.5% Promissory Notes agreed to extend the maturity date of the 11.5% Promissory Notes from July 31, 2002 to September 30, 2002. The Company raised the additional funds required by May 15. In so doing, the Company agreed to amend the terms of the 11.5% Promissory Notes to secure all of such Notes by a first priority lien on the assets of the Company, including intangible assets and intellectual property. On September 23, 2002, the major terms and conditions of all of the 11.5% Note Purchase Agreements, as amended, were changed as follows: 1. The due date of the 11.5% Promissory Notes was changed to December 31, 2002 and the Company agreed to continue to market the 11.5% Promissory Notes issue so long as the maximum amount of the 11.5% Promissory Notes allowed under the 11.5% Note Purchase Agreements of $3 million has not been reached. At December 31, 2002 the principal amount of the 11.5% Promissory Notes outstanding was approximately $2.1 million. 2. The Company's 11.5% Promissory Notes and Paid Equity Warrants sold since December 2001 became convertible immediately into common shares of the Company at $0.02 per common share, or 50 common shares per $1.00 invested, pursuant to anti-dilution clauses and pursuant to at least 80% of the 11.5% Promissory Notes in the current $250,000 round and previous $150,000 round of financing being raised from holders of Paid Equity Warrants and the 11.5% Promissory Notes. 3. The 11.5% Promissory Notes are convertible at the conversion rate described above into common shares at the option of MSU Devices if the Company successfully completed the following: - Conversion of the Paid Equity Warrants at the conversion price described above. - Conversion of at least 70% of the Company's current U.S. accounts payables outstanding of approximately $600,000, and current long-term debt of approximately $918,000 into common shares at a price of $0.02 per common share, or 50 common shares per $1.00 of indebtedness. - Convenes a shareholder meeting no later than December 31, 2002 and obtains shareholder approval to: (i) increase the authorized capital of the company to allow for the conversions outlined above, and (ii) reverse splits the common stock of the Company such that after the reverse split, assuming all account payables, 11.5% Promissory Notes, long-term debt and Paid Equity Warrants are converted into common shares, there will be no more than 5 million outstanding common shares. The shareholder meeting did not occur. 8 - Obtains shareholder approval for an employee stock option plan for a maximum of 750,000 share options. If the Company's U.S. accounts payables (approximately $600,000), 11.5% Promissory Notes (approximately $2.1 million outstanding), long-term debt (approximately $943,000) and Paid Equity Warrants ($1.2 million) are converted into common shares, the Company will have on a fully diluted basis between 300 and 360 million common shares outstanding which would suggest a reverse split ratio of approximately 60-70 existing shares for every common share in order to arrive at a maximum of 5 million shares outstanding after the reverse split outlined above. In connection with the beneficial conversion feature granted to the holders of the 11.5% Promissory Notes related to the amendment on September 23, 2002, the company recorded an approximately $1.3 million charge for the beneficial conversion feature. Since the Company did not meet the terms and conditions of the 11.5% Note Purchase Agreements, the holders of the 11.5% Promissory Notes can accelerate the maturity of the 11.5% Promissory Notes and can elect to exercise their first priority lien on the assets of the Company, including intangible assets and intellectual property. The security pledged to the 11.5% Promissory Notes will remain in effect until the Company has satisfied all the terms and conditions of the 11.5% Note Purchase Agreements. In the fiscal year ending June 30, 2002, the Company issued approximately $ 1.5 million in 11.5% Promissory Notes. In the fiscal quarters ending September 30, 2002 and December 31, 2002, the Company issued approximately $325,000 and $320,000 in 11.5% Promissory Notes. In the fiscal quarter ending December 31, 2002, the Company issued approximately $320,000 in 11.5% Promissory Notes. The 11.5% Promissory Notes matured on December 31, 2002. The outstanding principal amount, together with accrued interest, was due to be paid on that date, and the Company did not pay such amounts. NOTE 7 - SUBSEQUENT EVENTS As of January 31, 2003, the Company is in default on approximately $2.1 million of secured 11.5% Promissory Notes and approximately $943,000 of long-term debt. Consequently, the holders of both of these issues of notes can accelerate the maturity of their notes. The holders of the secured 11.5% Promissory Notes can elect to exercise their first priority lien on all the Company's assets, including intangible assets and intellectual property. In such event, we could not conduct business and would cease to exist as a going concern. The holders of the long term debt can also accelerate the maturity of the their notes, and their claims against the Company will be subordinate to those of the 11.5% Promissory Notes. Due to the difficulty of reaching compromise agreements with certain creditors, the Company has been considering, and may in the very near future, seek to reorganize under Chapter 11 of the Bankruptcy Code (Chapter 11 of Title 11 of the United States Code). If the Company were to complete a reorganization successfully, it anticipates it would continue as a going concern, at least for a limited period of time, after emerging from bankruptcy. The Company is actively pursuing additional capital that would fund its operations during a reorganization and for at least for a limited period of time after emerging from bankruptcy. There can be no assurance that such liquidity requirements will be met or that the Company will be able to continue as a going concern. 9 The filing of a Chapter 11 petition would suspend the Company's obligations to pay principal and interest on both the 11.5% Promissory Notes and the long term debt during the reorganization proceeding. In a successful reorganization, the Company anticipates its obligations to pay the outstanding principal and any accrued interest on both the 11.5% Promissory Notes and the long term debt would be eliminated by exchanging them for newly-issued shares of the Company's common stock. The secured 11.5% Promissory Notes matured on December 31, 2002. The outstanding principal amount, together with accrued interest, was due to be paid on that date, and the Company did not pay, and, as of January 31, 2003, still has not paid, such amounts. The long-term debt was issued in the restructuring of the Company's UK operations. The debt matures December 31, 2006. Accrued interest was due and payable on such debt on December 31, 2002, and the Company did not pay, and, as of January 31, 2003, still has not paid, such interest. Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Overview of Business Operations Forward Looking Statements This quarterly report on Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Act"), and Section 21E of the Securities Exchange Act of 1934, as amended, which can be identified by the use of forward-looking terminology such as, "may," "expect," "could," "plan," "seek," "anticipate," "estimate," or "continue" or the negative thereof or other variations thereon or comparable terminology. These forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those referred to in the forward-looking statements and are made pursuant to the "safe-harbor" provisions of the Private Securites Litigation Reform Act of 1995. These statements are made based on management's current expectations or beliefs as well as assumptions made by, and information currently available to, management. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors with respect to any such forward-looking statements, including certain risks and uncertainties that could cause actual results to differ materially from the Company's expectations ("Cautionary Statements"), are disclosed in this report on Form 10-Q and other filings made by the company pursuant to the securities exchange act of 1934. 10 In addition, a variety of factors could cause actual results to differ materially from those anticipated in the Company's forward-looking statements, including the following factors: Failure to resolve the two debt defaults described in the first risk factor below, failure to initiate or complete the chapter 11 reorganization described in the second risk factor below, market acceptance of existing and new products, difficulties in developing and marketing new products, competition from other products and technologies, access to capital, changes from anticipated levels of sales, and future national and international economic and competitive conditions. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Company does not undertake any obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should carefully review the risk factors described in this report and in other reports and documents the Company files from time to time with the Securities and Exchange Commission. FACTORS AFFECTING OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CONSIDER CAREFULLY THE FOLLOWING RISKS AND ALL OTHER INFORMATION CONTAINED HEREIN, INCLUDING OUR FINANCIAL STATEMENTS AND RELATED NOTES, BEFORE MAKING AN INVESTMENT DECISION. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES FACING OUR COMPANY. ADDITIONAL RISKS AND UNCERTAINTIES THAT WE DO NOT PRESENTLY KNOW OR THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO IMPACT OUR BUSINESS OPERATIONS. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, THEY COULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS. IN THAT CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE. 11 RISKS RELATED TO OUR BUSINESS We are in default on approximately $3.1 million of debt As of January 31, 2003, we are in default on approximately $2.1 million of secured 11.5% Promissory Notes and approximately $943,000 of long-term debt. Consequently, the holders of both of these issues of notes can accelerate the maturity of their notes. The holders of the secured 11.5% Promissory Notes can elect to exercise their first priority lien on all of our assets, including intangible assets and intellectual property. In such event, we could not conduct business and would cease to exist as a going concern. The holders of the long term debt can also accelerate the maturity of the their notes, and their claims against us will be subordinate to those of the 11.5% Promissory Notes. The secured 11.5% Promissory Notes matured on December 31, 2002. The outstanding principal amount, together with accrued interest, was due to be paid on that date, and we did not pay, and, as of January 31, 2003, still have not paid, such amounts. The long-term debt was issued in the restructuring of our UK operations. The debt matures December 31, 2006. Accrued interest was due and payable on such debt on December 31, 2002, and we did not pay, and, as of January 31, 2003, still have not paid, such interest. We are considering reorganizing under Chapter 11 of the Bankruptcy Code Due to the difficulty of reaching compromise agreements with certain creditors, we have been considering, and may in the very near future, seek to reorganize under Chapter 11 of the Bankruptcy Code (Chapter 11 of Title 11 of the United States Code). If we were to complete a reorganization successfully, we anticipate we would continue as a going concern, at least for a limited period of time, after emerging from bankruptcy. We are actively pursuing additional capital that would fund our operations during a reorganization and for at least for a limited period of time after emerging from bankruptcy. There can be no assurance that such liquidity requirements will be met or that we will be able to continue as a going concern. The filing of a Chapter 11 petition would suspend our obligations to pay principal and interest on both the 11.5% Promissory Notes and the long term debt during the reorganization proceeding. In a successful reorganization, we anticipate our obligations to pay the outstanding principal and any accrued interest on both the 11.5% Promissory Notes and the long term debt would be eliminated by exchanging them for newly-issued shares of our common stock. We have incurred significant net losses and may never achieve profitability. We have incurred significant operating losses and are uncertain about our future operating results. For the six months ended December 31, 2002, we incurred a net loss of approximately $2.3 million. At December 31, 2002, we had an accumulated deficit of approximately $40.7 million and a deficit in stockholders' equity of approximately $4.1 million. 12 We need to generate and sustain substantially greater revenues from sales of our product and services if we are to achieve profitability. If we are unable to achieve these greater revenues, our losses will continue indefinitely, and we may never generate profits. If this occurs, the market price of our common stock may not recover. Our ability to continue as a going concern is uncertain. The auditors' report on our consolidated financial statements for the fiscal year ended June 30, 2002 states that because of our significant losses from operations, accumulated deficit, negative cash flows and limited revenues, among other factors, there is substantial doubt about our ability to continue as a going concern. This "going concern" opinion could adversely affect our ability to sell our products, to attract and retain strategic relationships and to obtain additional financing. In addition, the two debt defaults described in the first risk factor could result in our ceasing to be a going concern. In addition, the failure to restructure our debt into equity through a Chapter 11 reorganization or through an out-of-court settlement with our creditors could cause us to no longer be a going concern. Our long-term viability as a going concern is dependent on a number of factors, including: - our ability to resolve successfully the two debt defaults; - our ability to restructure our debt into equity through a Chapter 11 reorganization or through an out-of-court settlement with our creditors; - our ability to obtain adequate sources of debt or equity financing to meet current commitments and fund our continued operations; - our ability to develop a viable business through the sale of our MSU V5 Internet appliance products; and - our ability to develop a viable business through the sale of our engineering and software services; and - our ability to achieve profitability and cash flows from operations in amounts that will sustain our operations. Our cash resources may be insufficient to operate or grow our business. We have only just begun to derive revenue from sales of our products and engineering and software services. As a result, historically, we have been dependent on debt and equity raised from individual investors and related parties to sustain our operations. As of December 31, 2002, we had cash and cash equivalents in the amount of $28,000. We do not believe we have sufficient cash resources to finance our operations and expected capital expenditures for the remainder of fiscal year 2003. Our future capital requirements will depend on several factors, including the rate of the market acceptance of our products, our ability to expand our customer base, our level of expenditures for sales and marketing and the cost of product upgrades. The sufficiency of our cash resources may also depend to a certain extent on general economic, financial, competitive and other factors beyond our control. Moreover, we expect our operating losses and net operating cash outflows to continue during the fiscal year 2003. As a result, we do not believe we will be able to achieve the revenue and gross margin objectives necessary to achieve positive cash flow or profitability without obtaining additional financing. Although we are actively pursuing additional sources of capital to fund our operations, we may not be able to secure additional debt or equity financing on terms acceptable to us, or at all. If our business does not generate sufficient cash flow from operations and sufficient future financings are not available, we may not be able to operate or grow our business, pay our expenses when due or fund our other liquidity needs. 13 Our MSU V5 Internet appliance products may not gain broad market acceptance. We expect to derive a significant portion of our revenues for the foreseeable future from sales of our MSU V5 Internet appliances, which may not achieve market acceptance, and from the sale of engineering and software services related primarily to software development work-for-hire agreements with third-party hardware vendors for the Windows CE family of operating systems. To date, we have earned an insignificant amount of revenues from sales to a limited number of customers. We cannot predict when sales will generate sufficient revenue to operate our business, if ever. A number of factors will determine whether we will achieve market acceptance, including: - the success of our sales and marketing efforts for our Internet appliances and our engineering and software services; - the quality and ease of use of our product over other Internet access devices; - the cost, performance and functionality of our products and services; - the success of our strategic relationships; and - the continued acceptance of the Internet as a medium for communication, commerce and entertainment. The market for Internet appliances is new and is evolving rapidly. As the market develops, consumers and businesses may not choose our products. As a result, we cannot predict when our products will achieve market acceptance, if ever. If our products do not achieve or maintain market acceptance, or if market acceptance develops more slowly than expected, our business, operating results and financial condition will be adversely impacted. The average selling price of our products may decline due to a number of factors, including: - competitive pricing pressures; - rapid technology changes; - sales discounts; and - our agreements with third party distributors. Our ability to maintain or increase revenues will depend upon our ability to increase sales volumes of existing products and engineering services and to develop and introduce new products and product enhancements in quantities sufficient to offset declines in sales prices. We must also continually reduce our product costs. Our efforts to reduce costs and develop new products to offset further declines in average sales prices may not be successful. If our average selling price declines more rapidly than our costs, our gross margins will decline, which could adversely impact our business and results of operations. 14 We face intense competition. The Internet access market is very competitive. Our MSU V5 Internet appliance product family faces competition from the following: - manufacturers and suppliers of other stand-alone Internet appliance platforms such as Compaq Computer Corporation, New Internet Computer Co., NetGem SA and Sony Corporation; - thin client workstations manufacturers such as IBM Corporation, Wyse Technology, Inc. and Neoware Systems, Inc.; and - manufacturers of name brand PCs, such as Apple Computer, Dell Computer Corporation, Gateway, Inc., Hewlett-Packard Company and IBM Corporation, as well as "white" box PC manufacturers. In addition, as the market for Internet access devices develops, we expect that brand name companies will attempt to develop and launch their own intelligent computing devices. We also expect to face increased competition from PCs and from numerous other products that offer connectivity to the Internet. Additionally, companies with significant market presence in the computer hardware, software and networking industry may enter the markets in which we compete to further intensify competition. Many of the companies with which we compete have an established market presence, relationships with manufacturers, Internet service providers and retailers who will develop and market their products. In addition, our competitors may have significantly greater financial, marketing and technical resources than we do. If we are unable to compete effectively in this market, our business and prospects will suffer. Additionally, the announcement of the release, and the actual release, of products competitive with our existing and future product lines, could cause our existing and potential customers to postpone or cancel plans to purchase any of our existing and future product offerings, which would adversely impact our business, results of operations, and financial condition. Our entry into providing engineering and software services is untested and may not provide the revenue stream necessary to support the business. Our success depends on our ability to attract and retain key personnel. Our future success depends on our ability to attract, hire, train and retain a substantial number of highly skilled personnel and on the continued service and performance of our senior management team. The loss of the services of our executive officers or other key employees could adversely affect our business. In addition, we will need to add a significant number of new technical support and operations personnel to develop and maintain our business. Competition for qualified personnel in the technology industry is intense, and we may fail to attract or retain the employees necessary to execute our business model successfully. 15 We must increase our direct sales force and the distribution channels for our products. Our sales and marketing strategy is to utilize our direct sales force as well as strategic alliances with distributors, independent agents, system integrators, value added resellers and Internet service providers to increase sales of our products. We are currently developing sales, distribution and marketing capabilities in the United States and internationally. It is expensive and time-consuming for us to develop a global marketing and sales force and strategic relationships. We may not be able to provide adequate incentives to our sales force or to establish strategic relationships with other companies to sell, market or distribute our products on acceptable terms, if at all. If we are unable to successfully hire, motivate, retain and expand our sales force and further develop our sales and marketing capabilities, if we fail to establish strategic relationships, or if our strategic partners fail to promote our products, we will have difficulty maintaining and increasing our revenues and market awareness of our products. We must respond to rapid technological change and evolving industry standards to remain competitive. The Internet access and consumer electronics industries are characterized by rapidly changing technology, evolving industry standards and frequent introductions of new products. The broad array of competing and incompatible emerging technologies may lead consumers to postpone buying decisions until one or more of such technologies gain widespread acceptance. Our success will depend upon our ability to anticipate such technological changes, adapt our products and introduce competitive products and features that meet changing customer requirements and remain competitive in terms of price and product performance. Technological developments or products introduced by our competitors could cause our existing or future products to become obsolete which could adversely affect the market acceptance of our products and our revenues. We cannot accurately predict the extent of our future revenues. Our revenues and net income, if any, in any particular period may be lower than revenues and net income, if any, in a preceding or comparable period. This complicates our planning processes and reduces the predictability of our earnings. As a result, period-to-period comparisons of our results of operations may not be meaningful, and you should not rely upon them as indicators of our future performance. Our quarterly operating results may fluctuate due to the following factors, many of which are outside our control: - changes in composition of revenue between products and services; - occurrence and timing of new product introductions or enhancements by us or our competitors; - development and distribution arrangements with third parties; - research and development expenditures; - seasonal demand for consumer electronic products; and - consumer preferences. 16 Product defects may harm our business and reputation. Consumer electronics containing computer operating systems, including Internet access devices, frequently contain errors or bugs. We have detected and may continue to detect errors and product defects in connection with new releases and upgrades of our Internet access device. Despite our internal testing and testing by current and potential customers, errors may be discovered after our products or related software and tools are installed and used by customers. These errors could result in reduced or lost revenue, delay in market acceptance, diversion of development resources, damage to our reputation, or increased service and warranty costs, any of which could adversely affect our business and results of operations. Our products must successfully integrate with products from other vendors, such as third party software applications and consumer electronics hardware. As a result, when problems occur in a device or network using our product, it may be difficult to identify the source of the problem. The occurrence of hardware and software errors, whether caused by our products or another vendor's products, may result in reduced market acceptance of our products, and any necessary product revisions may force us to incur significant expenses. The occurrence of these problems could materially adversely affect our business and results of operations. We provide our customers with a six-month warranty period for defects in workmanship on the entire product and a twelve-month warranty period for defects in workmanship related to the electrical components of the product. A significant number of warranty claims could have a material adverse effect on future operating results. Although we carry general liability insurance, our insurance may not be adequate to indemnify us for all product defect liabilities. Any claims resulting in liability that is not covered by insurance or is in excess of insurance coverage, could occupy significant amounts of our management's time and attention, harm our reputation and negatively affect our business. We must adequately protect our intellectual property. Historically, we have not filed patents to protect our intellectual property. We believe we have adequately protected our intellectual property through a combination of trade secrets, copyrights and trademark laws as well as non-disclosure and confidentiality agreements. However, these measures provide only limited protection, and we may not be able to detect unauthorized use and take appropriate steps to enforce our intellectual property rights. If our protection of our intellectual property proves to be inadequate or unenforceable, others may be able to use our proprietary developments without compensation to us, resulting in potential cost advantages to our competitors. We do not know of any instances where our products violate the intellectual property rights of others or inappropriately use their technology. However, there has been an increasing amount of litigation in the Internet industry regarding intellectual property rights. It is possible that third parties may in the future claim that our product infringes upon their intellectual property rights. We could be subject to infringement claims as the number of products, services and competitors in our market grows. Any claim, with or without merit, could consume our management time, result in costly litigation, cause delays in implementation of our product or require us to enter into royalty or licensing agreements. Royalty or licensing agreements, if required and available, may be on terms unacceptable to us or detrimental to our business. Moreover, a successful claim of product infringement against us or our failure or inability to license the infringed or similar technology on commercially reasonable terms could seriously harm our business. 17 We face risks associated with international sales and operations that could harm our company's international operations. International sales are subject to inherent risks, including: - unexpected changes in international regulatory requirements and tariffs; - difficulties in staffing and managing foreign operations; - longer payment cycles; - greater difficulty in accounts receivable collection; - potentially adverse tax consequences; - price controls or other restrictions on foreign currency; and - difficulties in obtaining export and import licenses. These risks could materially and adversely affect our overall business, operating results and financial condition as we continue our international operations. Fluctuations in the exchange rate of foreign currencies could negatively affect our business. Our international operations will subject us to various government regulations, export controls and the normal risks involved in international operations and sales. Our operating subsidiary in the United Kingdom conducts business in pounds sterling. Any decline in the value of the pound sterling against the US dollar will have the effect of decreasing our earnings when stated in US dollars. In addition, the relative strength of the US dollar versus other foreign currencies may affect the price of our products when compared to those of our competitors. As our international operations expand, we expect to use an increasing number of foreign currencies, causing our exposure to currency rate fluctuations to increase. We currently do not engage in any hedging transactions that might have the effect of minimizing the consequences of currency fluctuations. As a result, currency exchange rate fluctuations could seriously harm our business, operating results and financial condition. We may be unable to manage future growth. To succeed in implementing our business strategy, we must rapidly execute our sales and marketing strategy, further develop and enhance our product, product support capabilities, and our engineering and software services and implement effective planning and operating processes. If this rapid growth occurs, it will place significant demands on our management and our operational resources. To manage any anticipated growth we must: - establish and manage multiple relationships with our manufacturers, clients and other third parties; - continue to implement and improve our operational, financial and management information systems; and - hire, train and retain additional qualified personnel. 18 Our systems, procedures and controls may not be adequate to support our operations, and our management may not be able to perform the tasks required to capitalize on market opportunities for our product and services. If we fail to manage our growth effectively, our business could suffer materially. We have incurred a substantial amount of debt that matures in a relatively short period of time. As of December 31, 2002, we have issued approximately $2.1 million of secured notes bearing an interest rate of 11.5%. We did not repay the principal of, and accrued interest on, these notes on December 31, 2002 and we are in default. Our performance is subject to many financial, economic, business and other factors affecting our operations, many of which are beyond our control. If we are unable to generate sufficient cash flow from operations to meet our future repayment obligations, we may be required to refinance these notes or to obtain additional financing. We may be unable to obtain such refinancing or additional financing on acceptable terms, if at all. Additionally, at any time, the holders can elect to convert all principal and interest due under the notes into 50 shares of our common stock for each $1 invested, which could result in substantial dilution of our stockholders. We rely on one third-party manufacturer. We outsource all of our manufacturing to a contract manufacturer, Biostar Microtech International Corporation in Taiwan who builds our product under license. We depend on Biostar to produce sufficient volume of our products in a timely fashion and at satisfactory quality levels. In addition, we rely on Biostar to place orders with suppliers for the components it needs to manufacture our products. If Biostar fails to produce quality products on time and in sufficient quantities, our reputation and results of operations would suffer. Our reliance on Biostar exposes us to the following risks outside our control: - unexpected increases in manufacturing costs; - interruptions in shipments if our manufacturer is unable to complete production; - inability to control quality of finished device products; - inability to control delivery schedules; - unpredictability of manufacturing yield; - potential lack of adequate capacity; and - potential inability to secure adequate volumes of components. Shortages of components and materials may delay or reduce our sales and increase our costs. The inability of us or our manufacturer to obtain sufficient quantities of components or other materials necessary for the production of our products could result in reduced or delayed sales or lost orders. Any delay in, or loss of, sales could adversely impact our operating results. While we believe that many of the materials used in the production of our products are generally readily available from a variety of sources, certain components, such as the x86 National Semiconductor Geode GX1 processors we use in our products, are available from one or a limited number of suppliers. Any interruption in the supply of any of these components, or the inability of MSU or the manufacturer to procure these components from alternative sources at acceptable prices within a reasonable time, could have an adverse affect on our business and operating results. 19 RISKS RELATED TO OUR INDUSTRY The market for Internet appliances is new and may not develop as we anticipate. Our business and prospects are highly dependent on broad market acceptance of Internet appliances for access to a wide variety of Internet-based applications. The Internet appliance market is new and evolving. As a result, the potential size of this market opportunity and the timing of its development are uncertain. Broad acceptance of Internet appliances by consumers and business will depend on factors such as: - the perceived advantages of Internet appliances over other Internet access devices such as personal computers, PDA's and wireless phones; and - the development of content and applications that are accessible from Internet appliances. Our business and prospects depend on the development and market acceptance of Internet appliances and our ability to successfully market our Internet access device to potential strategic partners. The market for Internet appliances may develop at a slower rate than we anticipate or may not develop to the level we expect. If the market for Internet appliances does not develop or develops more slowly than we anticipate, our revenues will not grow as quickly as we anticipate, if at all. Sales of our products depend on the continued growth in the use of the Internet. Because our products are primarily Internet access devices, our revenues depend on the increased use and acceptance of the Internet as a medium for communication, commerce and entertainment. Rapid growth in the use of the Internet is a recent phenomenon. As a result, its acceptance and use may not continue at historical rates, and a sufficient number of customers may not adapt or continue to use the Internet as a medium for communication, commerce and entertainment. A decrease in the demand for Internet services or a reduction in the anticipated growth for Internet services may prevent us from expanding our business and increasing our revenue. Government regulation and legal uncertainties regarding the Internet could harm our business. The adoption of new Internet laws and regulations or the application of existing laws and regulations to the Internet and e-commerce may decrease the growth in the use of the Internet. For example, tax authorities in a number of states are currently reviewing the appropriate tax treatment of companies engaged in e-commerce, and new state tax regulations may subject consumers to additional state sales or other taxes when purchasing products over the Internet. These laws and regulations could decrease the use of the Internet as a means of commerce, which, in turn, could result in a decrease in the demand for our products or an increase in our cost of doing business. 20 RISKS RELATED TO OWNING OUR STOCK Our common stock is subject to the Penny Stock Rule. Our common stock currently trades on the OTC Bulletin Board and is considered a "penny stock". The SEC has adopted regulations that define penny stocks as securities with a price of less than $5.00 per share other than securities registered on certain national securities exchanges or quoted on the NASDAQ stock market, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. As a result, our securities are subject to "penny stock rules" that impose additional sales practice requirements on broker-dealers who sell penny stock securities to persons other than established customers and accredited investors. For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of penny stock securities and have received the purchaser's written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the "penny stock rules" require the delivery, prior to the transaction, of a disclosure schedule prescribed by the SEC related to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements must be sent disclosing recent price information on the limited market in penny stocks. These regulations may reduce the market liquidity of our securities by limiting the ability of broker/dealers to trade our securities and the ability of purchasers of our securities to sell their securities in the secondary market. The low price of our common stock also has a negative effect on the amount and percentage of transaction costs paid by individual purchasers and our potential ability to raise additional capital by issuing additional shares. The primary reasons for these effects include the internal policies of many institutional investors that prohibit the purchase of low-priced stocks, the fact that many brokerage houses do not permit low-priced stocks to be used as collateral for margin accounts or to be purchased on margin and brokerage house policies and practices that tend to discourage individual brokers from dealing in low-priced stocks. In addition, since broker's commissions on low-priced stocks represent a higher percentage of the stock price than commissions on higher priced stocks, the current low share price of the common stock results in individual purchasers paying transaction costs that are a higher percentage of their total share value than would be the case if the share price were substantially higher. High transaction costs can erode an investor's return on investment. Consequently, both the ability of a broker-dealer to sell our common stock and the ability of holders of our common stock to sell their securities in the secondary market may be adversely affected. Future sales by current stockholders may depress our stock price. Sales of a substantial number of shares of common stock, or even the potential for such sales, could adversely affect the market price of our common stock and could impair our ability to raise capital through the sale of equity securities. As of December 31, 2002, we had outstanding 66,270,754 shares of common stock. Of these shares: - 22,822,747 shares are freely tradable without restriction or further registration under the Securities Act unless purchased by our "affiliates;" and - 43,448,007 shares of common stock are "restricted shares" as defined in Rule 144 of the Securities Act. 21 Furthermore, an additional: - 5,947,667 shares of common stock are issuable upon the exercise of currently exercisable options; - 78,375,000 shares of common stock are issuable upon the exercise of currently outstanding warrants; and - 114,132,926 shares of common stock are issuable upon the conversion of currently outstanding convertible promissory notes and accrued interest. Provisions in our charter documents and Delaware law may deter takeover efforts. Certain provisions of our certificate of incorporation and bylaws, including those related to our ability to offer "blank check" preferred stock, may discourage, delay or prevent a merger or acquisition that a stockholder may consider favorable. We are also subject to Section 203 of the Delaware General Corporation Law which restricts certain business combinations with interested stockholders. The combination of these provisions may inhibit a non-negotiated merger or other business combination. The price of our common stock may fluctuate. The market price of our common stock has been highly volatile in the past and may continue to be volatile in the future. For example, since January 1, 2002, the market price of our common stock on the OTC Bulletin Board has fluctuated between $0.01 and $0.25 per share. The market price of our common stock may fluctuate significantly in response to a number of factors, some of which are beyond our control, including: - variations in our quarterly operating results; - changes in estimates of our financial performance by securities analysts; - changes in market valuations of comparable Internet-related companies; - announcements by us or our competitors of new products, services, significant contracts, acquisitions, strategic relationships, joint ventures or capital commitments; - our inability to locate or maintain suppliers for our product at prices that will allow us to attain profitability; - product or design flaws, product recalls or similar occurrences; - additions or departures of key personnel; - sales of common stock in the future; and - fluctuations in stock market prices and volume, which can be particularly common among Internet-related securities. Our management and larger stockholders exercise significant control over our company. 22 As of December 31, 2002, our executive officers and directors beneficially own, in the aggregate, approximately 15.6 % of our outstanding common stock. As a result, these stockholders will be able to exercise significant control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, which could delay or prevent someone from acquiring or merging with us. These stockholders may use their influence to approve or take actions that may be adverse to your interests. Results of Operations Comparison of the six months ended December 31, 2002 to the six months ended December 31, 2001 follows: Revenue. Revenues for the six months ended December 31, 2002 were approximately $139,000, a significant percentage increase over the prior year. Revenues for the six months ended December 30, 2001 were approximately $36,000. Units sold for the six months ended December 31, 2002 were approximately 725 units. The sales for the six month period ended December 31, 2002 was due primarily to sales to one customer. Unit sales for the six month period ended December 31, 2001 were of an earlier model and were insignificant. Cost of Revenues. Cost of revenues for the six months ended December 31, 2002 were approximately $117,000, and represent the cost of the MSU V5 devices sold. The increase of approximately $89,000 from the corresponding period ending December 31, 2001 is a result of increased sales of product. Research and Development. Research and development expenses generally consist of expenditures related to the Company's development of its hardware and software. For the Six months ended December 31, 2002, research and development expenses of approximately $205,000 were 29% of the level of the six months ended December 31, 2001. The Company's research and development efforts during this period, while significantly reduced, were concentrated on enhancing the software for the MSU V5 device. Selling, general and administrative. Selling, general and administrative expenses of approximately $612,000 for the six months ended December 31, 2002 decreased by approximately $809,000 from $1.4 million. The decrease is primarily due to 1) lower personnel costs as a result of reduced headcount, and 2) lower sales and marketing costs as result of reduced sales activity. Selling, general and administrative expenses principally consist of the cost of employees (other than those dedicated to research and development), advertising and promotional costs which are charged to operations as incurred, communication, rent, occupancy costs and professional fees. In general terms, the Company continues to develop a structured and professional sales and marketing framework to market the current and future products. Interest expense. Interest expense for the six months ended December 31, 2002 decreased by approximately $36,000 from approximately $162,000 in the corresponding period in 2001. The decrease relates to the reduced amount of debt outstanding. Debt conversion expense. In the current six month period, in connection with the beneficial conversion feature granted to the holders of the 11.5% promissory Note related to the amendment on September 23, 2002, the company recorded a charge of approximately $1.3 million. 23 Liquidity and Capital Resources As of January 31, 2003, the Company is in default on approximately $2.1 million of secured 11.5% Promissory Notes and approximately $943,000 of long-term debt. Consequently, the holders of both of these issues of notes can accelerate the maturity of their notes. The holders of the secured 11.5% Promissory Notes can elect to exercise their first priority lien on all the Company's assets, including intangible assets and intellectual property. In such event, we could not conduct business and would cease to exist as a going concern. The holders of the long term debt can also accelerate the maturity of the their notes, and their claims against the Company will be subordinate to those of the 11.5% Promissory Notes. Due to the difficulty of reaching compromise agreements with certain creditors, the Company has been considering, and may in the very near future, seek to reorganize under Chapter 11 of the Bankruptcy Code (Chapter 11 of Title 11 of the United States Code). If the Company were to complete a reorganization successfully, it anticipates it would continue as a going concern, at least for a limited period of time, after emerging from bankruptcy. The Company is actively pursuing additional capital that would fund its operations during a reorganization and for at least for a limited period of time after emerging from bankruptcy. There can be no assurance that such liquidity requirements will be met or that the Company will be able to continue as a going concern. The filing of a Chapter 11 petition would suspend the Company's obligations to pay principal and interest on both the 11.5% Promissory Notes and the long term debt during the reorganization proceeding. In a successful reorganization, the Company anticipates its obligations to pay the outstanding principal and any accrued interest on both the 11.5% Promissory Notes and the long term debt would be eliminated by exchanging them for newly-issued shares of the Company's common stock. The secured 11.5% Promissory Notes are convertible, along with accrued interest, into approximately 114 million shares of common stock. See Note 6 - "Convertible Promissory Notes" to the financial statements contained in this Report on Form 10-Q. These Notes matured on December 31, 2002. The outstanding principal amount, together with accrued interest, was due to be paid on that date, and the Company did not pay, and, as of January 31, 2003, still has not paid, such amounts. The long-term debt was issued in the restructuring of the Company's UK operations. The debt matures December 31, 2006. Accrued interest was due and payable on such debt on December 31, 2002, and the Company did not pay, and, as of January 31, 2003, still has not paid, such interest. Assuming the Company continues as a going concern, the Company's business plan is predicated principally upon the successful marketing of its MSU V5 product and the marketing of the Company's software development capabilities. The Company anticipates that its existing working capital resources and revenues from operations will not be adequate to satisfy its funding requirements in fiscal 2003 and that it will be required to continue to raise additional capital. There can be no assurance that the Company's liquidity requirements will be met or that it will be able to continue as a going concern. 24 Assuming the resolution of the two debt defaults described above, failure to obtain additional capital could cause delay or abandonment of our business plans. The Company anticipates that it will depend on outside sources of capital to fund operating losses for at least the next twelve months. Additional capital may also be required for a variety of other reasons, including unforeseen delays, unanticipated expenses, increased capital requirements, engineering design changes and other technology risks or other corporate purposes. These additional funds may not be available. Even if those funds are available, we may not be able to obtain them on a timely basis, or on terms acceptable or favorable to us. Failure to obtain additional funds could result in the delay or abandonment of our development and expansion plans, and we may be unable to fund our ongoing operations. Historically, the Company has financed its operations through private sales of unregistered equity and debt securities. During the six month period ended December 31, 2002, the Company received short term funding from the receipt of approximately $645,000 of cash related to the issuance of 11.5% convertible promissory notes. For the six month period ended December 31, 2002, cash used in operating activities was approximately $ 721,000. Cash used in operating activities in the comparable period, ending December 31, 2001 was approximately $2.2 million. At December 31, 2002 the Company's cash balance was approximately $28,000. Assuming the resolution of the two debt defaults described above, The Company estimates that it needs approximately $400,000 of additional cash for the fiscal quarter ending March 31, 2003. Due to the uncertainty of revenue streams, the Company is not able to forecast accurately its cash needs for the rest of the fiscal year ending June 30, 2003. Current cash usage is approximately $100,000 per month. Again, assuming the resolution of the two debt defaults described above, The Company believes that cash flows generated by operations through the remainder of fiscal 2003 will be insufficient to meet its cash needs for working capital and capital expenditures. The Company is actively pursuing additional capital to fund its operations. The sale of additional equity or convertible debt securities will result in an additional dilution to the Company's stockholders. No assurance can be given that the Company will successfully raise such additional financing, or that additional financing, if available, will be available on terms favorable to the Company. Again, assuming the resolution of the two debt defaults described above, failure to raise such additional financing could have a material adverse effect on the Company. Item 3 - Quantitative and Qualitative Disclosures About Market Risk We are exposed to market risk from changes in exchange rates that may adversely affect our results of operations and financial conditions. Our policy is not to use financial instruments for trading or other speculative purposes. We are not currently a party to any "off balance sheet" financial instruments. Item 4 - Controls and Procedures (a) The existing financial controls insure that officers of the Company are aware of disclosable items. 25 (b) There were no significant changes in internal controls or other factors that could significantly affect these controls subsequent to the date or our evaluation of disclosure controls and procedures. PART II - OTHER INFORMATION Item 1 - Legal Proceedings None, but see Part II, Item 3. Item 2 - Changes in Securities and Use of Proceeds Issuance of 10% and 11.5% Convertible Promissory Notes In February 2002, the Company issued approximately $637,000 of 10% Promissory Notes without registration under the Act in reliance on Section 4(2) of the Act or Regulation D promulgated thereunder, which were secured by the assets of the Company. In March 2002, the Company issued approximately $888,000 of 11.5% Promissory Notes, of which approximately $637,000 was in exchange for the 10% Promissory Notes issued in February 2002. In the six month period ending December 31, 2002, the Company issued approximately $645,000 of 11.5% Promissory Notes for cash. The Notes were sold, without registration under the Act in reliance on Section 4(2) of the Act or Regulation D promulgated thereunder, to the following:

The Company has issued a total of approximately $2.1 million of the 11.5% Promissory Notes as of December 31, 2002. The 11.5% Promissory Notes are convertible at any time at the option of the investors into shares of common stock at a rate of 50 shares per $1 loaned, subject to adjustment in certain events. See Note 6 - "Convertible Promissory Notes" to the financial statements contained in this Report on Form 10-Q, for a description of changes in the major terms and conditions of the 11.5% Note Purchase Agreement that were made on September 23, 2002. 26 Item 3 - Defaults upon Senior Securities As of January 31, 2003, the Company is in default on approximately $2.1 million of secured 11.5% Promissory Notes and approximately $943,000 of long-term debt. Consequently, the holders of both of these issues of notes can accelerate the maturity of their notes. The holders of the secured 11.5% Promissory Notes can elect to exercise their first priority lien on all the Company's assets, including intangible assets and intellectual property. In such event, we could not conduct business and would cease to exist as a going concern. The holders of the long term debt can also accelerate the maturity of the their notes, and their claims against the Company will be subordinate to those of the 11.5% Promissory Notes. Due to the difficulty of reaching compromise agreements with certain creditors, the Company has been considering, and may in the very near future, seek to reorganize under Chapter 11 of the Bankruptcy Code (Chapter 11 of Title 11 of the United States Code). If the Company were to complete a reorganization successfully, it anticipates it would continue as a going concern, at least for a limited period of time, after emerging from bankruptcy. The Company is actively pursuing additional capital that would fund its operations during a reorganization and for at least for a limited period of time after emerging from bankruptcy. There can be no assurance that such liquidity requirements will be met or that the Company will be able to continue as a going concern. The filing of a Chapter 11 petition would suspend the Company's obligations to pay principal and interest on both the 11.5% Promissory Notes and the long term debt during the reorganization proceeding. In a successful reorganization, the Company anticipates its obligations to pay the outstanding principal and any accrued interest on both the 11.5% Promissory Notes and the long term debt would be eliminated by exchanging them for newly-issued shares of the Company's common stock. The secured 11.5% Promissory Notes are convertible, along with accrued interest, into approximately 114 million shares of common stock. See Note 6 - "Convertible Promissory Notes" to the financial statements contained in this Report on Form 10-Q. These Notes matured on December 31, 2002. The outstanding principal amount, together with accrued interest, was due to be paid on that date, and the Company did not pay, and, as of January 31, 2003, still has not paid, such amounts. The long-term debt was issued in the restructuring of the Company's UK operations. The debt matures December 31, 2006. Accrued interest was due and payable on such debt on December 31, 2002, and the Company did not pay, and, as of January 31, 2003, still has not paid, such interest. 27 Item 4 - Submission of Matters to a Vote of Security Holders None. Item 5 - Other information See Part II, Item 3. Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits - None (b) Reports on Form 8-K: The Company did not file any reports on Form 8-K during the fiscal quarter ending December 31, 2002. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MSU DEVICES INC. (Registrant) Date: January 31, 2003 By /s/ Robert L. George -------------------------- Robert L. George, President, Chief Executive Officer and Director By /s/ Kwok H. Phoon ---------------------------- Kwok H. Phoon, Acting Chief Financial Officer (Principal Financial Officer) 28 CERTIFICATION With regard to the Form 10-Q for the fiscal quarter ending December 31, 2002 (the "periodic report") of MSU Devices, Inc. (the "issuer"), I Robert L. George, certify that: 1. the periodic report fully complies with the requirement of Section 13(a) of 15(d) of the Securities Exchange Act of 1934, and 2. the information contained in the periodic report fairly presents, in all material respects, the financial condition and results of operation of the issuer. Date: January 31, 2003 /s/ Robert L. George ------------------------- Robert L. George Chief Executive Officer 29 CERTIFICATION With regard to the Form 10-Q for the fiscal quarter ending December 31, 2002 (the "periodic report") of MSU Devices, Inc. (the "issuer"), I Kwok H. Phoon, certify that: 1. the periodic report fully complies with the requirement of Section 13(a) of 15(d) of the Securities Exchange Act of 1934, and 2. the information contained in the periodic report fairly presents, in all material respects, the financial condition and results of operation of the issuer. Date: January 31, 2003 /s/ Kwok H. Phoon ----------------------- Kwok H. Phoon Acting Chief Financial Officer (Principal Financial Officer) 30 CERTIFICATION I, Robert L. George, certify that: 1. I have reviewed the quarterly report on Form 10-Q of MSU Devices, Inc. ( the registrant"); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations an cash flows of the registrant as of, and for, the period presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including is consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management of other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: January 31, 2003 /s/ Robert L. George ------------------------- Robert L. George Chief Executive Officer 31 CERTIFICATION I, Kwok H. Phoon, certify that: 1. I have reviewed the quarterly report on Form 10-Q of MSU Devices, Inc. ( the registrant"); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations an cash flows of the registrant as of, and for, the period presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including is consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management of other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: January 31, 2003 /s/ Kwok H. Phoon ----------------------- Kwok H. Phoon Acting Chief Financial Officer (Principal Financial Officer) 32

MSU DEVICES INC 10-Q