Edgar Filing: BURST COM INC

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

[X] Annual report under Section 13 or 15(d) of the Securities
Exchange Act of 1934

For the Fiscal Year ended: December 31, 2001

[ ] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934

For the transition period from ____________ to ____________ .

Commission File No. 33-35580-D

BURST.COM, INC.
(Formerly known as Instant Video Technologies, Inc.)
--------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)

Delaware 84-1141967
------------------------------- ---------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)

613 Fourth Street, Suite 201
Santa Rosa, California 95404
---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)

(415) 391-4455
(Registrant's Telephone Number, Including Area Code)

Securities Registered Under Section 12(b) of the Exchange Act: None.

Securities Registered Under Section 12(g) of the Exchange Act:

Common Stock $.00001 Par Value

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]

The aggregate market value of the Registrant's Common Stock held by
non-affiliates on March 31, 2002 was approximately $241,500 based on the closing
price of the Common Stock as reported on The Nasdaq Over the Counter Bulletin
Board for that date.

As of March 31, 2002, there were 19,173,846 shares of the Registrant's Common
Stock outstanding.

BURST.COM, INC.

2001 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS

Page
----
PART I

Item 1. Business .......................................................... 3

Item 2. Property .......................................................... 16

Item 3. Legal Proceedings ................................................. 16

Item 4. Submission of Matters to a Vote of Security Holders ............... 16

PART II

Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters ............................................. 17

Item 6. Selected Financial Data ........................................... 18

Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................. 19

Item 7A. Quantitative and Qualitative Disclosures About Market Risk ........ 29

Item 8. Financial Statements and Supplementary Data ....................... 29

Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ........................................ 29

PART III

Item 10. Directors and Executive Officers of the Registrant ................ 30

Item 11. Executive Compensation ............................................ 32

Item 12. Security Ownership of Certain Beneficial Owners and Management .... 33

Item 13. Certain Relationships and Related Transactions .................... 34

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ... 36

Signatures ........................................................ 38

Instant Video(R), Burstware(R), Burstaid(R), Faster-Than-Real-Time(R), Burstware
Conductor(R), Burstware Player(R), and Burstware Server(R) are registered
trademarks of BURST.COM, INC. All other names are trademarks and/or registered
trademarks of their respective owners.

SPECIAL NOTICE REGARDING FORWARD-LOOKING STATEMENTS

Some of the matters discussed under the captions "Business," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere in this report include forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events, including, among other things:

o implementing our business strategy;
o maintaining sufficient cash balances to continue in operation;
o attracting and retaining customers; o obtaining and expanding market
acceptance of the products and services we offer;
o forecasts of Internet usage and the size and growth of relevant
markets;
o rapid technological changes in our industry and relevant markets and
o competition in our market.

In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "could," "predicts," "potential," "continue,"
"expects," "anticipates," "future," "intends," "plans," "believes," "estimates"
and similar expressions. These statements are based on our current beliefs,
expectations and assumptions and are subject to a number of risks and
uncertainties. Actual results, levels of activity, performance, achievements and
events may vary significantly from those implied by the forward-looking
statements. A description of risks that could cause our results to vary appears
under the caption "Risks and Uncertainties" in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in this
report. These forward-looking statements are made as of the date of this report,
and except as required under applicable securities law, we assume no obligation
to update them or to explain the reasons why actual results may differ.

PART I

ITEM 1: BUSINESS.

THE COMPANY

We are an independent provider of client/server network software and
intellectual property for the delivery of video and audio information over
networks. Our office is located in Santa Rosa, California. Our software manages
the delivery of video and audio content over a variety of networks; optimizing
network efficiency and quality of service. Our Burstware(R) suite of software
products enables companies to transmit video and audio files at
Faster-Than-Real-Time(R)speed, which is accomplished by utilizing available
bandwidth capacity in conjunction with data compression to send more video or
audio data to users than the players are consuming in real time. This data is
stored on the user's machine for playing on demand, thus isolating the user from
noise and other network interference. The result is high quality, full-motion
video and CD-quality audio to the end-user. Burstware(R) utilizes various
components of our international patent portfolio, including the
Faster-Than-Real-Time(R) delivery method.

In January 2000, we changed our name from "Instant Video Technologies,
Inc." to "Burst.com, Inc." Our stock trades on the Nasdaq over the counter
bulletin board under the symbol "BRST".

In November 2000, due to insufficient funds and sales to support our
organization, we laid off 77 employees out of a total of 95 employees and
substantially reduced our sales, marketing and engineering spending. In March
2001, we laid off all but five of the remaining employees, and accepted the
resignations of then Chief Executive Officer Douglas Glen, Chief Financial
Officer John Lukrich, and Vice President & General Counsel Edward Davis. The
Chief Executive Officer position was assumed by our Chairman, Richard A. Lang,
and our Controller, Jeffrey Wilson, took over as Chief Financial Officer. In
October 2001, the number of full-time employees was reduced to

two: Chief Executive Officer Richard A. Lang, and Vice President, Operations
Eric Walters. Since that date, engineering, licensing, legal, accounting and
other support services are being procured on an "as-needed" basis from a
combination of former employees providing contract services, and outside
consulting, legal and accounting firms. In light of our reduced operations and
limited working capital, we have changed our mode of conducting business by
engaging in a business model that focuses on the licensing of existing versions
of Burstware(R), with product enhancements provided as needed by outside
engineering contractors. We also began discussions with both existing customers
and new customers regarding the licensing of both Burstware(R) and our
underlying patent portfolio. These discussions resulted in new revenues in the
amount of approximately $57,000 during the fourth quarter of 2001. We currently
have five customers who are acting as resellers and use our software in their
business. Three customers accounted for 53%, 36% and 13%, respectively, of our
total revenue in fiscal year 2001.

In November 2001, the Company entered into a three-year non-exclusive
Master Reseller Licensing agreement with Seo Yeong Digital, of South Korea, a
company focused on the deployment and marketing of video-on-demand systems for
hotels and communities within India. We received $25,000 in the fourth quarter
of 2001 as a royalty payment towards the deployment of video-on-demand clients
in the Korean marketplace.

At the end of 2001, we abandoned the operation of our Hosting Network, due
to lack of funds required to operate the system (we may reintroduce this service
if such funds become available in the future). The Hosting Network previously
provided a seven location delivery network that utilized Burstware(R) technology
to permit clients to store their audio and video content on our servers for
delivery to end users over the Internet. The Hosting Network was established to
showcase the Burst technology capabilities. See "Liquidity and Capital
Resources" and "Risks and Uncertainties" under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Item 7 and
Financial Statements and Supplementary Data in Item 8 below.

INDUSTRY BACKGROUND

In recent years, several related technologies have converged to enable the
distribution of video and audio content over electronic communications networks.
As network bandwidth, data storage, processing power, and compression
technologies have become increasingly available, the demand for high quality
video and audio over the Internet, as well as over intranet and extranet
networks, has expanded rapidly. The result of such developments has been the
transition of the Internet from a static, text-oriented network to an
interactive environment filled with graphical and audio-visual content.

Distributing audio-visual content over the Internet, or within an intranet,
offers certain advantages and capabilities not generally available through
traditional media, including consumer targeting and interactive responsiveness.
As businesses have begun to recognize the cost, inconvenience and inefficiency
of business communication tools such as audio and videoconferencing, online
communications between business-to-business, business-to-consumer and
business-to-employee have become commonplace

In order to capitalize on this expansion in Web-based content and in
anticipation of the implementation of broadband networks that will provide a
conduit for entertainment content to be delivered into consumer households via
the Internet, a number of companies developed first generation software
solutions intended to deliver such content to the end user. These first
generation solutions have commonly been referred to as real-time streaming
solutions that allow for the transmission and remote playback of continuous
"streams" of media content, including live video and audio broadcasts. These
technologies were designed to deliver audio and video content over widely used
28.8 kbps narrow bandwidth modems and, to a limited extent, were capable of
utilizing higher speed access provided by digital subscriber lines, cable modems
and other broadband emerging technologies. Recently, several companies have
released or announced newer version streaming technologies that provide improved
viewing and listening quality as well as improved network utilization.

MARKET OPPORTUNITY

Although current streaming technology represents a significant advancement
over earlier technologies, it has historically remained unable to provide the
client with reliable, uninterrupted, full-motion, studio-quality video,
particularly video-on-demand, or VOD, and CD-quality audio. That is, first
generation solutions rely upon a network design in which various client
computers are connected to centralized server computers. Typically, one server
is intended to service a multitude of clients. During a typical session, a
server must deliver data in frequent and regular intervals, or just in time, for
the length of any real-time play of content. For example, a 30-minute video
requires that constant communication between servers and clients be maintained
for 30 minutes of real-time viewing. Moreover, in all cases involving real-time
streaming, as the number of end users expands, the number of server connections
must also increase at a ratio of 1 to 1. Real-time streaming through such a
network cannot scale efficiently and, given the infrastructure requirements,
remains costly. This is a particularly important limitation for the distribution
of time-based content to home televisions via broadband connections. The
inherently poor picture quality and network inefficiencies associated with
typical real-time streaming solutions are prohibitive to the successful
marketing of video-on-demand services to consumers.

As real-time streaming expands rapidly online with growing demand for
audio-visual content, client-centric delivery becomes increasingly susceptible
to congestion and disruption within the established client-server universe. As a
result, a client's multimedia experience typically is interrupted or degraded.
Additionally, the number of real-time connections that can be maintained
simultaneously by the server is limited by processing power as well as bandwidth
availability. This, along with the fact that a server tends to devote
disproportionate resources to the client with the most available bandwidth, also
reduces the quality as well as the availability of the video and audio content
to most users on the network.

As a result of these limitations, plus the fact that most streaming
technology involves proprietary encoding schemes and limited platform
acceptance, widespread dissemination of high-quality streaming content has yet
to occur within either the business-to-business or business-to-consumer market.
Escalating demand within these markets as well as the need for quality
enhancement of content delivery have created a need for a software solution
capable of eliminating network disruptions and utilizing client bandwidth
efficiently. During the later part of 2001, companies that had invested heavily
in the development of real-time streaming delivery platforms began to
acknowledge the inherent problems in the existing technology. For example,
Microsoft recently announced its offering of "3rd Generation" streaming
approaches that promise improved viewing and listening quality as well as
improved network utilization. Real Networks has announced "Turbo Play," an
improved Real Networks product promising better streaming media quality. See
"Competition" below.

We believe that our intellectual property will be attractive to any company
that wishes to deliver digital media over electronic networks at a quality level
high enough to justify charging end users, content providers or advertisers. As
a result, our business model involves developing strategies that will enable us
to successfully enforce our intellectual property and receive what we believe
will be substantial licensing revenues as a result, although there can be no
assurance that this will be the case.

THE BURST SOLUTION

With our patented Burstware(R) technology, we provide a server-based
intelligent network management system delivering "Faster-Than-Real-Time(R)"
content across a variety of networks. Our software is designed to work equally
well with content created using any data compression/decompression (CODEC)
methodology. The Java-script Burstware(R) solution ensures a consistent,
high-quality experience over multiple platforms through optimization of network
resources and superior isolation of clients from network disturbances.

In a Burst-Enabled(TM) network, the server delivers "bursts" of content of
various sizes and frequencies, as required, into a client-side buffer at a
Faster-Than-Real-Time(R) rate of consumption. On the client side, the local
buffer of stored, or cached, data acts as a reserve providing continuous play in
the event that data flow across the network is disrupted. Once the network
recovers, the local buffer is rapidly "topped off" at a Faster-Than-Real-Time(R)
rate. Upon delivery completion, the server disengages from the client and is
free to address other clients

awaiting content delivery, with service prioritized based on the client's buffer
level, rate of consumption, available bandwidth and other variables.

Under typical network conditions, demand for media content rises and falls.
Real-time streaming's architecture must allocate network bandwidth for the peak
demand, wasting bandwidth during lower demand occurrences. Bursting tends to
average out the peaks and troughs using an intelligent buffer management system.
Buffers are replenished in anticipation of client needs at rates
Faster-Than-Real-Time(R). This intelligent network management reduces demand for
bandwidth at peak times.

With the same amount of allocated bandwidth, Burstware(R) supports more
users with less infrastructure. In a November 2000 study by Approach, Inc., a
research firm specializing in the digital media market, Burstware(R) was shown
to be up to 25% more bandwidth efficient than Microsoft's Windows Media System.

With a need-based delivery model and the ability to service the same number
of clients using fewer network resources, Burstware(R) technology also offers
quantifiable savings over a wide variety of end user environments. Simulations
have shown that Burstware's(R) intelligent network management system can provide
significant improvement in network efficiency, or throughput, when compared to
real-time streaming. The Approach report also concluded that the return on
investment for a content provider using Burstware(R) was 16% to 43% more
favorable than the return on investment for a similar configuration using
Windows Media System, beginning with version 6.4.

During all phases of content delivery, Burstware's(R) network-based
architecture allows for continuous monitoring of consumption rates, multiple
end-user needs, and changes in network conditions. Using connection acceptance
criteria, Burstware(R) can determine which network legs or servers are
overburdened and then shift the load accordingly. In addition, through
synchronizing content delivery across backup servers and conductors, the
Burstware(R) system creates a reliable failover for uninterrupted service in the
event of component or network failure, thereby eliminating the need for the
client to request that the server resend the entire file.

Developed with the flexibility of open standards, the Burstware(R) network
management elements are focused exclusively on content delivery without regard
to proprietary CODEC or rendering technologies, leaving application developers
free to use whichever CODEC is required of their application. Burstware(R)
architecture currently supports numerous encoding schemes, including MPEG1,
MPEG2, MP3, ASF, AVI and QuickTime, with the ability to adapt quickly to new
technologies as they are brought to market. Moreover, the Burstware(R) solution
is platform and player neutral. Burstware(R) Server operates on Microsoft
Windows NT, and Windows 2000 Solaris and Linux platforms as well as a
Burst-Enabled(TM) Windows Media Player, and QuickTime for Windows.

The intelligent Burstware(R) network resource management features enable
multiple end user applications as well. With the capacity to deliver data in a
clear, efficient and cost-effective manner, the Burstware(R) solution creates a
high-quality audio-visual experience for the end-user and enables powerful
business-to-business, business-to-customer and business-to-employee
communication. Burstware(R) also gives producers, aggregators and developers the
ability to reach new markets with virtually unlimited access to vast libraries
of content. With these various applications, Burstware's(R) network delivery
mechanism is ideally suited for numerous industries including news,
entertainment, retail and advertising as well as local, state and federal
governments and agencies.

BUSINESS OF THE COMPANY

Overview

We are a provider and licensor of Burstware(R) software and intellectual
property for use within commercial, multimedia, and interactive networks,
including the Internet. We also intend to continue the expansion of the number
of patents contained within our patent portfolio and develop additional
enhancements to Burstware(R) that may be requested by customers and as funds
permit

The potential applications and uses of our technology are not limited to PC
media delivery applications. We have begun developing and implementing other
strategies to expand Burst's technology to other potential applications
including video-on-demand servers and multimedia hardware, such as smart-TVs,
network appliances and set-top boxes, multiplying the potential markets for
Burstware(R)-based products. Additionally, we have implemented a strategy that
focuses on the licensing of our Burstware(R) software and underlying
intellectual property to companies that manufacture and deploy complete video
and audio-on-demand systems. We have revised our pricing model to enable these
potential customers to procure Burst technology on a "per-client" basis, thus
simplifying the revenue accounting process and providing customers with a way to
incorporate the costs of Burst technology as a one-time "fixed cost" that can be
amortized over the life of the client device.

Burst Technology

Burstware(R) is a client-server software product that manages and optimizes
the delivery of high quality video and audio (time-based media) across broadband
networks. The heart of Burstware's(R) capabilities is embodied in its patented
"Faster-Than-Real-Time(R)" transfers of data that enable interference-free
time-based media delivery and playback. The first "proof of concept" commercial
product was released in February 1999.

The Burstware(R) video delivery system consists of one or more servers,
Burstware(R) Conductors and client-side players interconnected by one or more
networks. Burstware(R) supports a broad array of encoding standards, although it
is neutral to specific compression technologies. This multi-tiered,
client-server system provides enterprise-class fail-over protection combined
with full scalability, and can operate over a combination of private LANs and
public broadband networks.

Burstware(R) is designed to benefit customers through the following
capabilities of the product: 1) more simultaneous users of video and audio
within the same bandwidth used by the competition; 2) highest quality viewing
experience without disruptions; 3) low cost, scalable expansion to meet
increased numbers of users; and 4) control over the effects of video and audio
on the enterprise network.

Strategy

Burst.com's goal is to be the leading provider of "faster-than-real-time"
or "Burst" digital media delivery technology to the broadband-centered
media-on-demand industry. We view "faster-than-real time" technology as
essential to the successful deployment of commercially viable media-on-demand
systems, which we believe will require the quality of service and network
efficiencies that such technology provides. We will pursue this goal by
continuing the development of our patent portfolio as available funds permit and
by upgrading and licensing our proprietary software, Burstware(R), to companies
that require our technology solution in order to achieve commercially viable
market solutions. We plan to enforce our patent rights and to build our patent
licensing revenue to the extent we are successful in the enforcement of our
patent rights. We also plan to continue the licensing of our Burstware(R) media
delivery solution to value added resellers, set-top box manufacturers and
developers of media-on-demand systems, among others.

Develop Proprietary Technology

Since our inception, we have been a leader in developing innovative
solutions to media delivery problems. Our Burstware(R) architecture provides
better bandwidth economies, higher reliability and a superior consumer
experience when compared to real time streaming technologies. We will continue
to enhance the technology underlying Burstware(R) in response to customer
requests and as funds permit. We will accomplish this through a combination of
(a) the utilization of outside engineering contract resources on an "as-needed"
basis; (b) the publication of our client-side source code to aid developers in
the creation of applications built on the Burstware platform; (c) the possible
licensing of our source code to very large customers capable of implementing and
supporting Burstware(R) on a large scale and in turn providing us with revenues
commensurate with the access to our source code. Enhancements may include the
development of Burstware(R) extensions supporting live events. This

functionality, which has already been developed in a prototype form, would
permit delivery of live events to the Windows Media Player and other
industry-standard players with the added benefit of "time-shifted" viewing,
seamless ad-insertion, and will also provide "pausing" and "rewinding"
functionality to end users.

Extend our Patent Portfolio

We regard our patent portfolio as critical to our ability to realize
maximum value for our technology. Since the company was first incorporated, we
have had 33 U.S. and international patents issued, and we currently have another
nine patent applications at different stages of prosecution within the U.S. and
international patent offices.

Our patents address our Faster-Than-Real-Time(R) media delivery mechanism,
various implementations of this mechanism, network resource optimization as an
extension of our basic intellectual property, and elements of advanced
client-side functionality. Our patents have been issued in the United States,
Australia, Europe, Korea, India, Japan and Canada.

License our Technology To Industry Leaders

For the past several years, we have pursued a strategy of selling media
delivery software and hosting services. This strategy, combined with the greatly
reduced cash resources available as a result of the 2001 downturn in the capital
markets, has not produced the level of revenues necessary to sustain our effort
to compete head-to-head with powerful leaders such as Microsoft and
RealNetworks. Our revised strategy is to offer to license our technology
software and patents to one or more leading end-to-end media-on-demand solution
providers, and/or set-top box manufacturers. We believe that companies who
license our technology and patents will obtain a sustainable competitive
advantage in terms of bandwidth efficiency, reliability and user experience. We
believe that we will be able to maximize the value of our technology and
intellectual property assets through such licensing arrangements, although there
can be no assurance that this will be the case.

Target licensees include (i) marketers of server/client software, (ii)
infrastructure providers, such as telecommunications and cable companies and
(iii) manufacturers and marketers of enabling hardware for broadband
media-on-demand services to business and consumers, including "smart-TVs",
Personal Video Recorders (PVRs) and set-top box manufacturers. We are currently
in discussions with several companies whose business activities are focused in
these areas.

Engineering and Product Development

We believe that our future success will depend in part on our ability to
enhance Burstware(R) and maintain our technological leadership. Our willingness
to make source code available to developers, combined with a focus on the
licensing to companies with substantial technological support infrastructures
provides us with a mechanism to see our core Burstware product(s) further
enhanced by other companies and developers who enter into licensing agreements
with us to enable them to undertake such development. Our internal product
development is being undertaken with outsourced engineering resources, primarily
engineers who formerly were our employees or consultants and are familiar with
the technology. These engineers are enhancing the core Burstware product with
features that are being requested by existing or prospective customers who are
willing to pay for these improvements in our core product(s). We plan to provide
testing and quality assurance through outside resources as well, as required and
financed by our current and prospective customers.

During fiscal years 2000 and 1999, we made substantial investments in
product development and related hosting activities ($4,300,328 in 2000 and
$4,076,700 in 1999). Research and development expenses decreased to $188,223
during fiscal year 2001. The current version of Burstware(R) has been developed
primarily by our former internal engineering staff and, in some instances, with
the assistance of external consultants. In March 1998, we released a Beta
version of Burstware(R), followed by subsequent modifications during the year.
We released our first commercial (GA) Burstware(R) product suite in February
1999. This release is a client-server software product that manages and
optimizes the delivery of high quality video and audio across broadband
networks. The servers

become intelligent network managers, efficiently allocating bandwidth and
scheduling burst delivery of multimedia content among multiple users. Microsoft
Corporation's Windows NT/95/98 operating systems are supported on client
machines, with Windows NT, Windows 2000, and Sun Microsystems' Solaris operating
systems supported on servers in client-server networks. Our software runs on
current versions of these platforms. In August 1999, we released support for the
Linux platform in our Version 1.1.3. Also in August 1999, we acquired
Timeshift-TV, Inc. in a stock-only transaction from Richard A. Lang, our
Chairman and Chief Executive Officer and two other individuals who subsequently
became employees of ours. Timeshift-TV holds assets, including intellectual
property, in the area of time-shifted real-time broadcasting, which we have
integrated into our advanced video and audio delivery solution. We also plan to
license the Timeshift-TV intellectual property to other parties for various
applications. Our success in this area will be a function of the successful
prosecution of existing patent applications and the enforcement of any patents
that may issue thereafter. We recorded $1,330,000 in expense for in-process
research and development costs purchased in connection with this acquisition. In
November 1999, we released the capability to Burst-Enable(TM) the Windows Media
Player in Version 1.2. In November 2000, due to insufficient funding and sales
to support our organization, we laid off all but two engineers and cut back
drastically in our product development spending. We laid off our remaining
engineers in March 2001. We currently rely upon outside engineering resources,
primarily former engineering employees, to provide technical support services on
an "as-needed" consulting basis. These individuals have been utilized in 2001
for product enhancements and user required modifications that were provided to
both Seo Yeong Digital and Cequent, two of our customers.

Product Offerings

Our suite of Burstware(R) software is summarized below:

Burstware Component Features
------------------------------------ ------------------------------------

Conductor: o Central management service

The Conductor manages the o Monitors all servers
distribution of player requests over
multiple servers, providing o Centralized point of control for
scalability, load balancing and video and audio on network
reliable fail over
o Scalable deployment of servers

Features o Add and remove servers as needed

o Asynchronous

o No performance bottlenecks

o Reliable fail over mechanism

o Load balancing

o Replicated conductors

o Audit trail logging

Server: o Patented buffer management system

The server "bursts" media files to o Provides significant network
player memory or disk buffers in efficiencies and enhanced viewer
Faster-Than-Real-Time(R), tracking experience
buffer levels and allocating
bandwidth accordingly. o Faster-Than-Real-Time(R)delivery

o Provides isolation from network
problems

o Traffic shaping

o Limits bandwidth usage to the
allocated bandwidth

o Controls impact of video and audio
on the network

o Utilizes optimized connection
acceptance criteria for guaranteed
quality-of-service

o CODEC-neutral

o Replicated server for load
balancing and reliable fail over

o Extensive logging of client
session statistics

Player: Burst-Enabled(TM) Windows Media
Player

Plays data out of the local buffer o Burstware Server(R) delivers
to the end user, shielding the end content to Windows Media Player
user from network disruptions.
o Provides both disk-based and
RAM-based caching

o Supports player scripting and high
interactivity

o Existing Windows Media Player
applications can easily be
burst-enabled

o Works in a browser or in a
standalone application

o VCR-like functionality and
controls

o CODECS supported include: MPEG-1,
MPEG-2, MP3, Windows Media Audio,
and Apple Quicktime ASF

Burstware(R)Java Based (JMF) Player

o Player scripting

o Works in a browser or in a
standalone application

o VCR-like functionality and
controls

o Supports many industry standard
CODECs

Burst-Enabled QuickTime for Windows
Player

Architecture

Burstware(R) employs a multi-tier, distributed architecture to provide a
fully scalable and fault-tolerant platform for high-quality multimedia delivery
and management. The architecture is designed to take advantage of the benefits
and minimize the shortcomings of using an unreliable, heterogeneous, IP-based
network--such as the Internet--for reliable multimedia delivery to a mass
audience.

Component Overview

The central management component of the architecture is the Burstware
Conductor(R), which manages and monitors the Burstware Servers(R) and provides
the point of contact for burst-enabled client applications, such as the Windows
Media Player.

The Burstware Server(R) provides reliable media delivery to clients, and
uses flow optimization algorithms to maximize overall bandwidth throughput,
while ensuring that each client is allocated sufficient bandwidth for
uninterrupted playback of video.

Burst-enabled client applications provide an intelligently managed
client-side cache, and co-operate with the conductor and server to provide the
playback of video and audio exactly as the file was encoded, with no jitter,
dropped frames, or signal degradation.

Media Delivery Procedure

When a Burst-Enabled(TM) client requests a media file, it contacts a
conductor with a request for service. The conductor intelligently routes the
client to the server that offers the best point of service for the request. The
client then establishes a two-way reliable TCP/IP connection to the server, and
delivery and playback of the media file begins.

The client continuously provides feedback to the server about how fast the
media file is being consumed, the state of the client buffer, and other
information. This data from all clients is fed into the server's flow
optimization algorithm described above, and the server uses the flow algorithm
to schedule delivery of data to clients at the rate that maximizes use of
network resources and minimizes the likelihood of buffer starvation. Flow rates
are continuously adjusted as network conditions and server loads change.

Advantages

Burstware's(R) multi-tiered architecture offers two key advantages over the
traditional two-tier streaming architecture: enterprise-class scalability and
mission-critical fault tolerance.

Scalability

The Burstware(R) system is highly scalable, and can grow from one server to
hundreds of servers in a manner that is completely transparent to clients. Since
only the conductors are aware of the location and number of servers, new servers
can be added and existing ones moved or removed without any updates to client
applications. One conductor can support and manage hundreds of servers. The
conductor continually monitors server loads and routes incoming client requests
to the least loaded eligible server, providing intelligent load balancing that
goes far beyond such simple schemes as round robin routing.

Because client interaction with the conductor is limited to the initial
request for service, a single conductor domain can easily scale to support tens
of thousands of concurrent client connections. Additionally scalability can be
achieved by employing multiple conductor domains, which can be integrated with
third-party IP routing solutions.

Fault Tolerance

Burstware(R) achieves complete fault-tolerance, including no single point
of failure, by fully replicating all components in the system. The conductor is
replicated in kind, and burst-enabled clients can contact either conductor for
service. Additionally, each server is automatically configured to provide
failover protection for all other servers containing the same media content.
Servers and conductors can be added and subtracted at runtime without shutting
down other system components.

If a server fails or becomes unavailable for any reason, including the
failure of a network link from the client to the server, all clients that have
lost contact with the server are automatically routed to other servers.
Burstware(R) establishes a new connection to an available server for each
client, and the new server picks up multimedia delivery exactly where the failed
server left off. Since the client-side buffer provides the ability for clients
to disconnect and re-connect without impacting the viewing experience, the
viewer is unaware that any failure has occurred.

Technology

The design mission for Burstware(R) technology is to provide the premier
platform for the management and delivery of digital video and audio content.
Burst.com has recognized the needs of the marketplace for a product that
provides quality, reliability and manageability far beyond what existing
streaming solutions can deliver.

Burstware's(R) design takes advantage of emerging trends in technology such
as available client-side storage and network bandwidth to provide a
forward-thinking, flexible and highly effective approach to multimedia delivery
and management. The engineering team that created our Burstware product(s) and
the current engineering consulting team has extensive experience in network
protocols, distributed multi-tiered architectures, digital video, real-time
control systems, and optimization algorithms. As a result, we believe
Burstware(R) is well equipped to address the escalating demand for multimedia
applications.

Architected for Industry Trends

By taking the caching model all the way to the client, Burstware(R) is the
first adopter in a new paradigm for multimedia delivery, and is positioned to
take advantage of the trends toward broadband networks and inexpensive client
storage. Designed to optimize expensive resources such as bandwidth and
server-side hardware by utilizing freely available client-side storage
resources, Burstware(R) provides an advanced network management and optimization
platform for audio and video content delivery.

Central to the Burstware(R) technology are the scheduling algorithms in the
Burstware Server(R), which schedule bursts of data of varying size and time
intervals to each client. The Burstware(R) Scheduler employs proprietary
algorithms to guarantee each client quality of service while optimizing the use
of bandwidth and other network resources.

The Burstware Server(R) Scheduling Engine consists of a Call Admission
Control System, or CAC, a Flow Optimizer and a Flow Engine. The CAC ensures that
a new client is accepted onto the network only if its admission will not
compromise quality of service to existing clients or to the new client. It is
worth noting that a configurable "burst margin" of bandwidth is held in reserve
by the CAC for use by the Flow Optimizer as described below. Clients that are
rejected by one Burstware Server(R) are transparently routed to another, making
the end user unaware that one of the Burstware Servers(R) has reached its
maximum utilization.

The Flow Optimizer calculates the amount of data to deliver, or the flow
rate, to each client in order to maximize Burstware Server(R) throughput while
ensuring that each client receives sufficient data flow for uninterrupted,
continuous playback. The burst margin that is held in reserve by the CAC
algorithm is available for allocation by the Flow Optimizer, which forces
delivery of content in faster-than-real-time even under heavy network load
scenarios. Overall, this process exerts upward pressure on client-side buffer
levels, ensuring a jitter-free viewing experience.

The Flow Engine is a low level sub-system responsible for achieving the
session flow rates imposed by the Flow Optimizer. It advances through disk or
cache resident content files and paces the transmission of the video data as
bursts over the outgoing transmission control protocol connections linking the
server to each player. Incoming status notifications from each player provide
any needed feedback on actual flow rates and downstream buffer conditions.

These optimization algorithms enable a single Burstware Server(R) to
simultaneously deliver files ranging the full spectrum of encoded bit rates,
from ASF files designed for 28.8 modems to MPEG-2 files encoded at 8 Mbps or
more, to a wide variety of clients with radically different connectivity and
other capabilities, while maintaining the highest quality viewing experience for
each client.

Application-Level Quality of Service in Unpredictable Networks

One of the challenges of IP-based video delivery systems is to provide a
smooth, uninterrupted video experience in the face of the variable bandwidth
capacities and network latencies of a packet-switched network. Traditional
streaming solutions, by delivering data just in time for display to the client,
are highly sensitive to moment-to-moment variations in the network capacities at
each link between the client and server. Whenever bandwidth capacities fall
below the encoding rate of the video, even briefly, video quality will suffer.

As described in the above section, Burstware(R) is able to provide a high
quality of service by employing a sophisticated client cache-management scheme
and delivering video data faster-than-real-time consumption. This
application-level quality of service is far less expensive than network-layer
quality of service, or QoS, schemes, which require that every router between the
client and server be able to guarantee that bandwidth and latency fall within a
narrow, specified range. Application-level QoS has the additional advantage of
working across network segments that are not capable of providing network-layer
QoS.

Application-level QoS also enables the use of higher-quality video
encodings across channels with variable bandwidth capacity. Real-time streaming
architecture requires that videos be encoded at a rate less than the minimum
bandwidth between the client and the server. Burstware(R), on the other hand, is
resilient to the average bandwidth between client and server, allowing delivery
of higher bit rate encodings.

Network Management Capabilities

A significant barrier to widespread adoption of streaming technologies has
been reluctance on the part of network managers to subject their networks to the
unpredictable and demanding requirements of traditional streaming solutions.
With Burstware(R), bandwidth use can be controlled at various levels, including
the entire Burstware domain, an individual Burstware Server(R) or locally on the
client side. Bandwidth limits can be adjusted dynamically at runtime, allowing
sophisticated traffic shaping over time and space. Content-specific caching and
routing controls also provide users with the flexibility needed for today's
applications.

Client configuration parameters include those for network optimization and
control, content protection, and player behavior. These parameters can be
centralized in a web page or customized by individual clients, giving
application developers a high degree of control over their video-enabled
applications.

Open Architecture

One of the keys to adoption of new technologies is a high degree of
interoperability with existing hardware and software. Burstware(R) has been
designed from the ground up to have open architecture at every product level,
allowing easy integration with a wide variety of third-party solutions.

The ability to interoperate with other applications is accomplished at
several different levels. A wide variety of industry-standard players, as well
as other applications, can be Burst-enabled using our Player Software
Development Kit. Burst-enabled players retain all of their existing
functionality, thus facilitating integration of an existing Windows Media Player
web application, for example, to the Burstware(R) delivery system (This
discussion not required here)Integration with third-party automated billing and
report generation tools is accomplished with the Burstware(R) Log Toolkit, which
provides both an XML-based and an ODBC-based data transfer capability. We also
believe that external cache management systems such as those offered by Akamai
and Inktomi can integrate with Burstware(R) through our directory-based media
management system.

Portability is another important aspect of an open architecture.
Burstware(R) is a software-only solution and the Burstware Servers(R) and
Conductors are written almost entirely in Java, allowing easy porting as new
hardware and OS platforms become available. Additionally, interprocess
communication is 100% IP-based and runs on nearly all modern networks, both
wired and wireless. This highly portable implementation allows Burstware to take

immediate advantage of new advances in hardware such as multiprocessor,
multi-NIC, SMP Servers, advanced storage systems and wireless technologies.

Competition

We compete in markets that are rapidly evolving and intensely competitive.
We have experienced and expect to continue to experience increasing competition
from current and potential competitors, many of which have significantly greater
financial, technical, marketing and other resources.

In addition to Burst, there are two significant media delivery companies,
Microsoft and Real Networks, that compete in similar market segments. The
Burstware(R) product is priced similarly to products offered by our major
competitors, but competition is based primarily on features and functionality.
Our competitors have traditionally used real-time streaming technology as
opposed to our Faster-Than-Real-Time(R) solution. Real Networks and Microsoft
have concentrated on the consumer markets. Real Networks, Microsoft and to a
lesser degree Apple are moving into the business-to-business markets with large
clients such as 3Com and Northrup Grumman. There has been for the most part
limited competition in the broadband arena. Because of our patent portfolio, we
are able to offer unique competitive advantages in network efficiency
management, scalability and reliability features and functionality. While
Burstware can deliver multimedia content in a real-time mode, our architecture
is ideally suited to capitalize on the growth in broadband networks and
inexpensive storage by implementing our "faster-then-real-time" or "burst" mode
of digital media delivery.

Real Networks

RealSystem G2 is a fully integrated encoder, server, splitter/cache and
player system. Real Networks is dominant in the Internet market and the low
bandwidth applications, which have primarily centered around news and
entertainment markets. With its dominance in the consumer market and brand
awareness, Real Networks is gaining ground in the business sector with clients
like 3Com, Boeing and General Electric. We believe that Real Networks' use of
real-time streaming technology, its lack of network management and its
CODEC-dependence will give us a competitive advantage in the
business-to-business market. To effectively deploy Real Networks for a broadband
application, the software must be bundled with Digital BitCasting, and Inktomi
(or similar edge-caching product). Real Networks has announced "Turbo Play," an
improved Real Networks product promising better streaming media quality.

Windows Media

Windows Media Technologies provides an end-to-end solution for streaming
multimedia, from content authoring to delivery to playback. Microsoft is
building brand strength by bundling Windows Media with other Microsoft Products.
Windows Media Technologies has historically targeted the streaming audio segment
by being the only streaming media platform to feature FM-stereo quality over a
modem and improved piracy protection.. Windows Media has traditionally claimed
that it relies on real-time streaming technology to deliver video and audio.
Consumers with the Windows Media Player (a component of Windows Media
Technologies) can use the Burst-Enabled(TM) Windows Media Player to increase the
content quality, reliability and efficiency of their network. Microsoft recently
announced its offering of a new generation streaming technology that promises
improved viewing and listening quality as well as improved network utilization.

Others

There are other companies who offer streaming media solutions for the
Internet and corporate intranets. Many claim to have streaming media solutions
for corporate training, distance education, health care, and entertainment. Some
companies offer media servers with the ability to stream content to up to 500
desktops at one time. Others offer content management and media players.
Burstware(R)'s potential competitors offer no or limited network management, and
viewing and listing quality is uniformly poor. This is a rapidly evolving
market. Most competitors, current and potential, will have access to more
resources than are available to us at this time.

Sales and Marketing

While we pursue Burstware(R) software and patent licensing arrangements, we
will continue to support our value added resellers and software customers Seo
Yeong Digital, Cequent and TVN Entertainment on an as-needed basis, using
outside engineering consultants as well as pursue new customers. Our target
market is comprised of large companies involved in the enablement or direct
sales and/or manufacture of digital media-on-demand solutions. In addition,
potential customers include businesses or other end-users that desire to send,
receive or effectively manage high-quality video and audio content over their
own networks or to outside customers through the Internet. Applications include
corporate communications, education, advertising, entertainment and
broadcasting. .

We currently market to our customers through direct sales, but intend to
retain outside sales representatives and additional value added resellers. The
internal sales organization consists of one outside individual providing
services on a commission basis, our CEO and our VP of Operations, as required.

We do not believe that there is any significant seasonality that would
affect sales of our products or services. As of December 31, 2001, there was no
backlog of unfilled orders for our products.

Patents and Trademarks

Our business is highly dependent on our patent portfolio. We have nine U.S.
patents. The early patents describe a broad class of systems that allow a user
to view, edit, store video information and send and receive the data associated
with that video information over networks in less time than is normally required
to view or listen to the content. The later patents describe particular
distribution methods designed to deliver video information to remote systems.

Our core patents describe systems that are able to send and receive a
high-quality video or audio segments or programs, store received information
locally, manipulate that information with editing, processing, compression and
decompression tools, display the signal for viewing and optionally re-send the
manipulated information on to other such machine systems in
faster-than-real-time. Our current patents will expire on various dates in 2007
through 2016.

We have two European patents that incorporate the subject matter of the
first six U.S. patents, three Australian patents, one South Korean patent, one
Japanese patent, two Indian patents, and one Canadian patent. We have filed for
a number of additional domestic and international patents.

In addition to protecting the Burstware(R) product offerings, our patents
have broader application as various market applications appear, and our
potential to license our intellectual property expands into additional vertical
market segments.

We view our portfolio as a critical component in gaining relationships with
strategic partners. Potential licensees include companies such as server and
client manufacturers, bandwidth providers, content aggregators, copyright
owners, and other hardware manufacturers.

Our plan is to establish the value of our patent portfolio through
successful enforcement of our patent portfolio, and subsequently to seek
licensing revenues from any companies who seek to utilize our patented
technology in their products or services. We have assembled a matrix of
potential licensing candidates whose goods and/or services we believe will
require them to license our technology in order to avoid being in violation of
our patents.

We have registered the trademarks "INSTANT VIDEO(R)", BURSTWARE(R),
BURSTAID(R), FASTER-THAN-REAL-TIME(R), BURSTWARE CONDUCTOR(R), BURSTWARE
PLAYER(R) and BURSTWARE SERVER(R)," in the United States, as well as in certain
countries in Europe and Asia.

Employees

We laid off 77 employees in November 2000 and 11 employees on April 1, 2000
due to insufficient funding and revenues to support our organization. Several
former employees have agreed to avail themselves on a contract basis, should the
need and funding arise. As of March 31, 2002, we had two full-time employees,
our Chief Executive Officer Richard A. Lang and our Vice President of
Operations, Eric Walters. We have never experienced a work stoppage and no
personnel are represented under collective bargaining agreements. We are
utilizing contract services on an as-needed basis to provide support services
such as accounting, legal, technical and administrative.

ITEM 2. PROPERTY.

We presently occupy approximately 450 square feet of office space at 613
Fourth Street, Suite 201, Santa Rosa, California, under a lease that expires at
the end of March 2002, with the option to extend to an additional one year term.
The lease provides for rent of $900 per month. We believe that our current
facility is suitable and sufficient to accommodate our operating needs for the
foreseeable future. To the extent that we are successful in restoring and
expanding our current level of operations, we may need additional space, which
we believe is readily available in proximity to our current office at comparable
lease rates.

ITEM 3. LEGAL PROCEEDINGS.

On January 17, 2001, the Company filed for arbitration in an action against
Whit SoundView f/k/a E*Offering. The action was filed with the American
Arbitration Association in San Francisco. The dispute involves the rescission of
an exclusive investment banking agreement and return of fees. This action was
settled in October 2001 under an agreement to abandon the dispute with no cash
payments or obligations by either party to the other, and full mutual releases
of liability.

We are not aware of any material legal proceedings pending or threatened
against us.

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

None

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

MARKET INFORMATION

Our common stock is traded on the Nasdaq OTCBB (Over The Counter Bulletin
Board under the symbol (prior to January, 2001, our common stock had been traded
on the Nasdaq SmallCap Market). The following table sets forth the closing high
and low bid prices of the Common Stock for the periods indicated. These prices
are believed to be representative inter-dealer quotations, without retail
markup, markdown or commissions, and may not represent prices at which actual
transactions occurred.

Bid
2001 ----------------
-----------
1st Quarter $1.190 $0.188
2nd Quarter $0.500 $0.130
3rd Quarter $0.190 $0.035
4th Quarter $0.080 $0.035

2000
-----------
1st Quarter $ 18.375 $ 7.75
2nd Quarter $ 9.6875 $ 4.75
3rd Quarter $ 8.625 $ 4.625
4th Quarter $ 5.75 $ 0.25

The number of holders of record of the Company's $.00001 par value Common Stock
at December 31, 2001, was approximately 288. The closing bid price of our stock
was $0.04 and $0.03 at December 31, 2001 and March 31, 2002, respectively.

DIVIDENDS

No dividends have been paid with respect to our stock. At December 31,
2001, we had an accumulated deficit of approximately $60.6 million and, until
this deficit is eliminated, we do not intend to pay any dividends. Although
holders of common stock are entitled to receive dividends, if and when, declared
by our Board of Directors, it is anticipated that any and all future earnings
for the foreseeable future will be retained, consistent with the Board of
Director's historical policy, to fund operations and any necessary capital
improvements.

RECENT SALES OF UNREGISTERED SECURITIES

In November and December 2000 and during 2001, we issued to certain
investors, including Gordon Rock, one of our principal stockholders, secured
promissory notes in the aggregate principal amount of $1,300,000 and warrants to
purchase an aggregate of 5,933,333 shares of our common stock at exercise prices
ranging from $0.15 to $0.30 per share. Such promissory notes are secured by
security interests in all of our assets.

In March 2001, we issued to an individual investor a 10% promissory note in
the principal amount of $100,000, collateralized by 100,000 shares of Eagle
Wireless International, Inc. common stock. In connection with this note
issuance, in March 2001, we reduced the exercise price, from $5.00 to $0.875 per
share, of warrants held by the investor to purchase 98,870 shares of common
stock and issued to the investor new warrants to purchase 50,000 shares of
common stock at $0.875. The loan was repaid in full in May 2001.

During 2001, we issued 9% convertible notes payable to Draysec Finance
Limited, one of our principal shareholders, in the aggregate principal amount of
$100,000, with interest and principal due in February and March 2002. The notes
are convertible into a new series of preferred stock at a per share conversion
price of $5.00 at the option of the noteholder. In November 2001, Draysec agreed
to extend the due date of the loan to November 21, 2002. In consideration for
this extension, we reduced the exercise price of warrants to purchase shares of
our common stock held by Draysec from $5.00 to $0.30 per share.

In July 2001, we granted to Silicon Prairie Partners, LP an option to
purchase 250,000 shares of our common stock at an exercise price of $.18 per
share. Silicon Prairie Partners, LLP is an affiliate of John J. Micek III, one
of our directors. In February 2002, this option was exercised with respect to
138,888 shares at an aggregate option exercise price of $25,000.

In December 2001, we issued warrants to purchase an aggregate of 80,000
shares of our common stock at an exercise price of $0.30 per share and two
three-year promissory notes in the aggregate amount of $20,000 to two law firms
in consideration for the cancellation of outstanding legal fees in the aggregate
amount of $81,960.

In December 2001, we issued an option to purchase 50,000 shares of our
common stock at an exercise price of $0.30 per share and a three-year promissory
note in the amount of $32,000 to a consultant in consideration for the
cancellation of outstanding consulting fees in the amount of $32,000.

In January 2001, we granted options to purchase 150,000 shares of common
stock exercisable at $0.2812 per share to an independent contractor and in April
2001 we granted options to purchase 100,000 shares of common stock exercisable
at $0.1875 per share to an employee.

Warrants to purchase an aggregate of 4,843,371 shares of our common stock
at an initial exercise price of $5.00 per share issued in January 2000 and a
warrant to purchase 857,633 shares of our common stock at an initial exercise
price of $5.83 per share issued in August 2000 contain anti-dilution provisions
that adjust the exercise prices and the number of shares exercisable thereunder
if shares of our common stock are issued or deemed issued at prices below these
warrant exercise prices. The issuance of the warrants described above as well as
the issuance of additional warrants to purchase an aggregate of 433,333 shares
of our common stock in 2002 at a warrant exercise price of $0.30 per share
resulted in a decrease in the exercise price of the January 2000 warrants to
$4.30 per share and an increase of 831,262 warrant shares. These issuances also
resulted in a decrease in the exercise price of the August 2000 warrant to $5.01
per share and an increase of 148,340 warrant shares.

The sales of the above securities were deemed to be exempt from
registration under the Securities Act of 1933, as amended (the "Act") in
reliance on Section 4(2) of the Act, Regulation D and /or Rule 701 promulgated
under the Act. In each such transaction, the recipients of securities
represented that they were accredited investors and intended to acquire
securities for investment only and not with a view to or for sale in connection
with any distribution thereof. Appropriate legends were affixed to the
securities issued in such transactions.

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with
our financial statements and related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this report. The statement of operations data for the fiscal years ended
December 31, 1998 and December 31, 1997 and the balance sheet data as of
December 31, 1998 and 1997 are derived from financial statements audited by KPMG
LLP, independent certified public accountants but that are not included in this
report. The statements of operations data for the fiscal years ended December
31, 2000 and 1999 and the balance sheet data as of December 31, 2000 and 1999
are derived from financial statements audited by BDO Seidman, LLP, independent
certified public accountants, and, except for the balance sheet data for fiscal
year ended December 31, 1999, are included elsewhere in this report. The
statement of operations data for the fiscal year ended December 31, 2001 and the
balance sheet data as of December 31, 2001 are derived from financial statements
audited by Berenfeld, Spritzer, Schecter and Sheer, independent certified public
accountants, and are included elsewhere in this report. Historical results are
not necessarily indicative of the results to be expected in the future.

Fiscal Year Ended December 31,
------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------- ------------ ------------ ------------ ------------

Statement of Operations Data:

Revenue $ 138,019 $ 499,376 $ -- $ 15,000 $ 247,879
============= ============ ============ ============ ============

Loss from operations $ (3,706,639) $(19,556,700) $(11,509,619) $ (4,663,867) $ (1,928,637)
============= ============ ============ ============ ============
Extraordinary gain, net of taxes $ 399,279 $ -- $ -- $
=============
Net loss $ (3,577,322) $(19,609,984) $(12,977,729) $ (6,916,420) $ (2,062,373)
============= ============ ============ ============ ============
Beneficial conversion feature of
Series B Preferred Stock $ -- $ -- $ -- $ (8,762,425) $ --
------------- ------------ ------------ ------------ ------------

Net loss applicable to Common
Stockholders $ (3,577,322) $(19,609,984) $(12,977,729) $(15,678,845) $ (2,062,373)
============= ============ ============ ============ ============

Basic and diluted net loss per
common share: $ (.17) $ (.98) $ (1.42) $ (2.35) $ (0.39)
============= ============ ============ ============ ============
-----------------------------------------------------------------------------------------------------------------------------------

December 31,
-----------------------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------

Balance Sheet Data:

Cash and cash equivalents $ 6,112 $ 296,584 $ 302,979 $ 2,212,141 $ 20,551
Total assets $ 141,554 $ 1,662,133 $ 1,091,826 $ 3,249,622 $ 155,191
Long-term obligations $ 274,970 $ -- $ -- $ -- $ 16,833
Stockholders' equity (deficit)
$(2,799,130) $(1,192,730) $(5,464,646) $ 2,793,358 $ (983,267)
-----------------------------------------------------------------------------------------------------------------------------------

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Certain statements contained in the following Management's Discussion and
Analysis of Financial Condition and Results of Operations, including, without
limitation, statements containing the words "believes," "anticipates,"
"estimates," "expects," and words of similar meaning, constitute forward-looking
statements which involve risks and uncertainties. Burst's actual results could
differ materially from those anticipated in these forward looking statements as
a result of certain factors, including those factors set forth under "Risks and
Uncertainties" below.

GENERAL

We are an independent provider of client/server network software and
intellectual property for the delivery of video and audio information over
networks. Our principal executive offices are located in Santa Rosa, California.
Our software manages the delivery of video and audio content over various
networks, including the Internet and corporate intranets, optimizing network
efficiency and quality of service. Our Burstware(R) suite of software products
enables companies to transmit video and audio files at Faster-Than-Real-Time(R)
speed, which is accomplished by utilizing data compression and/or available
bandwidth capacity to send more video or audio data to users than the players
are demanding. This data is stored on the users' machines for playing on demand,
thus isolating the user from noise and other network interference. The result is
high quality, full-motion video and CD-quality audio to the end-user. Our
revenue is derived from fees for software licenses.

We have incurred significant losses since our inception, and as of December
31, 2001, we had an accumulated deficit of $60,623,200 and cash on hand of
$6,112. Our operating expenses as of December 31, 2001

were approximately $75,000 per month. As of March 31, 2002, we had approximately
$30,000 cash on hand. As previously disclosed, we had been pursuing a business
plan that envisioned raising significant additional capital to continue
developing and marketing our products. However, sales of our newly released
products have been slower than expected and we have not been successful in
raising the additional capital necessary to implement our original business
plan. We believe that in view of the limited market demand for our products and
the change in market conditions that emerging new technology companies have
faced since April of 2000, it no longer appears realistic for us to pursue such
a comprehensive, capital intensive plan. Consequently, we have reduced projected
operating expenses to approximately $75,000 per month, primarily by closing all
of our marketing offices and reducing our workforce from 95 to two (our Chief
Executive Officer and Vice President, Operations). Our goal is to seek
additional financing from accredited investors to maintain limited operations
and to fund our pursuit of software and patent portfolio licensing
opportunities. We are also pursuing strategic relationships with companies that
can benefit from our technology. There can be no assurance that we will be
successful in our efforts to raise capital or, if successful, that we will
succeed in efforts at licensing and strategic partnering, in which case we would
be required to terminate our operations. See also "Liquidity and Capital
Resources" below.

RESULTS OF OPERATIONS

Revenue

During the year ended December 31, 2001, we earned revenue in the amount of
$138,019 compared to $499,376 for fiscal year 2000. These revenues came
primarily from two new customers, Cequent, an American video on demand services
company, and Seo Yeong Digital, of Korea. We also collected patent licensing
revenues from TVN Networks, which were due to us from a licensing contract
signed in 1999. During 2001, one customer, Cequent, accounted for approximately
53% of revenues. Two other customers, Seo Yeong Digital and LoFi Media,
accounted for 26% and 13%, respectively of our revenues during fiscal year 2001.
During 2000, our customer Interzest accounted for 60% of our revenues. No other
single customer accounted for more than 10% of revenues.

We had revenue of $499,376 for the year ended December 31, 2000, compared
to no revenue for the same period in 1999, primarily from licensing of our
Burstware media delivery software and operation of our media hosting service,
which has since been closed. We released our first product, Burstware(R) Version
1.1, to the public in February 1999, and in November 1999 we released
Burstware(R) Version 1.2, which contained the Burst-Enabled(TM) Windows Media
Player. In 1999 we recruited key sales, marketing, and development contributors
and signed six reseller agreements. Customer evaluations were undertaken during
the second half of 1999 and initial sales commenced in February 2000. During
2000, we also introduced our content hosting service, which enabled customers to
store their audio and video content on our Burstware(R) servers for delivery to
their end-users. We discontinued this service in 2001.

Cost of Revenue

We had no cost of revenue for the year ended December 31, 2001. The product
cost of revenue recorded for 2000, in the amount of $30,764, consisted primarily
of the cost of equipment purchased from a third-party, which was resold to a
customer in connection with a software sale. Resale of equipment is not part of
our sales strategy, and we do not plan to make such sales to any significant
degree in the future. We had no cost of revenue for the year ended December 31,
1999.

Operating Expenses

Operating expenses were $3,459,699 for the year ending December 31, 2001,
excluding equipment losses and write-downs discussed below, as compared to
$18,712,381 during fiscal year 2000. This resulted in total operating expenses
decreasing by $15,252,682 for the year ending December 31, 2001, as compared to
fiscal year 2000. Operating expenses consist of research and development
expenses, sales and marketing expenses, losses on abandonment, disposition, and
write-downs of equipment and general and administrative expenses.

Sales and Marketing

For the year ending December 31, 2001, sales and marketing expenses were
$120,710, as compared to $8,175,525 during fiscal year 2000. Sales and marketing
expenses were substantially lower during 2001, due to our greatly reduced
operating scope and lack of operating capital. As of April 2, 2001, all
remaining sales and marketing staff were laid off, and all remote sales offices
had been closed.

During the year ended December 31, 2000, the $3,990,008, or 95%, increase
in sales and marketing over the year ended December 31, 1999, was primarily a
result of increased advertising and other marketing related expenses,
compensation and employee related expenses, sales commissions and travel costs.

Research and Development

For the year ending December 31, 2001, research and development expenses
were $188,223 as compared to $4,300,328 during fiscal year 2000. Research and
development expenses consisted primarily of contract labor expenses incurred for
enhancements to and maintenance of our Burstware(R) technology and other
operating costs. The decrease for the year ending December 31, 2001 is primarily
attributable to elimination of the in-house engineering staff that had
previously developed and enhanced our software technologies. As of April 2,
2001, none of the research and development staff remained as full-time
employees, and we substantially reduced our product development spending.

During the year ended December 31, 2000, the $223,596, or 5 %, increase in
research and development expenditures over the year ended December 31, 1999, was
primarily attributable to increases in the number of engineers that developed
and enhanced our software technologies.

Impairment of Long Lived Assets

We review our long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. For the year ended
December 31, 2001, losses on abandonment, disposition, and write-downs of
equipment were $384,959 as compared to $1,312,931 during fiscal year 2000 (there
were no such losses in fiscal year 1999). The losses for 2000 resulted primarily
from impairment in our leasehold improvements, computers and equipment assets
located at our then principal office as a result of our layoff of 77 of our 95
employees at the time. The reasons for the 2001 impairment review were related
to the layoff of 16 of 20 full time employees (80% of our total staff) in March
2001. The writedown itself included both the net book value of abandoned
equipment and leasehold improvements and a reduction to estimated fair value of
certain remaining equipment and computers.

General and Administrative

For the year ending December 31, 2001, general and administrative expenses
were $3,150,766 as compared to $6,236,528 during fiscal year 2000. General and
administrative expenses consist primarily of compensation and fees for
professional services, and the decrease in absolute dollars is attributable to
the substantial reduction in our operations as a result of insufficient funds.
We believe that general and administrative expenses will continue at reduced
levels for the foreseeable future.

During the year ended December 31, 2000, we incurred a $2,989,158, or 92%,
increase in general and administrative expense over the year ended December 31,
1999, which resulted from additional personnel, equipment and facilities costs
to support increased operations.

We had net loss from operations of $3,706,639 for the year ending December
31, 2001, as compared to $19,556,700 during fiscal year 2000. This was an 81%
decrease for the year ending December 31, 2001, over the same period in 2000.
The decreased overall year-to-date loss resulted from the reduced expenditures
discussed above.

Total other expense net was $514,681 for the year ending December 31, 2001,
as compared to $53,284 for the 2000 fiscal year. The increase in net other
expenses was substantially due to a $324,430 loss from the sate of Eagle
Wireless International, Inc. common stock and a $373,752 increase in interest
expense resulting from additional debt financing during 2001, offset by a
$269,733 gain of sale of assets. Total other expense net was $1,468,110 for the
1999 fiscal year. The decrease in net other expenses from 1999 to 2000 was due
to a $1,414,826 decrease in interest. The decrease in interest expense was
primarily due to reduction of debt and associated interest expense through
conversion to common stock in our January 2000 private placement and an increase
in interest income earned on the proceeds of equity financings. These decreases
in net other expenses were offset by non-cash expense recorded in connection
with additional shares of common stock issued without cash consideration to
investors in our January 2000 financing. .

Extraordinary Gain

During 2001, we entered into settlement agreements with vendors and
creditors pursuant to which we recognized approximately $643,000 of
extraordinary gain.

LIQUIDITY AND CAPITAL RESOURCES

Our immediate goal is to seek financing to maintain limited operations and
continue to license our Burstware(R) product and explore the enforceability and
monetization of our patent portfolio. We believe that we need at least $700,000
in additional financing to continue our operations through December 2002.
However, any projection of future cash needs and cash flows is subject to
substantial uncertainty.

Operating expenses to date have been funded primarily through debt and
equity financing. Our operating expenses as of December 31, 2001 were
approximately $75,000 per month. As of March 16, 2002, we had approximately
$20,000 cash on hand. We have reduced projected operating expenses to
approximately $75,000 per month by reducing our workforce to two full-time
employees and utilizing outside independent contractors on an "as-needed" basis
for all our support services, including engineering, administrative, licensing,
legal and accounting.

In 2001, our operating expenses were met by a combination of loan financing
and very modest revenues from the sales of our Burstware(R) product and patent
licensing. During the year, we raised $1,000,000 from loan financing from
secured creditors (and repaid $100,000) and recognized $138,019 in revenues from
Burstware(R) and patent licensing. Based on our inability to reduce expenditures
to a further degree, we believe that operating requirements cannot currently be
met without immediate additional financing. We are currently in negotiations to
obtain additional financing of approximately $700,000 through the issuance of
secured debt and warrants to purchase our common stock. We believe that if
successful in obtaining this additional capital, based upon our reduced
operating costs, we will be able to operate until December 2002 without the need
for additional financing, although there can be no assurance that this will be
the case. During this period, we plan to focus our efforts on the exploration of
our ability to enforce our patent rights, the licensing of our Burstware(R)
product and attracting at least one large strategic partner and investor that
will enable us to continue to develop and market our technology within

the scope of our business goals. In the event that we are unsuccessful in
obtaining this additional capital we would be required to terminate our
operations.

On January 30, 2001, we sold 1,500,000 shares of our common stock to Eagle
Wireless International, Inc. in exchange for 400,000 shares common stock of
ClearWorks.net, Inc. (a wholly owned subsidiary of Eagle Wireless International,
Inc.). In a separate transaction, the Company executed a software license
agreement with Eagle Wireless in exchange for 104,000 shares of Eagle Wireless
stock. On January 30, 2001, our common stock was valued at $0.5625 per share and
ClearWorks.net, Inc. common stock was valued at $3.40 per share. During 2001, we
sold all of the Eagle Wireless stock and all of the ClearWorks.net stock at
varying prices, to provide cash for our continued operations.

RECENT DEVELOPMENTS

Since December 2001, we successfully negotiated a settlement of our former
San Francisco office lease for a combination of 300,000 shares of our common
stock and a three-year promissory note for $50,000. This eliminated a previous
landlord claim for approximately $1,229,000. In addition, we have reduced our
trade payables that were 90 days or more outstanding by approximately $785,000
(53%), through negotiated settlements, which included the issuance of warrants
to purchase an aggregate of 80,000 shares of our common stock, and in some
cases, the issuance of notes and small cash payments. We also eliminated
additional debt to one creditor in the aggregate amount of approximately
$629,000. We also reached settlements with former executive officers and an
employee pursuant to which we eliminated an aggregate amount of approximately
$975,000 in debt in consideration for the payment of cash of approximately
$15,000, the issuance of an aggregate of 494,946 shares of our common stock
(having a fair market value of approximately $19,696) and additional debt to
such individuals in the aggregate amount of approximately $106,735, payable in
three years without interest. We also are renegotiating debts owed to other
former employees. If we are successful in these negotiations, we could eliminate
up to approximately $150,000 of debt.

RISKS AND UNCERTAINTIES

Liquidity

The opinion from our auditors on our December 31, 2001 financial statements
contains a paragraph suggesting that substantial doubt exists about our ability
to continue as a "going concern." At the time of this report, we had
insufficient cash reserves and receivables necessary to meet forecast operating
requirements. In the event we are unsuccessful in our efforts to raise
additional funds, we will be required to significantly reduce cash outflows and,
possibly, discontinue our operations.

Risks Relating to Burst.Com, Inc.

We are not currently profitable and may not achieve profitability.

We have a history of losses and are likely to continue to incur net losses
at least through the year 2002. As the result of having significantly reduced
operating expenses, we will not need to generate as high of revenue levels as in
previous years in order to continue operations. We will, however, need to
generate additional revenues to achieve profitability, which may not occur. Even
if we achieve profitability, we may be unable to sustain or increase
profitability. in the future.

We will need immediate financing in order to continue our operations, and we may
not be able to raise immediate financing on favorable terms, or at all.

We need to raise immediate capital to continue our operations and implement
our plans to respond to competitive pressures, or otherwise to respond to
unanticipated requirements. We are currently offering secured promissory notes
and warrants directed to strategic investors. The terms of such financing,
including the interest rate

and maturity dates of such notes and the number and exercise price of such
warrants, will be subject to negotiations between us and the prospective
investors, We cannot be certain that we will be able to obtain this or any other
future financing on commercially reasonable terms or at all. Our failure to
obtain immediate financing, or inability to obtain financing on acceptable
terms, could require us to limit our plans, incur indebtedness that has high
rates of interest or substantial restrictive covenants, issue equity securities
that will dilute your holdings, or discontinue all or a portion of our remaining
operations.

Our future success in the licensing of our Burstware(R) product may depend
on our ability to keep pace with technological changes, which could result in a
loss of revenues.

The emerging video streaming and content delivery industry is characterized
by:

o rapidly changing technologies;
o frequent new product introductions; and
o rapid changes in customer requirements.

Video streaming technologies have reached commercially acceptable levels only in
the last several years and are continuing to experience numerous changes. As a
result, we must be able to maintain and extend our technological edge in order
to ensure that our products remain commercially viable. We intend to provide the
source code to our software to select customers so that they can design their
own improvements in our product. We also intend to make enhancements to our
software through the use of outside engineering contractors, on an "as-needed"
basis, paid for by our customers. There is no guarantee that we will be able to
implement either of these two strategies. Failure to do so could severely impair
our ability to successfully market our current Burstware(R) software as a
stand-alone media delivery solution.

Our Burstware(R) products must comply with a number of current industry
standards and practices established by various international bodies. Our failure
to comply with evolving standards, including industry standard CODECS, will
limit acceptance of our products by market participants. If new standards are
adopted in our industry, we may be required to adopt those standards in our
products. It may take us a significant amount of time to develop and design
products incorporating these new standards. We may also become dependent upon
technologies developed by third parties and have to pay royalty fees, which may
be substantial, to the developers of the technology that constitutes the newly
adopted standards.

Our products are technologically complex and are designed to interface with
third-party products, such as Microsoft's Windows Media Player(R) and the
QuickTime(R) Player using publicly disseminated application program interfaces,
or APIs. Modifications to the APIs for these third-party products could require
further development effort on our part to continue to make the interface work
properly or, in some cases, result in an inability of our products to work
properly with third-party products. There is no assurance that these development
efforts or similar kinds of changes will be successful or that we can develop
new products effectively and quickly enough to avoid loss of revenues or market
share.

If we do not develop new products or new product features in response to
customer requirements or in a timely way, customers may not buy our products,
which would seriously harm the software licensing portion of our business.

The software media delivery industry is rapidly evolving and subject to
technological change and innovation. In order to continue to pursue the software
licensing side of out business, we must continue to enhance our products by
adding new product features and introduce new products in response to customer
requirements. If we fail to do so or in a timely manner, our customers may not
buy our products, resulting in serious harm to our business.

We will not be able to sell sufficient quantities of our software products to
sustain a viable software licensing business if the market for software media
delivery products does not develop or if a competing technology displaces our
products.

The software media delivery market is in the early stage of development and
is still evolving. For example, telecommunication companies such as SBC
Communications, Inc. intend to develop products and services for delivering
video content to their customers through digital subscriber line, or DSL,
networks. While we believe that our products can be successfully incorporated
into DSL and other broadband networks, further testing and development of our
products in a DSL network and other broadband environments will be necessary.
There can be no assurance that our products can be successfully incorporated
into DSL or other broadband networks or that companies operating such networks
will purchase our products. Our lack of product diversification exposes us to a
substantial risk of loss in the event that the software media delivery market
does not develop or if a competing technology replaces our software. If a
competing technology replaces or takes significant market share from the
products that our software support, we will not be able to sell our products in
quantities sufficient to grow our business.

We rely upon our sales of a small number of products, and the failure of any one
of our products to be successful in the market could substantially reduce our
revenue .

We rely on licensing of a small number of existing software products to
generate substantially all of our revenue and we currently are not developing
any additional software products. Consequently, if our existing products are not
successful our sales could decline materially, which harm our financial
performance.

Our software products generally have long sales cycles and implementation
periods, which increase our costs in obtaining orders and reduce the
predictability of our earnings.

Our products are technologically complex. Prospective customers generally
must make a significant commitment to test and evaluate our software and to
integrate it into their products. As a result, our sales process is often
subject to delays associated with lengthy approval processes. For these and
other reasons, the initial sales cycles of our new software products has been
lengthy, recently averaging approximately four to six months from initiation in
late 1999 to completion in 2000. We expect that future sales will also
experience lengthy sales cycles.

Our products are often embedded in our customers' web pages. Since the
proper development of video enabled web pages requires a relatively high level
of technological expertise, we may be required to provide professional service
support to our customers in this area. There can be no assurance that we will be
able to continue to staff adequately for and deliver the level of professional
services required, or that we will be able to charge the customer fully for this
work. The result could be further impediments to sales and possibly higher than
anticipated costs of sales.

Long sales cycles are also subject to a number of significant risks over which
we have little or no control and that are not usually encountered in a short
sales span. These risks include our customers' budgetary constraints, internal
acceptance reviews and cancellation. In addition, orders expected in one quarter
could shift to another because of the timing of our customers' procurement
decisions. The time required to implement our products can vary significantly
with the needs of our customers and generally lasts for several months; larger
implementations can take several calendar quarters. This complicates our
planning process and reduces the predictability of our financial results.

We may not be successful in protecting our intellectual property.

Our success will depend, in large part, on our ability to protect the
intellectual property that we have developed through patents, trademarks, trade
secrets, copyrights, licenses and other intellectual property rights. We cannot
guarantee that we will be able to protect our intellectual property. We are
subject to a number of risks relating to intellectual property rights, including
the following:

o the means by which we seek to protect our proprietary rights may not
be adequate to prevent others from misappropriating our technology or
from independently developing or selling technology or products with
features based on or similar to ours;

o Legal standards relating to the validity, enforceability and scope of
protection of proprietary rights in Internet-related businesses are
uncertain and still evolving;
o our products may be sold in foreign countries that provide less
protection to intellectual property than is provided under U.S.,
Japanese or European community laws;
o our intellectual property rights may be challenged, invalidated,
violated or circumvented and may not provide us with any competitive
advantage; and
o our patents pending may not be approved or may be only partially
approved.

As a result, we cannot predict the future viability or value of our proprietary
rights and those of other companies within the industry.

If our proprietary technology infringes upon the intellectual property rights of
others, our costs could increase and our ability to license our products or
patents could be limited.

We are not aware of any activity that may be infringing any proprietary
right of a third party. There can be no assurance, however, that aspects of our
technology would not be found to violate the intellectual property rights of
other parties. The resulting risks include the following:

o other companies may hold or obtain patents or may otherwise claim
proprietary rights to technology that is necessary to our business;
o if we violate the intellectual property rights of other parties, we
may be required to modify our products or intellectual property or to
obtain a license to permit their continued use; and
o any future litigation to defend us against allegations that we have
infringed upon the rights of others could result in substantial costs
to us, even if we ultimately prevail.

There are a number of companies that hold patents for various aspects of
the technology incorporated in our industry's standards (i.e. technologies that
deliver or manage audio and video content such as Java, Video, Audio, Vector
Graphics, Shockwave, and Cursors.) We expect that companies seeking to gain
competitive advantages will increase their efforts to enforce any patent rights
that they may have. The holders of patents from which we have not obtained
licenses may take the position that we are required to obtain a license from
them. We cannot be certain that we would be able to negotiate any license at an
acceptable price. Our inability to do so could substantially increase our
operating expenses or require us to seek and obtain alternative sources of
technology necessary to produce our products.

We began our current product line of software only recently and, as a result,
your ability to evaluate our prospects may be limited.

Although we have been operating since 1993, we have only recently commenced
sales of our present product line of media delivery software. Prior to that
time, we sold custom designed software products, which we do not anticipate
selling in the future. Our limited operating history with respect to our current
software may limit your ability to evaluate our prospects because of:

o our limited historical financial data relating to sales of our current
software;
o our unproven potential to generate profits; and
o our limited experience in addressing emerging trends that may affect
our software business.

As a young company that recently commenced a new product line, we face
risks and uncertainties relating to our ability to implement our business plan
successfully. You should consider our prospects in light of the risks, expenses
and difficulties we may encounter.

We may experience fluctuations in our future operating results, which will make
predicting our future results difficult.

These fluctuations may result from a variety of factors, including:

o market acceptance of our products, including changes in order flow
from our largest customers, and our customers' ability to forecast
their needs;
o the timing of new product announcements by our competitors;
o the lengthy sales cycle of our products;
o increased competition, including changes in pricing by us or our
competitors;
o delays in deliveries by our suppliers and subcontractors;
o currency exchange rate fluctuations; and
o general economic conditions in the geographic areas in which we
operate.

Accordingly, any revenues or net income in any particular period may be
lower than our revenues and net income in a preceding or comparable period.
Period-to-period comparisons of our results of operations may not be meaningful,
and you should not rely upon them as indications of our future performance. In
addition, our operating results may be below the expectations of securities
analysts and investors in future periods. Our failure to meet these expectations
will likely cause our share price to decline.

Our products could contain defects, which would reduce sales of those products
or result in claims against us.

We develop complex software for media delivery, content management and
storage. Despite testing, software errors have been found in our product and, in
some cases, our product's performance when initially deployed has not met
customer expectations. To date, we believe that all of the errors in question
have been resolved. There can be no assurance, however, that other errors will
not occur, as errors such as these are common in the development of any software
product. Additional errors in our product could result in, among other things, a
delay in recognition or loss of revenues, loss of market share, failure to
achieve market acceptance or substantial damage to our reputation. We could be
subject to material claims by customers, and we may need to incur substantial
expenses to correct any product defects. We do not have product liability
insurance to protect us against losses caused by defects in our products, and we
do not have "errors and omissions" insurance. As a result, any payments that we
may need to make to satisfy our customers may be substantial.

We depend on a limited number of key personnel who would be difficult to
replace, and we may not be able to attract and retain management and technical
personnel.

Because our products are complex and our market is new and evolving, the
success of our business depends in large part upon the continuing contributions
of our management and technical personnel. The loss of the services of either of
our two current employees, Richard A. Lang, our Chairman of the Board, and Chief
Executive Officer and Eric Walters, our Vice President of Operations, would
substantially interfere with our operations. We do not have key person life
insurance policies covering any of our employees. We are currently seeking such
insurance coverage for Mr. Lang. The insurance coverage that we may secure on
Mr. Lang may be insufficient to compensate us for the loss of his services.

Risks Relating to Our Industry

If software media technology or our method of implementing this technology is
not accepted, we will not be able to sustain or expand our business.

Our future success depends on the growing use and acceptance of video
applications for PCs and set-top boxes including the growth of video on the
Internet. The market for these applications is new, and may not develop to the
extent necessary to enable us to expand our business. We have invested
significant time and resources in the

development of products for this market. If the target market for our solution
does not grow, we may not obtain any benefits from these investments.

The markets in which we operate are highly competitive, and many of our
competitors have much greater resources than we do, which may make it difficult
for us to become profitable.

Competition in our industry is intense, and we expect competition to
increase. Competition could force us to charge lower prices for our products,
reduce demand for our products and reduce our ability to recover development and
manufacturing costs.

Some of our competitors:

o have greater financial, personnel and other resources than ours;
o offer a broader range of products and services than ours;
o may be able to respond faster to new or emerging technologies or
changes in customer requirements than we can;
o may have a more substantial distribution network than ours;
o benefit from greater purchasing economies than we do;
o offer more aggressive pricing than we do; and
o devote greater resources to the promotion of their products than we
do.

We will not be able to compete effectively if we are not able to develop
and implement appropriate strategies to address these factors.

Internal development efforts by our customers and new entrants to the market may
increase competition.

In the future, some of our customers may internally develop products that
will replace the products that we currently sell to them. In addition, some
leading companies, with substantially greater resources than we have, may
attempt to enter our market. The recent growth in the market for media delivery
and related technologies is attracting large entrants.

We depend on the continued growth and commercial acceptance of the Internet.

Our business will be adversely affected if usage of the Internet and
broadband access does not continue to grow as anticipated. This growth may be
inhibited by a number of factors, such as:

o inadequate network infrastructure;
o inconsistent quality of service;
o lack of cost-effective broadband high-speed services;
o lack of cost-effective storage; and
o security concerns.

Even if Internet use and broadband access grows, the Internet
infrastructure may not be able to support future growth adequately and its
reliability and quality of service may suffer. In addition, numerous websites
have experienced service interruptions due to outages and other delays occurring
internally and throughout the Internet network infrastructure. If these outages
or delays occur frequently in the future, Internet usage, as well as usage of
our products, could grow more slowly or decline.

Delivery of video using the Internet is an emerging business. Many of our
customers are new companies that are innovating and counting on Burstware(R) to
provide a technological edge. Because many of these companies are early stage
enterprises without revenues, they may delay payment or fail to pay our
invoices. For this reason, we have deferred a substantial portion of revenue
booked until collectibility has been assured. There is no assurance that this
revenue will ultimately be collected and recognized or that future bookings will
not be deferred.

We may face government regulation and legal uncertainties relating to the
Internet.

Currently, there are few laws or regulations that specifically regulate
communications or commerce on the Internet. However, laws and regulations may be
adopted that address issues such as user privacy, pricing and the
characteristics and quality of products and services. For example, recent
federal legislation prohibits the transmission of certain types of information
and content over the Internet. In addition, several telecommunications companies
have petitioned the Federal Communications Commission to regulate Internet and
on-line service providers in a manner similar to long distance telephone
carriers and to impose access fees on such providers. This could increase the
cost of transmitting data over the Internet. Moreover, it may take years to
determine the extent to which existing laws relating to issues such as property
ownership, libel and personal privacy apply to the Internet. Finally, state tax
laws and regulations relating to the provision of products and services over the
Internet are still developing. If individual states impose taxes on products and
services provided over the Internet, the cost of our products and services may
increase and we may not be able to increase the price we charge for our products
to cover these costs. Any new laws or regulations or new interpretations of
existing laws and regulations relating to the Internet could adversely affect
our business.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At December 31, 2001, we had no funds invested in any securities or money
market funds.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMTARY DATA

The Report of the Independent Public Accountants and the accompanying
financial statements and notes to the financial statements are on pages F-1
through F-25. Financial statement schedules are not required and have been
omitted.

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

Our independent auditors for fiscal year 2000 were BDO Seidman, LLP. On
March 7, 2002, we appointed Berenfeld, Spritzer, Schecter and Sheer as our
independent auditors for the fiscal year ended December 31, 2001. The change in
independent auditors was recommended by the Company's audit committee and
approved by the Board of Directors in light of our reduced operations and in
order to reduce auditing expenses. The independent auditor's report of BDO
Seidman, LLP for the fiscal years ended December 31, 1999 and 2000, dated April
9, 2001, stated that "the Company has suffered recurring losses from operations
and has a net capital deficit that raise substantial doubt about its ability to
continue as a going concern." During fiscal years 1999 and 2000 and through the
date of the change in auditors, there were no disagreements between the Company
and BDO Seidman, LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure. Prior to
engaging Berenfeld, Spritzer, Schecter and Sheer, neither we nor anyone on our
behalf consulted with such firm regarding (i) the application of accounting
principles to a specified transaction, either completed or proposed; or the type
of audit opinion that might be rendered on our financial statements, or (ii) any
matter that was either the subject of a disagreement or a reportable event.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Our executive officer, key employee and directors and their ages as of
December 31, 2001, are as follows:

Name Age Position
--------------------------------------------------------------------------------
Richard A. Lang 48 Chairman, President, Chief Executive Officer
and Chief Financial Officer
Eric H. Walters 45 Vice President, Operations
Trevor Bowen (1)(2) 52 Director
John J. Micek III (1)(2) 49 Director and Secretary
Brian Murphy (2) 46 Director
Barry L. Ritholtz 40 Director

(1) Member of the compensation committee
(2) Member of the audit committee

The following sets forth biographical information as to the business
experience of each Executive Officer and Director of the Company for the
year ended December 31, 2001:

Richard A. Lang is our Chairman of the Board, President, Chief Executive
Officer and Chief Financial Officer. From September 1997 through the end of May
2000 he served as President and from September 1997 through September 2000 he
served as Chief Executive Officer. From January 31, 1997 through August 1997,
Mr. Lang served as one of our directors. Mr. Lang served as our Chairman of the
Board and Treasurer until January 31, 1997. He had served as Chairman of the
Board, Chief Executive Officer and Treasurer from December 1993 to September
1995 and as a Director since August 1992. He has been a Director of our
subsidiary, Explore Technology, Inc., since February 1990, and served as its
President from February 1990 to August 1992. Mr. Lang has presided over the
development of our patent portfolio. He is the inventor of record for the bulk
of our Intellectual Property. Mr. Lang was also a co-founder of Go-Video, Inc.,
Scottsdale, Arizona and co-inventor of Go-Video's patented dual-deck VCRs. Mr.
Lang received his A.A. degree from Scottsdale College. Starting April 1, 2001,
Mr. Lang has again become Chief Executive Officer as a result of the resignation
of Douglas Glen.

Trevor Bowen is a partner in Principle Management Limited, an artiste
management company with offices in Dublin and New York. He was a partner in KPMG
LLP for eleven years before joining Principle Management Limited in 1996. Mr.
Bowen holds a number of directorships in companies in the media, entertainment
and film business. Mr. Bowen also holds a number of non-executive directorships
and is Chairman of an international consulting group. Mr. Bowen received a
Bachelor of Business Studies degree from Trinity College Dublin and is a Fellow
of The Institute of Chartered Accountants in Ireland. He has also completed a
Corporate Finance Course at Harvard University.

John J. Micek III has been one of our directors since April 1990, Secretary
and Treasurer since January 1994, and served as our President from April 1990 to
August 1992. Mr. Micek currently serves as President of Universal Warranty
Insurance located in Palo Alto, California, and Omaha, Nebraska. From 1994 to
1997, Mr. Micek served as general counsel for U.S. Electricar in San Francisco,
California. From January 1989 to March 1994, Mr. Micek practiced law in Palo
Alto, California. He has served as a Director of Armanino Foods of Distinction,
Inc., a publicly-held specialty food manufacturer in Hayward, California, since
February 1988. He also serves as a Director of Universal Group, Inc., a Midwest
group of insurance companies, and Cole Publishing Company in northern
California. He received a Bachelor of Arts Degree in History from the University
of Santa Clara and a Juris Doctorate from the University of San Francisco School
of Law.

Brian Murphy has been one of our directors since January 1997. He is a
partner in O.J. Kilkenny & Company, Chartered Accountants specializing in the
entertainment industry with offices in London, England and Dublin, Ireland. The
firm provides a wide range of services to their clients, consisting of major
international entertainment artists, covering all areas of financial management
and audit and accountancy advise. Mr. Murphy is involved at the executive level
with a number of companies in the media and entertainment business, particularly
in the field of digital post-production, film and television. Mr. Murphy
received a Bachelors Degree in Commerce from Dublin University, and became a
fellow of the Institute of Chartered Accountants in Ireland, England and Wales.
Mr. Murphy became one of our directors as representative of Draysec Finance
Limited, one of our principal stockholders.

Barry L. Ritholtz has been one of our directors since March 8, 2002. Since
March 2001, he has been the Market Strategist for Weatherly Securities, which
has since merged with Ehrenkrantz King Nussbaum, a brokerage firm and investment
bank headquartered in Garden City, New York. Mr. Ritholtz is responsible for
writing the firm's Daily Pre-opening Comments and its biweekly Market Commentary
for the firm's brokers, portfolio managers and clients. He also develops and
maintains the Model Portfolio used as the basis of managed monies by private
banking portfolio managers. Mr. Ritholtz has served as research editor for
MacToday, a desktop publishing magazine and frequently publishes articles on
finance and technology issues. He has been a contributor to CBS Marketwatch and
his perspective on the markets have been quoted by various media, including Dow
Jones, Good Morning Silicon Valley, thestreet.com and the San Jose Mercury News.
Mr. Ritholtz is also the founder of W3 Ventures, Ltd., a technology strategy and
consulting firm. From January 2000 to February 2001, he was Investment
Strategist for Auerbach, Pollack & Richardson, a New York investment bank, and
from October 1998 to January 2000, he was Investment Strategist for Trautman
Kramer, a New York investment bank. From January 1996 to February 1998, Mr.
Ritholtz was a securities trader for A.J. Michaels, a West Islip, New York
securities broker. Mr. Ritholtz received a Bachelor of Arts Degree in Political
Science from State University of New York at Stony Brook and a Juris Doctorate
(cum laude) from the Benjamin N. Cardozo School of Law.

Eric H. Walters, a key employee, has served as our Vice President,
Operations since October 2001, where he is responsible for our administrative
operations as well as intellectual property management. From March 2000 to
October 2001, Mr. Walters served as the manager of our Intellectual Property
Department. From March 1999 to March 2000, he was our Manager of Inside Sales.
Mr. Walters has been associated with us since our formation in 1990. He held the
position of Director of Corporate Communications during 1991 and 1992. Prior to
joining us in 1990 and again in 1999, Mr. Walters worked at Intel Corporation in
Press Relations for the Digital Imaging and Video Division. Mr. Walters is the
co-inventor of record for several of our patents.

Section 16(a) Beneficial Ownership Reporting Compliance.

Gordon Rock, one of our principal shareholders, was required to file a Form
3 reflecting his acquisition in August 2001 of a warrant to purchase 1,000,000
shares of our common stock that resulted in his total beneficial ownership
interest exceeding 10% of our outstanding shares. In addition, during fiscal
year 2001, Mr. Rock was required to file a Form 4 with respect to nine
acquisitions of our common stock aggregating 145,700 shares and eleven
acquisitions of warrants to purchase an aggregate of 4,833,332 shares of our
common stock. Mr. Rock filed a Form 5 reflecting these acquisitions on March 6,
2002. The Form 5 was required to be filed on or before February 15, 2002.

ITEM 11. EXECUTIVE COMPENSATION AND OTHER MATTERS.

Summary of Compensation. The following table sets forth all compensation
earned or paid for services rendered to us in all capacities by our Chief
Executive Officer for the fiscal year ended December 31, 2001. No other
executive officer earned more than $100,000 in salary and bonus for the fiscal
year ended December 31, 2001.

Summary Compensation Table

Long-Term
Annual Compensation Compensation
-----------------------------------------------------------------------
Name and Year Salary Bonus Securities
Principal Underlying All Other
Position Options (#) Compensation($)
-----------------------------------------------------------------------------------------------------------------------

Richard A. Lang, 2001 $ 120,000 $ 7,500 -- $ 17,400(1)
Chairman 2000 330,616 -- 269,594 12,000(2)
of the Board, 1999 240,000 -- -- --
President and Chief
Executive Officer
-----------------------------------------------------------------------------------------------------------------------
Douglas Glen, Chief 2001 $ 30,000(3) $ -- -- $ --
Executive Officer 2000 188,294 -- 941,470 69,000(4)
1999 -- 100,000 --

(1) Represents monthly auto allowance payments made to Mr. Lang in the amount of
$2,400 and 15,000 shares of common stock of Eagle Wireless International, Inc.
transferred by us to Mr. Lang in lieu of salary with an aggregate fair market
value of $15,000.

(2) Represents monthly auto allowance payments made to Mr. Lang.

(3) Represents shares of common stock of Eagle Wireless International, Inc.
transferred by us to Mr. Glen, our former Chief Executive Officer in lieu of
salary with an aggregate fair market value of $30,000. Mr. Glen resigned as our
Chief Executive Officer on March 31, 2001.

(4) Represents monthly housing allowance payments made to Mr. Glen.

Option Grants. During 2001, no options were granted to our current Chief
Executive Officer, Richard A. Lang, or to our former Chief Executive Officer,
Douglas Glen.

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

The following table sets forth information concerning option exercises and the
aggregate value of unexercised options for the year ended December 31, 2001,
held by our current and former Chief Executive Officers. Our Chief Executive
Officers did not exercise any stock options in 2001.

Number of Securities Underlying Value of Unexercised In-the Money
Unexercised Options at Options at
Shares Value December 31, 2001 December 31, 2001(1)
Acquired on realized -----------------------------------------------------------------------------
Name Exercise(#) ($) Exercisable(#) Unexercisable(#) Exercisable($) Unexercisable($)
---------------------------------------------------------------------------------------------------------------------------------

Richard A. Lang -- -- 1,619,796 31,965 $ 0 $ 0
Douglas Glen -- -- 1,131,470 -- 0 0

(1) The value realized on exercised options and the value of unexercised
in-the-money options at December 31, 2001 is based on a value of $0.04 per
share, the closing bid price of our common stock at December 31, 2001. All
such options had exercise prices in excess of this value.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The following table sets forth information with respect to beneficial
ownership of our common stock by: o each person who beneficially owns more than
5% of our common stock; o each of our executive officers; o each of our
directors; and o all executive officers and directors as a group.

Except as otherwise noted, the address of each 5% stockholder listed in the
table is c/o Burst.com, Inc., 613 Fourth Street, Suite 201, Santa Rosa,
California 95494. Beneficial ownership is determined in accordance with the
rules of the Securities and Exchange Commission and includes voting and
investment power with respect to shares. To our knowledge, except under
applicable community property laws or as otherwise indicated, the persons named
in the table have sole voting and sole investment control with respect to all
shares beneficially owned. The applicable percentage of ownership for each
stockholder is based on 19,173,846 shares of common stock outstanding on March
31, 2002 together with applicable options and warrants for that stockholder.
Shares of common stock issuable upon exercise of options and other rights
beneficially owned are deemed outstanding for the purpose of computing the
percentage ownership of the person holding those options and other rights, but
are not deemed outstanding for computing the percentage ownership of any other
person.

Number of Shares Percentage of
Name and Address of Beneficial Owner Beneficially Owned Outstanding Shares
------------------------------------------------------------------------------------------------------------

5% Stockholders
---------------

Draysec Finance Limited 2,041,678 (1) 10.37%
Gordon Rock 10,496,801 (2) 40.12%
SBC Venture Capital Corporation 1,863,606 (3) 9.23%
Chelsey Capital 1,648,472 (4) 8.22%
Robert London 1,155,369 (5) 5.95%
Eagle Wireless International, Inc. 1,500,000 (6) 7.48%
Special Situations Funds 1,171,629 (7) 5.76%

Executive Officers and Directors
--------------------------------

Richard A. Lang 2,632,528 (8) 12.61%
Trevor Bowen 1,826,578 (9) 9.50%
John J. Micek III 566,988 (10) 2.91%
Brian Murphy 1,945,033 (11) 10.05%
Barry L. Ritholtz 25,000 (12) *

All executive officers and directors as a group (5 persons) 6,993,982 24.35%

* Represents less than a one (1) percent interest

(1) Includes 1,525,769 shares held, options to purchase 200,000 shares, and
warrants to purchase 46,109 shares of our common stock. Also includes
options to purchase 100,000 shares of our common stock held by Trevor Bowen
and options to purchase 169,800 shares of our common stock held by Brian
Murphy, each of whom represents Draysec Finance on our Board of Directors.

(2) Includes 1,593,050 shares of our common stock held by Mr. Rock, 1,916,413
shares held by Mercer Management Inc., options to purchase 500,000 shares
held by Mr. Rock, and warrants to purchase 6,487,338 shares of our common
stock held by Mercer Management, Inc.

(3) Includes 857,633 shares of our common stock and a warrant to purchase
1,005,973 shares of our common stock.

(4) Includes 769,750 shares of our common stock and warrants to purchase
878,722 shares of our common stock.

(5) Includes 913,279 shares of our common stock and warrants to purchase
242,090 shares of our common stock.

(6) Represents 1,500,000 shares of our common stock.

(7) Represents warrants to purchase 1,171,629 shares of our common stock owned
by Special Situations Fund III. L.P., Special Situations Private Equity
Fund, L.P., Special Situations Cayman Fund, L.P. and Special Situations
Technology Fund, L.P. Such shares are deemed beneficially owned by Austin
W. Marxe and David M. Greenhouse, who serve as executive officers of the
investments advisors of such funds.

(8) Includes 897,346 shares of our common stock in the name of the Lisa Walters
and Richard Lang Revocable Trust, options to purchase 1,613,182 shares of
our common stock held by Richard Lang, and options to purchase 122,000
shares of our common stock held by Lisa Walters, Mr. Lang's spouse.

(9) Includes 1,771,878 shares of our common stock held beneficially by Draysec
Finance and options to purchase 54,700 shares of our common stock.

(10) Includes 43,773 shares of our common stock held by Mr. Micek, 138,888
shares of our common stock held by Silicon Prairie Partners, L.P., 50,000
shares of our common stock held by Universal Warranty Corp., and 12,829
shares held by Universal Assurors Agency, Inc. Also includes options to
purchase 290,978 shares of our common stock held by Mr. Micek, warrants to
purchase 6,250 shares of our common stock held by Mr. Micek, warrants to
purchase 6,500 shares of our common stock held by Universal Warranty Corp.
and warrants to purchase 15,625 shares held by Universal Assurors Agency,
Inc.

(11) Includes 1,771,878 shares of our common stock held beneficially by Draysec
Finance and options to purchase 173,155 shares of our common stock held by
Mr. Murphy.

(12) Represents options to purchase 25,000 shares of our common stock.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Since January 1, 2001, there has not been, nor is there currently proposed,
any transaction or series of similar transactions to which we were or are to be
a party in which the amount involved exceeds $60,000 and in which any director,
executive officer or holder of more than 5% of our common stock, or an immediate
family member of any of the foregoing, had or will have a direct or indirect
interest other than:

o compensation arrangements, which are described where required under
Item 11. Executive Compensation and Other Matters. above; and
o the transactions described below.

Transactions with Gordon Rock

In November and December 2000 and during 2001, Gordon Rock, one of our
principal stockholders and a director from April 2001 to July 2001, loaned us an
aggregate amount of $1,270,000 evidenced by our secured promissory notes at an
interest rate of 9% per annum with respect to $1,210,000 of such debt and at an
interest rate of prime plus 2% with respect to $60,000 of such debt. The
aggregate principal amount of $1,210,000 plus accrued

interest is due and payable on November 21, 2002 (the due date was extended to
this date pursuant to the lender creditor agreement discussed below), $30,000 of
principal plus accrued interest is due and payable on November 17, 2004 and the
remaining $30,000 of principal plus accrued interest is due and payable on
December 12, 2004. Mr. Rock loaned to us an additional $60,000 in February 2002
evidenced by our secured promissory note at an interest rate of prime plus 2%
and due and payable along with accrued interest on February 14, 2005. Such loan,
as well as the prior loans to the Company by Mr. Rock discussed above, are
secured by a security interest in all of our assets. As additional consideration
for such loans, we issued to Mr. Rock warrants to purchase an aggregate of
5,833.332 shares of our common stock at exercise prices ranging from $.15 to
$.30 per share (previously issued warrants at exercise prices in excess of $.30
per share were amended to reduce the exercise price to $.30 per share). In
connection with such debt financing, we also entered into a lender creditor
agreement with Mr. Rock in November 2001 that provided for the extension of the
due date of $1,270,000 of secured notes to November 21, 2002, as indicated
above. In consideration for such extension, we agreed that so long as any
portion of such debt remained outstanding, we would not, without the written
consent of Mr. Rock, (i) incur any new indebtedness or expense in excess of
$2,500, subject to certain exceptions, (ii) issue any additional securities,
(iii) sell or license any assets except in the ordinary course of business, (iv)
commence any litigation except as required by applicable law; (v) merger or
otherwise effect a reorganization, or (vi) amend our certificate of
incorporation or bylaws. During 2000, we issued a 6% convertible note payable to
Mercer Management, an affiliate of Mr. Rock. The note was convertible into a new
series of our preferred stock at a per share conversion price of Five Dollars
($5.00) at the option of the note holder. In conjunction with the issuance of
the warrants discussed above, the convertibility feature of this note was
removed and the interest rate was changed from 6% to 9%.

Transactions with Storie Partners LLP

In December 2001, Storie Partners LLP, which at that time was one of our
principal stockholders, assigned back to the Company without consideration
2,913,167 shares of our common stock. Such shares were cancelled and are no
longer issued and outstanding.

Transactions with John J. Micek III

Transactions with Barry L. Ritholtz

In May 2001, we entered into a letter agreement with W3 Ventures, Ltd., an
affiliate of Barry L. Ritholtz. Mr. Ritholtz became one of our directors in
March 2002. Under the agreement, W3 Ventures has agreed to act as our agent to
identify individuals and entities who may be interested in acquiring us or
investing in our securities. The agreement has a one-year term that may be
extended by mutual agreement. The agreement provides that if an individual or
entity introduced to us by W3 Ventures makes a cash, equity or other investment
during the term of the agreement or within one year after the expiration of the
agreement, we will pay W3 Ventures an amount in cash equal to 8% of the total
amount of the net investment. In addition, if an individual or entity introduced
to us by W3 Ventures acquires all or any portion of our business, we will pay to
W3 Ventures an amount in cash equal to 5% of the total purchase price, whether
the purchase is in cash, equity or the assumption of debt. As of March 31, 2002,
we have not entered into any agreement or transaction to which the agreement
with W3 Ventures would apply.

Transactions with Draysec Finance Limited

During 2001, we issued 9% convertible notes payable to Draysec Finance
Limited, one of our principal shareholders, in the aggregate principal amount of
$100,000, with interest and principal due in February and March 2002. The notes
are convertible into a new series of preferred stock at a per share conversion
price of $5.00 at the option of the noteholder. In November 2001, Draysec agreed
to extend the due date of the loan to November 21, 2002. In consideration for
this extension, we reduced the exercise price of warrants to purchase shares of
common stock held by Draysec from $5.00 to $0.30 per share.

PART IV

ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K

a) Exhibits

EXHIBIT INDEX

Exhibit Description
--------------------------------------------------------------------------------
2.1 ** State of Arizona, Articles of Merger of Video Press, Inc. into
Explore Technology, dated December 28, 1990; Agreement and Plan of
Merger dated August 29, 1993.

2.2 ** Action by Unanimous Consent of Board of Directors of Explore
Technology, Inc., July 15, 1992.

2.3 ** Certificate of Merger of Time Shift TV, Inc. into IVT Delaware, Inc.
dated July 26, 1999.

2.4 ** Agreement and Plan of Reorganization between Instant Video
Technologies, Inc., IVT, Delaware, and Time Shift TV dated August 3,
1999.

3.1.1** Certificate of Incorporation of Catalina Capital Corp. dated April
27, 1990.

3.1.2** Certificate of Amendment to the Certificate of Incorporation of
Catalina Capital Corp. changing its name to Instant Video
Technologies, Inc. dated August 17, 1992.

3.1.3** Amended and Restated Certificate of Incorporation dated January 27,
2000.

3.2.1** Bylaws of Catalina Capital Corp. dated April 27, 1990; Amendment No.
1 dated April 5, 1993.

3.3.2** Amended and Restated Bylaws dated January 27, 2000.

3.3.3** Certificate of Status Foreign Corporation dated March 12, 1993.

3.3.4** Certificate of Status Foreign Corporation dated August 29, 2000.

4.1** Specimen common stock certificate.

4.2 ** Securities Purchase Agreement by and among the registrant and
certain investors dated as of January 27, 2000.

4.3 ** Registration Rights Agreement by and among the registrant and
certain investors dated as of January 27, 2000.

4.4 ** Form of Warrant to purchase shares of common stock issued to certain
investors on January 27, 2000

4.5 ** Form of Lock-up Agreement entered into between the registrant and
each of certain officers, directors and principal shareholders in
January 2000.

4.6 Form of Warrant to purchase shares of common stock issued to Gordon
Rock during 2001.

4.7 Form of Warrant to purchase shares of common stock issued to certain
investors in December 2001.

10.1** Employment Agreement with Richard A. Lang.

10.2** Eagle Wireless International, Inc. Securities Purchase Agreement.

10.3** License Agreement with InterZest.

10.4** Eagle Wireless International, Inc. License Agreement

10.5 Letter Agreement with W3 Ventures, Ltd dated May 14, 2001.

10.6 Lender Creditor Agreement with Gordon Rock dated November 16, 2001.

21.1 ** Subsidiaries of the registrant.

--------
** Previously filed.

b) Reports on Form 8-K during quarter ended December 31, 2001:

None

SIGNATURES

In accordance with the requirements of Section 13 or 15(d) 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.

BURST.COM, INC.

Dated: April 12, 2002 By /s/ Richard A. Lang
--------------------------------
Richard A. Lang, Chairman, Chief
Executive Officer and
Chief Financial Officer

In accordance with the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:

Signature Title Date
--------- ----- ----

/s/ Trevor Bowen Director April 12, 2002
-----------------------
Trevor Bowen

/s/ John J. Micek Director April 12, 2002
-----------------------
John J. Micek III

/s/ Brian Murphy Director April 12, 2002
-----------------------
Brian Murphy

EXHIBIT INDEX

2.2 ** Action by Unanimous Consent of Board of Directors of Explore
Technology, Inc., July 15, 1992.

2.3 ** Certificate of Merger of Time Shift TV, Inc. into IVT Delaware, Inc.
dated July 26, 1999.

2.4 ** Agreement and Plan of Reorganization between Instant Video
Technologies, Inc., IVT, Delaware, and Time Shift TV dated August 3,
1999.

3.1.1** Certificate of Incorporation of Catalina Capital Corp. dated April
27, 1990.

3.1.2** Certificate of Amendment to the Certificate of Incorporation of
Catalina Capital Corp. changing its name to Instant Video
Technologies, Inc. dated August 17, 1992.

3.1.3** Amended and Restated Certificate of Incorporation dated January 27,
2000.

3.2.1** Bylaws of Catalina Capital Corp. dated April 27, 1990; Amendment No.
1 dated April 5, 1993.

3.3.2** Amended and Restated Bylaws dated January 27, 2000.

3.3.3** Certificate of Status Foreign Corporation dated March 12, 1993.

3.3.4** Certificate of Status Foreign Corporation dated August 29, 2000.

4.1** Specimen common stock certificate.

4.2 ** Securities Purchase Agreement by and among the registrant and
certain investors dated as of January 27, 2000.

4.3 ** Registration Rights Agreement by and among the registrant and
certain investors dated as of January 27, 2000.

4.4 ** Form of Warrant to purchase shares of common stock issued to certain
investors on January 27, 2000

4.5 ** Form of Lock-up Agreement entered into between the registrant and
each of certain officers, directors and principal shareholders in
January 2000.

4.6 Form of Warrant to purchase shares of common stock issued to Gordon
Rock during 2001.

4.7 Form of Warrant to purchase shares of common stock issued to certain
investors in December 2001.

10.1 ** Employment Agreement with Richard A. Lang.

10.2** Eagle Wireless International, Inc. Securities Purchase Agreement

10.3** License Agreement with InterZest.

10.4** Eagle Wireless International, Inc. License Agreement

10.5 Letter Agreement with W3 Ventures, Ltd dated May 14, 2001.

10.6 Lender Creditor Agreement with Gordon Rock dated November 16, 2001.

21.1 ** Subsidiaries of the registrant.

--------
** Previously filed.

BURST.COM, INC.
AND SUBSIDIARIES

Consolidated Financial Statements

December 31, 2001 and 2000

(With Independent Auditors' Reports Thereon)

INDEPENDENT AUDITORS' REPORT

To the Stockholders of
Burst.com, Inc. and Subsidiaries
Santa Rosa, California

We have audited the accompanying consolidated balance sheet of Burst.com, Inc.
and Subsidiaries (the "Company") as of December 31, 2001 and the related
consolidated Statement of Operations, Changes in Shareholders' Deficit, and Cash
Flows for the year then ended. These consolidated financial statements are the
responsibility of management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.

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

The accompanying consolidated financial statements for December 31, 2001 have
been prepared assuming the Company will continue as a going concern. As
discussed in Note 2, the Company has suffered recurring losses from operations
and has a net capital deficit that raises doubt about its ability to continue as
a going concern. Management's plans in regards to these matters are also
discussed in Note 2. The consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Burst.com, Inc. and its Subsidiaries as of December 31, 2001, and the
consolidated results of its Statements of Operations, Changes in Stockholders'
Deficit, and Cash Flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.

Berenfeld, Spritzer, Shechter & Sheer
Miami, FL
April 5, 2002

\BERENFELD, SPRITZER, SHECHTER & SHEER\

F-1

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

The Board of Directors and Stockholders
Burst.com, Inc. (formerly Instant Video Technologies, Inc.)

We have audited the accompanying consolidated balance sheet of Burst.com, Inc.
(formerly Instant Video Technologies, Inc.) and subsidiaries as of December 31,
2000 and the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for each of the two years in the period ending
December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards 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 in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Burst.com, Inc. and
subsidiaries as of December 31, 2000, and the results of their operations and
their cash flows for each of the two years in the period ending December 31,
2000 in conformity with accounting principles generally accepted in the United
States of America.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has a net capital deficit that raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard 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.

BDO SEIDMAN, LLP

San Francisco, California
April 9, 2001

F-2

BURST.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000

ASSETS
2001 2000
------------ ------------
CURRENT ASSETS:

Cash and cash equivalents $ 6,112 $ 296,584
Accounts receivable, net of allowance of $ 0 and $20,419 17,500 295,795
Loans to officers -- 139,633
Prepaid expenses and other current assets 12,258 42,084
------------ ------------

Total Current Assets 35,870 774,096
------------ ------------

Property and Equipment,
net of accumulated depreciation of $38,895 and $97,917 respectivley 102,984 570,700

Other assets 2,700 317,337
------------ ------------

TOTAL ASSETS $ 141,554 $ 1,662,133
============ ============

LIABILITIES AND STOCKHOLDERS' DEFICIT

CURRENT LIABILITIES:

Accounts payable $ 692,423 $ 1,550,573
Accrued expenses 504,573 515,873
Accrued interest 93,079 1,192
Deferred revenue 322,400 287,225
Notes and obligations payable, current portion 1,053,239 500,000
------------ ------------

Total Current Liabilities 2,665,714 2,854,863
------------ ------------

LONG TERM LIABILITIES 274,970 --
------------ ------------

STOCKHOLDERS' DEFICIT:

Convertible preferred stock, $.00001 par value, 20,000,000 shares
authorized; none issued and outstanding -- --
Common stock, $.00001 par value; 100,000,000 shares authorized;
18,734,958 and 20,148,125 shares issued and outstanding
during 2001 and 2000 respectively 187 201
Additional paid-in-capital 57,823,883 55,852,947
Accumulated Deficit (60,623,200) (57,045,878)
------------ ------------

Total Stockholders' Deficiency (2,799,130) (1,192,730)
------------ ------------

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 141,554 $ 1,662,133
============ ============

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

F-3

BURST.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

2001 2000 1999
------------ ------------ ------------

REVENUE $ 138,019 $ 499,376 $ --

COST OF REVENUE -- 30,764 --
------------ ------------ ------------

GROSS PROFIT 138,019 468,612 --
------------ ------------ ------------

COSTS AND EXPENSES:

Research and development 188,223 4,300,328 4,076,732
Sales and marketing 120,710 8,175,525 4,185,517
Losses on abandonment, disposition and write-downs
of property and equipment 384,959 1,312,931 --
General and administrative 3,150,766 6,236,528 3,247,370
------------ ------------ ------------

Total Costs and Expenses 3,844,658 20,025,312 11,509,619
------------ ------------ ------------

LOSS FROM OPERATIONS (3,706,639) (19,556,700) (11,509,619)
------------ ------------ ------------

OTHER INCOME (EXPENSES)

Loss on sale of marketable securities (324,430) -- --
Gains on sale of assets 269,733 -- --
Interest income 7,951 40,899 --
Interest expense (467,935) (94,183) (1,468,110)
------------ ------------ ------------

Total Other Income (Expenses) (514,681) (53,284) (1,468,110)

INCOME TAX BENEFIT 244,719 -- --

NET LOSS BEFORE EXTRAORDINARY ITEM (3,976,601) (19,609,984) (12,977,729)

EXTRAORDINARY GAIN,
NET OF INCOME TAX EXPENSE OF $244,719 399,279 -- --
------------ ------------ ------------

NET LOSS $ (3,577,322) $(19,609,984) $(12,977,729)
============ ============ ============
NET LOSS PER SHARE, BASIC AND DILUTED,
BEFORE EXTRAORDINARY ITEM $ (0.19) $ (0.98) $ (1.42)
============ ============ ============
NET LOSS PER SHARE, BASIC AND DILUTED $ (0.17) $ (0.98) $ (1.42)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 21,460,318 20,058,693 9,121,947
============ ============ ============

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

F-4

BURST.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

COMMON STOCK
------------------------------ PREFERRED STOCK
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------

Balance, December 31, 1998 7,940,966 $ 79 4,501,609 $ 45

Year ended December 31, 1999:
Exercise of stock options 111,800 1 -- --
Exercise of warrants 1,277,262 13 -- --
Value assigned to warrants and beneficial
conversion feautre upon issuance of debt -- -- -- --
Stock issued for services performed 499 -- -- --
Options issued for services performed -- -- -- 268,475
Conversion of Series A preferred stock
to common 5,000 -- (5,000) --
Purchased research and development costs 200,000 2 -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------

Balance, December 31, 1999 9,535,527 95 4,496,609 45

Year ended December 31, 2000:
Common stock offering, net of costs 3,474,625 35 -- --
Compensation related to options -- -- -- --
Compensation related to sale of common
stock to employees -- -- -- --
Conversion of debt to common stock,
net of costs 1,333,750 13 -- --
Conversion of preferred stock to common
stock, net of costs 4,496,609 45 (4,496,609) (45)
Exercise of warrants 50,000 1 -- --
Stock options issued for services performed -- -- -- --
Common stock offering, net of costs 857,633 9 -- --
Exercise of stock options 273,355 2 -- --
Penalty shares issued 126,626 1 -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------

Balance, December 31, 2000 20,148,125 201 -- --

Year ended December 31, 2001:
Stock issued in exchange for marketable securities 1,500,000 15 -- --
Negotiated settlement to prior offering costs -- -- -- --
Warrants and options issued with debt
Revaluation of stock options
Shares returned (2,913,167) (29)
Net loss -- -- -- --
------------ ------------ ------------ ------------

Balance, December 31, 2001 18,734,958 187 -- --
============ ============ ============ ============

ADDITIONAL
PAID-IN
CAPITAL DEFICIT TOTAL
------------ ------------ ------------

Balance, December 31, 1998 $ 27,251,399 $(24,458,165) $ 2,793,358

Year ended December 31, 1999:
Exercise of stock options 112,549 -- 112,550
Exercise of warrants 1,537,487 -- 1,537,500
Value assigned to warrants and beneficial
conversion feautre upon issuance of debt 1,467,146 -- 1,467,146
Stock issued for services performed 4,054 -- 4,054
Options issued for services performed -- 268,475
Conversion of Series A preferred stock
to common -- -- --
Purchased research and development costs 1,329,998 1,330,000
Net loss -- (12,977,729) (12,977,729)
------------ ------------ ------------

Balance, December 31, 1999 31,971,108 (37,435,894) (5,464,646)

Year ended December 31, 2000:
Common stock offering, net of costs 13,486,460 13,486,495
Compensation related to options 332,563 332,563
Compensation related to sale of common
stock to employees 77,726 77,726
Conversion of debt to common stock,
net of costs 5,106,684 5,106,697
Conversion of preferred stock to common
stock, net of costs (533,200) (533,200)
Exercise of warrants 49,999 50,000
Stock options issued for services performed 235,905 235,905
Common stock offering, net of costs 4,539,777 4,539,786
Exercise of stock options 393,591 393,593
Penalty shares issued 192,334 192,335
Net loss -- (19,609,984) (19,609,984)
------------ ------------ ------------

Balance, December 31, 2000 55,852,947 (57,045,878) (1,192,730)

Year ended December 31, 2001:
Stock issued in exchange for marketable securities 843,735 843,750
Negotiated settlement to prior offering costs 629,665 629,665
Warrants and options issued with debt 649,960 649,960
Revaluation of stock options (152,453) (152,453)
Shares returned 29 --
Net loss -- (3,577,322) (3,577,322)
------------ ------------ ------------

Balance, December 31, 2001 57,823,883 (60,623,200) (2,799,130)
============ ============ ============

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

F-5

BURST.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

2001 2000 1999
------------ ------------ ------------

Cash flows from operating activities:

Net loss $ (3,577,322) $(19,609,984) $(12,977,729)

Adjustments to reconcile net loss
to net cash used by operation activities:
Depreciation and amortization 82,757 592,494 209,198
Loss on asset impairments 384,959 1,312,931 --
Non-cash interest expense 369,434 -- 1,396,993
Settlement of receivable 139,633 -- --
Loss on sale of marketable securities 324,430 -- --
Gain on sale of assets (269,733) -- --
Revaluation of stock options (152,453) -- --
Stock options issued for services -- 235,905 272,529
Compensation from stock and option awards to employees -- 410,289 --
Purchased research and development -- -- 1,330,000
Conversion of legal fees to note payable -- -- 25,000
Issuance of penalty shares -- 192,335 --
Change in operating assets and liabilities:
Accounts receivable (8,930) (295,795) --
Prepaid and other current assets 29,826 (117,824) (57,485)
Other assets 314,637 (280,880) --
Accounts payable (649,415) 166,284 1,132,245
Accrued expenses 618,365 307,499 26,890
Accrued interest 91,887 (113,085) 114,277
Deferred revenue -- 235,625 51,600
------------ ------------ ------------

Net Cash Used by Operating Activities (2,301,925) (16,964,206) (8,476,482)
------------ ------------ ------------
Cash flows from investing activities:

Purchase of property and equipment -- (1,772,133) (749,994)
Sales of property and equipment 269,733 21,420 --
Proceeds from sale of marketable securities 841,720 -- --
------------ ------------ ------------

Net Cash Used by Investing Activities 1,111,453 (1,750,713) (749,994)
------------ ------------ ------------
Cash flows from financing activities:

Payment of receivables from Series B convertible stock offering -- -- 810,000
Proceeds from sale of stock , net of costs -- 17,868,131 --
Exercise of warrants and stock options -- 443,593 1,650,050
Payment of costs in connection with conversion of preferred
stock to common -- (533,200) --
Proceeds from debt financing 1,000,000 930,000 4,880,000
Repayment of debt (100,000) -- (22,736)
------------ ------------ ------------
------------ ------------ ------------
Net Cash Provided by Financing Activities 900,000 18,708,524 7,317,314
------------ ------------ ------------
Decrease in cash and cash equivalents (290,472) (6,395) (1,909,162)
Cash and cash equivalents, beginning of year 296,584 302,979 2,212,141
------------ ------------ ------------
Cash and cash equivalents, end of year $ 6,112 $ 296,584 $ 302,979
============ ============ ============

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

F-6

BURST.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

2001 2000 1999
---------- ---------- ----------

Supplemental disclosure of cash flow information:

Cash paid for state franchise tax $ 800 $ 800 $ 800

Cash paid for interest $ 6,613 $ -- $ 7,374

Supplemental schedule of non-cash investing and financing activities:

Offset of deferred revenue against accounts receivable $ 287,225 $ -- $ --

Exchange of common stock for licensing agreement - credited to
deferred revenue $ 322,400 $ -- $ --

Exchange of common stock for marketable securities $ 843,750 $ -- $ --

Notes issued in debt settlements - offset by accounts payable
and accrued expenses $ 208,735 $ -- $ --

Settlement of prior offering costs included in accrued expenses -
credited to additional paid-in-capital $ 629,665

Debt converted into 1,333,750 shares of common stock $ -- $5,335,000 $ --

In 1999, six notes payable issued in exchange for $335,000
were issued with front end warrants resulting in a discount to notes
payable of $70,153

In 1999, 5,000 shares of Series A Preferred Stock were
converted to 5,000 shares of common stock.

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

F-7

BURST.COM, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND CAPITALIZATION

Burst.com, Inc. and subsidiaries ("The Company") was incorporated in
the State of Delaware as Instant Video Technologies, Inc. On January
27, 2000, the Certificate of Incorporations was amended to change the
Company's name to Burst.com, Inc.

The Company's authorized capital stock consists of 100,000,000 shares
of common stock, $0.00001 par value per share, and 20,000,000 shares of
preferred stock, $0.00001 per share.

The board of directors has the authority, without action by the
Company's stockholders, to provide for the issuance of preferred stock
in one or more classes or series and to designate the rights,
preferences and privileges of each class or series, which may be
greater than the rights of the common stock. The Company had no
preferred stock outstanding as of December 31, 2001.

BUSINESS

The Company licenses burst transmission software and intellectual
property for use within commercial, multimedia and interactive
environments. The burst technology allows for time compression and
burst transmission of video/audio programming that results in
time-savings, network efficiency and superior quality products.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of
Burst.com, Inc and its wholly-owned subsidiaries, Explore Technology,
Inc. and Timeshift-TV. All significant intercompany balances and
transactions have been eliminated.

USE OF ESTIMATES

The accompanying consolidated financial statements have been prepared
in conformity with U.S generally accepted accounting principles. In
preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets
and liabilities as of the date of the balance sheet and operations for
the period. Although these estimates are based on management's
knowledge of current events and actions it may undertake in the future,
they may ultimately differ from actual results. The Company's most
significant estimates are those related to the valuation of stock,
stock options, and warrants in connection with equity and financing
transactions.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of money market accounts and other
short-term investments with an original or remaining term of three
months or less.

F-8

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash.

The Company maintains cash balances at several banks. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation up
to $100,000. From time to time, the Company had cash in financial
institutions in excess of federally insured limits.

INVESTMENTS

In accordance with Statement of Financial Accounting Standards (SFAS
No. 115) "Accounting for Certain Investments in Debt and Equity
Securities", securities are classified into three categories: held-to
maturity, available-for-sale and trading. The Company's investments
consisted of equity securities classified as available-for-sale.
Accordingly, they were carried at fair value in accordance with SFAS
No. 115. Further, SFAS No. 115 requires that unrealized gains and
losses for available-for-sales securities be excluded from earnings and
reported, net of deferred income taxes, as other comprehensive income.
As of December 31, 2001, the Company had disposed of all of its
available for sale securities.

COMPREHENSIVE INCOME

The Company had no component of comprehensive income other than its
reported amounts of net loss applicable to holders of common stock.

LONG-LIVED ASSETS

The Company periodically evaluates whether events and circumstances
have occurred that may warrant revision of the estimated life of
intangible and other long-lived assets, or whether the remaining
balance of intangible and other long-lived assets should be evaluated
for possible impairment. If and when such factors, events or
circumstances indicate that intangible or other long-lived assets
should be evaluated for possible impairment, the Company would make an
estimate of undiscounted cash flows over the remaining lives of the
respective assets in measuring recoverability.

During the years ended December 31, 2001, 2000, and 1999, the Company
recognized approximately $385,000, $1,312,932, and $0, respectively, of
impairment in leasehold improvements, computers and equipment assets.
See Note 4.

REVENUE RECOGNITION

The Company recognizes revenue in accordance with Statement of Position
(SOP) No. 97-2, "Software Revenue Recognition". Under the guidance of
SOP No. 97.2, no revenue is recognized until evidence of an arrangement
exists, delivery has occurred, the fee is fixed or determinable and
collection is probable. License fees and services are generally
recognized as revenue ratably over the license period.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation is computed
using the straight line method over the estimated useful lives of the
assets that range from three to five years. Replacements, maintenance
and repairs which do not extend the lives of the respective assets are
charged to expense as incurred.

F-9

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable, and debt. The
carrying amounts of such financial instruments approximate their
respective estimated fair value due to the short-term maturities and
approximate market interest rates of these instruments.

NET LOSS PER COMMON SHARE AND DILUTIVE SECURITIES

Earnings (loss) per share is computed in accordance with SFAS No. 128,
"Earnings per Share". Basic earnings per share is computed by dividing
net income, after deducting preferred stock dividends accumulated
during the period, by the weighted-average number of shares of common
stock outstanding during each period. Diluted earnings per share is
computed by dividing net income by the weighted-average number of
shares of common stock, common stock equivalents and other potentially
dilutive securities outstanding during the period.

The following is a summary of the securities that could potentially
dilute basic loss per share in the future that were not included in the
computation of diluted loss per share because to do so would be
anti-dilutive.

Year Ended December 31,
----------------------------------------
2001 2000 1999
----------------------------------------

Convertible Preferred Stock 4,496,609 -- --
Options 7,697,880 8,716,659 6,925,863

Warrants 12,827,291 6,435,396 905,384
---------- ---------- ----------

Total 20,525,171 15,152,055 12,327,856
========== ========== ==========

INCOME TAXES

The Company accounts for income taxes using SFAS No. 109, "Accounting
for Income Taxes," which requires recognition of deferred tax
liabilities and assets for expected future tax consequences of events
that have been included in the financial statements or tax returns.
Under this method, deferred tax liabilities and assets are determined
based on the difference between the financial statement and tax bases
of assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to reverse. A valuation
allowance is recorded for deferred tax assets if it is more likely than
not that some portion or all of the deferred tax assets will not be
realized.

ADVERTISING COSTS

Advertising costs are expensed as incurred. The Company incurred
$86,619 of advertising in 2001, $1,489,842 in 2000, and $587,000 in
1999.

F-10

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

RESEARCH AND DEVELOPMENT

Research and development costs are charged to operations as incurred
until such time as both technological feasibility is established and
future economic benefit is assured. To date, such conditions have not
been satisfied, and, accordingly, all software engineering and
development costs have been expensed as incurred. See Note 8 for
certain in-process research and development purchased in 1999.

STOCK-BASED COMPENSATION

The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" and related
interpretations, in accounting for its employee stock options rather
than the alternative fair value accounting followed by SFAS No. 123
"Accounting for Stock-Based Compensation." APB No. 25 provides that the
compensation expense relative to the Company's employee stock options
is measured based on the intrinsic value of the stock option. SFAS No.
123 requires companies that continue to follow APB No. 25 to provide a
pro-forma disclosure of the impact of applying the fair value method of
SFAS No. 123.

Equity instruments issued to non-employees are accounted for at fair
value. The fair value of the equity instrument is determined using
either the fair value of the underlying stock or the Black-Scholes
option pricing model.

RECLASSIFICATIONS

Certain items have been reclassified to conform to current year
presentation.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 requires companies to recognize all
derivative contracts as either assets or liabilities in the balance
sheet and to measure them at fair value. If certain conditions are met,
a derivative may be specifically designated as a hedge, the objective
of which is to match the timing of the gain or loss recognition on the
hedging derivative with the recognition of (i) the changes in the fair
value of the hedge asset or liability that are attributable to the
hedge risk or (ii) the earnings effect of the hedge forecasted
transaction. For a derivative not designated as a hedging instrument,
the gain or loss is recognized in income in the period of change. On
June 30, 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of
FASB Statement No. 133". SFAS No. 133 as amended by SFAS No. 137 is
effective for all fiscal years beginning after June 15, 2000. In June
2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivatives
Instruments and Certain Hedging Activities". SFAS No. 133 as amended by
SFAS No. 137 and 138 is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000.

The Company has not entered into derivatives contracts to hedge
existing risks or for speculative purposes. Accordingly, SFAS 133, 137
and 138 do not affect the Company's financial statements.

On December 3, 1999 the Securities and Exchange Commission ("SEC")
staff issued Staff Accounting Bulletin No. 101 (SAB 101) "Revenue
Recognition in Financial Statements" which reflects the basic
principles of revenue recognition in existing generally accepted
accounting principles. SAB 101 does not affect the Company's financial
statements.

In March 2000, the FASB issued Interpretation No. 44 (FIN 44),
"Accounting for Certain Transactions Involving Stock Compensation", an
interpretation of APB No. 25. FIN No. 44 clarifies the application of
APB No. 25 for (a) the definition of an employee for purposes of
applying APB No. 25, (b) the criteria for

F-11

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (Continued)

determining whether a plan qualifies as a non-compensatory plan, (c)
the accounting consequences of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an
exchange of stock compensation awards in a business combination. FIN
No. 44 became effective in July 2000, but certain conclusions cover
specific events that occur after either December 15, 1998, or January
12, 2000. FIN 44 did not have a material impact on the Company's
financial position, results of operations, or cash flows.

In June 2001, the FASB issued Statement No. 141 "Business
Combinations". This statement replaces Accounting Principle Board
("APB") Opinion No. 16, "Business Combinations", and SFAS 38,
"Accounting for Preacquisition Contingencies of Purchased Enterprises".
All business combinations in the scope of this statement are to be
accounted for using the purchase method. The single method approach
used in this statement reflects the conclusion that virtually all
business combinations are acquisitions and, thus, all business
combinations should be accounted for in the same way that other asset
acquisitions are accounted -- based on the values exchanged. This
statement does not change many of the provisions of Opinion 16 and
Statement 38 related to the application of the purchase method. The
provisions of this statement apply to all business combinations
initiated after June 30, 2001, and all business combinations accounted
for by the purchase method for which the date of acquisition is July 1,
2001, or later. FASB Statement 141 docs not affect the Company's
financial statements.

In June 2001, the FASB issued Statement No. 142 "Goodwill and Other
Intangible Assets". This Statement addresses financial accounting and
reporting for acquired goodwill and other intangible assets and
supersedes APB Opinion No. 17, Intangible Assets. It provides guidance
on how intangible assets that are acquired individually or with a group
of other assets (but not those acquired in a business combination)
should be accounted for in financial statements upon their acquisition.
This Statement also addresses how goodwill and other intangible assets
should be accounted for after they have been initially recognized in
the financial statements. FASB Statement No. 142 does not affect the
Company's financial statements.

In July 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations". This statement addresses financial accounting
and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs.
This statement requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset and subsequently allocated to
expense using a systematic and rational method. Adoption of this
statement is required for fiscal years beginning after June 12, 2002.
The adoption of Statement No. 143 is not expected to materially affect
the Company's financial statements.

In October 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Live Assets". This statement supersedes
Statement No. 121 but retains many of its fundamental provisions. The
statement also establishes a single accounting model, based on the
framework established in Statement 121, for long-lived assets to be
disposed of by sale. Additionally, the statement resolves significant
implementation issues related to Statement No. 121. The provisions of
this statement are effective for financial statements issued for fiscal
years beginning after December 15, 2001. The provision of Statement No.
144 is not expected to materially affect the Company's financial
statements.

NOTE 2 - GOING CONCERN CONSIDERATIONS

The accompanying consolidated financial statements have been presented
in accordance with accounting principles generally accepted in the
United States of America, which assume the continuity of the Company to
continue as a going concern. However, the Company has incurred
substantial losses resulting in an accumulated deficit of $60,623,600
as of December 31, 2001. The Company's current liabilities exceed
current assets by $2,629,844 at December 31, 2001. These conditions
raise substantial doubt as the ability of the Company to continue as a
going concern.

Management's plans with regards to these issues are as follows:

o Expanding revenues by focusing on a small number of existing
customers that management believes are growing and whose needs for
Burstware are increasing.

o Expanding revenues by finding a limited number of new customers
that can benefit by utilizing either Burstware in its current
form, or by licensing a combination of the Company's intellectual
property and/or Burstware source-code.

o Raising new investment capital, either in the form of equity or
loans, sufficient to meet the Company's greatly reduced monthly
operating expenses, until the revenues are sufficient to meet
operating expenses on an ongoing basis.

o Management is in the process of renegotiating outstanding
short-term debt.

Presently, the Company cannot ascertain the eventual success of
management's plans with any degree of certainty. No assurances can be
given that the Company will be successful in raising immediate capital
or that the Company will achieve profitability or positive cash flows.
If the Company is unable to obtain adequate additional financing and
bring the Company to profitability or positive cash flows, there can be
no assurance that the Company can continue as a going concern. The
accompanying consolidated financial statements do not include any
adjustments that might result from the eventual outcome of the risks
and uncertainty described above.

F-12

NOTE 3 - INVESTMENTS

During the year ended December 31, 2001, the Company acquired and sold
or exchanged 504,000 shares of available-for-sale securities for
$841,720. These shares were originally valued upon acquisition at
$1,166,150, resulting in realized losses of approximately $324,430.

The Company had no remaining securities as of December 31, 2001.

NOTE 4 - PROPERTY AND EQUIPMENT

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

Computer equipment $ 61,879 $ 509,191

Furniture 15,000 94,426

Office equipment 5,000 5,000

Software 55,000 55,000

Trade show booth 5,000 5,000
--------- ---------

141,879 668,617

Less accumulated depreciation (38,895) (97,917)
--------- ---------

$ 102,984 $ 570,700
========= =========

During 2001 and the fourth quarter of 2000, management determined that
certain computers and other equipment were not recoverable at their
current book value, and certain leasehold improvements and other assets
had been abandoned when sales offices were closed. Accordingly, the
Company recognized losses and write-downs of approximately $385,000 and
$1,312,932 during the years ended December 31, 2001 and 2000,
respectively.

Depreciation expense was $82,757, $592,494 and $209,198 for the years
ended December 31, 2001, 2000, and 1999, respectively.

F-13

NOTE 5 - ACCRUED LIABILITIES

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

Accrued severance costs $274,100 $ --
Accrued wages and vacation 180,223 350,723
Stock to be issued 31,796 --
Professional services -- 117,247
Other 18,454 47,903
-------- --------
$504,573 $515,873
======== ========

During 2001, the Company closed and abandoned its sales offices. It
also moved out of its San Francisco headquarters and moved to new
smaller facilities in Santa Rosa,

California. During the third quarter of 2001, the Company commenced
settlement negotiations to terminate the lease with the landlord of the
former San Francisco headquarters. Based upon the results of the
in-process negotiations, the Company reduced its prior estimate of
leasehold costs on abandoned leases by approximately $900,000, to
approximately $330,000. In December 2001, the Company reached a final
settlement whereas the Company issued a note payable in the amount of
$50,000 due in 2005, and agreed to issue 300,000 shares of the
Company's common stock valued at $12,000.

Additionally, by December 31, 2001, the Company had terminated all but
two of its remaining employees and had reached severance agreements
with several former key officers and employees. The Company also
entered into various settlement agreements with certain vendors,
resulting in the issuance of notes payable (See note 7).

NOTE 6 - DEFERRED REVENUE

During 2001, the Company entered into a licensing agreement with Eagle
Wireless International, Inc. whereby Eagle Wireless issued 104,000 of
its common stock valued at $322,400 in exchange for a two-year license
for certain technological rights. The license agreement is effective
the earlier of January 2002 or the commercial deployment of any
products incorporating the technology licensed from Burst. Accordingly,
the entire $322,400 has been deferred as of December 31, 2001.

F-14

NOTE 7 - NOTES AND OBLIGATIONS PAYABLE

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

6% convertible note payable to Mercer Management, Inc., interest
and principal due December 28, 2001 $ -- $ 500,000

Notes payable to Gordon Rock (net of unamortized discount
of $276,246) 993,754 --

Notes payable to investors, (net of unamortized discount of $4,280) 125,720 --

Notes and obligations payable issued in connection with debt
settlements 208,735 --
---------- ----------
$1,328,209 $ 500,000
========== ==========

NOTES PAYABLE TO GORDON ROCK

In February and April 2001, the Company issued two notes payable to
Gordon Rock in the aggregate principal amount of $350,000 at 9%
collateralized by a security interest in the assets of the Company. Mr.
Rock was a member of the Board of Directors at that time, but has since
resigned his seat on the Board. Mr. Rock is also one of the Company's
major stockholders and is deemed a related party.

In August and September 2001, the Company issued a series of notes
payable to Mr. Rock totaling an additional $305,000. Each of these
notes bears interest at 9% and is collateralized by a security interest
in all assets of the Company.

In connection with the April, August and September notes, Mr. Rock
received five-year warrants to acquire up to 183,333 shares of the
Company's common stock at an exercise price of $.30 per share,
1,000,000 shares at $.20 per share, and 1,666,666 shares at $.15 per
share. Accordingly, the Company recorded a discount on the notes for
the fair value of the warrants issued using the Black-Scholes model.
The resulting discount of $368,333 is being amortized over the term of
the notes.

In October and December 2001, the Company issued three additional notes
to Mr. Rock for loans totaling $115,000, with interest ranging from
prime (4.75% at December 31, 2001) plus 2% to 9%. The notes are
collateralized by a security interest in all assets of the Company. In
connection with these notes payable, Mr. Rock was issued 383,333
warrants to acquire common stock at $.30 per share.

Accordingly, the Company recorded a discount on the notes for the fair
value of the warrants issued using the Black-Scholes model. The
discount of $23,900 is being amortized over the term of the notes.

In December 2001, all of Mr. Rock's notes, originally expiring in
various amounts from November 2001 through February 2002, were extended
as follows: aggregate principal amount of $1,210,000 plus accrued
interest due and payable in November 2002; aggregate principal amount
of $30,000 plus accrued interest

F-15

NOTE 7 - NOTES AND OBLIGATIONS PAYABLE (Continued)

NOTES ISSUED TO GORDON ROCK (Continued)

due in November 2004; and the remaining $30,000 of principal and
accrued interest due in December 2004. In connection with the
extensions, Mr. Rock received 2,600,000 additional warrants to buy
shares of the Company's common stock at $.25 per share. In addition,
the convertibility feature of the note payable to Mercer Management at
December 31, 2000 was removed (see below). Accordingly, the Company
recorded a discount on the notes for the fair value of the warrants
issued using the Black-Scholes model. The discount of $151,060 is being
amortized over the term of the notes.

During 2000, the Company issued a 6% convertible note payable to Mercer
Management, an affiliate of Mr. Rock. The note was convertible into a
new series of Preferred Stock to be identified as Series A-2001 at a
per share conversion price of Five Dollars ($5.00) at the option of the
note holder. In conjunction with the issuance of the 2,600,000 warrants
discussed above, the convertibility feature of this note was removed
and the interest rate was changed from 6% to 9%.

NOTES ISSUED TO INVESTORS

In March 2001, the Company issued a $100,000 note payable to Robert
Schacter, one of the Company's stockholders, at 10%, collateralized by
100,000 shares of Eagle Wireless International, Inc. common stock. In
connection with the Schacter note issuance, in March 2001, the Company
repriced 98,870 existing $5.00 warrants and issued 50,000 additional
warrants to purchase a total of 148,870 shares of common stock at
$0.875. The warrants were valued at $100,000, resulting in a discount
on the note for the fair value of the warrants issued. The loan was
repaid in full in May 2001 and the remaining unamortized discount was
expensed.

During 2001, the Company issued 9% convertible notes payable to Draysec
Finance Limited, one of the Company's major stockholders, in the
aggregate principal amount of $100,000, with interest and principal due
in February and March 2002. The notes are convertible into a new series
of preferred stock to be identified as Series A-2001 at a per share
conversion price of $5.00 at the option of the noteholder.

In addition during 2001, the Company issued a promissory note to an
investor, in the principal amount of $30,000. The note is
collateralized by a security interest in all assets of the Company. The
note is due in March 2004 and bears interest at prime plus 2%. In
connection with the note, the Company issued 100,000 warrants to the
investor to acquire common stock at $.30 per share. Accordingly, the
Company recorded a discount on the note for the fair value of the
warrants issued using the Black-Scholes model. The discount totaling
$4,280 is being amortized over the term of the note.

During January 2000, the Company received $430,000 evidenced by notes
payable convertible into common stock, due in one year. The conversion
rate was the lower of: (1) $6.50, (2) 80% of the average closing price
of the Company's publicly traded shares in the 20 trading days
immediately preceding the closing of a then ongoing private placement,
or (3) the price agreed in that private placement. Upon completion of
the private placement discussed in Note 8 below, these and all other
notes outstanding totaling $5,335,000, were converted into 1,333,750
shares of common stock as of January 31, 2000. The conversion price was
$4.00 per share of common stock plus one warrant per share of common
stock acquired by conversion. Each warrant has an exercise price of
$5.00 and expires five years from the date of issue.

F-16

NOTES AND OBLIGATIONS ISSUED IN CONNECTION WITH DEBT SETTLEMENTS

During 2001, the Company entered into various settlement agreements
with some of its vendors, employees and landlord. In connection
therewith, the Company renegotiated its liabilities and reduced its
overall obligations from approximately $2,718,600 to $208,735. Some
settlements resulted in the recognition of extraordinary income. See
Note 13. In addition, the Company issued 80,000 warrants to acquire
common stock at $0.30 per share and 50,000 options to acquire common
stock at $0.30 per share. The warrants were valued at $2,520 and the
options were valued at $2,140, using the Black-Scholes model. As part
of these settlements, the Company is obligated to issue an aggregate
amount of 794,946 shares of its common stock. Accordingly, the Company
recorded a liability for stock to be issued in the amount of $31,796.

Maturities of long-term debt at December 31, 2001 are as follows:

2002 $ 1,053,239
2003 --
2004 132,645
2005 142,325
-----------
Total 1,328,209
Less: current Portion (1,053,239)
-----------
$ 274,970
===========

NOTE 8 - EQUITY

SHARE EXCHANGE AGREEMENT

During 2001, the Company exchanged 1,500,000 shares of its common stock
for 400,000 shares of Eagle Wireless International, Inc. common stock.
This transaction was valued at $843,735, the estimated fair value of
the Company's common stock at the date of the transaction.

SALES OF COMMON STOCK

During January 2000, the Company issued a total of 3,474,625 shares of
its common stock and warrants to purchase 3,474,625 shares of its
common stock for total proceeds of $13,898,500 in transactions with
various investors, including some directors and employees of the
Company. The price per share of common stock was $4.00, which included
the issuance of one warrant for each share of stock sold. The gross
proceeds were reduced by approximately $1,303,000 in transaction costs.
Each warrant was exercisable for one share of common stock at an
exercise price of $5.00 per share and expires 5 years from the date of
issue. Those warrants contained anti-dilution provisions that adjust
the exercise price and the number of shares exercisable there-under if
shares of the Company's common stock were issued or deemed issued at
prices below these warrant exercise price. The issuance of warrants
during the year ended December 31, 2001, as described in Note 7,
resulted in a decrease in the exercise price of these warrants to $4.30
per share and an increase of 831,262 warrant shares.

In connection with this offering, the Company also issued 98,870
five-year warrants to purchase common stock at $8.4375 per share were
issued to the placement agent. Compensation expense of $77,726 was
recorded as a result of sales of stock to employees for the excess of
fair value over the price paid.

During August 2000, the Company issued a total of 857,633 shares of its
common stock and warrants to purchase 857,633 shares of its common
stock for total proceeds of $5,000,000 to SBC Venture Capital Corp. The
price per share of common stock was $5.83 per share, which included the
issuance of one warrant for each share of stock sold. The gross
proceeds were reduced by approximately $460,214 in

F-17

NOTE 8 - EQUITY (Continued)

SALES OF COMMON STOCK (Continued)

transaction costs. Each warrant is exercisable for one share of common
stock at an exercise price of $5.83 per share and expires 3 years from
the date of issue. Those warrants contained anti-dilution provisions
that adjust the exercise price and the number of shares exercisable
there-under if shares of the Company's common stock were issued or
deemed issued at prices below these warrant exercise price. The
issuance of warrants in the year ended December 31, 2001, as described
in Note 7, resulted in a decrease in the exercise price of these
warrants to $5.01 per share and an increase of 148,340 warrant shares.

SHARES ISSUED IN DEBT SETTLEMENTS

In connection with the January 2000 sale of common stock, the Company
converted approximately $5,335,000 of notes payable to 1,333,750 shares
of its common stock and issued warrants to purchase 1,333,750 of its
common stock to the former debt holders.

LIABILITY FOR STOCK TO BE ISSUED

In connection with several settlement agreements, to Company agreed to
issue 794,946 shares of its common stock valued at $31,796. See Note 7.

STOCK ISSUED FOR SERVICES

During 1999, the Company issued 499 shares of common stock to a
contractor in lieu of cash for services performed. An expense of $4,054
was recorded as sales and marketing expense, based on the fair value of
the shares issued.

PURCHASE OF INTELLECTUAL PROPERTY THROUGH ISSUANCE OF COMMON STOCK

During 1999, the Company acquired certain intellectual property owned
by Timeshift-TV, Inc. for 200,000 shares of common stock. The Company
recorded $1,330,000 of expense for the in-process research and
development costs purchased in connection with this acquisition.
Timeshift-TV, Inc., an inactive corporation that owned patented rights
sought by the Company, was owned at the time of purchase by the
Company's president and two of the Company's management employees.

EXERCISE OF STOCK OPTIONS AND WARRANTS

During 2000, options were exercised to purchase 283,289 shares of
common stock at a weighted average price of $1.91. Warrants were
exercised to purchase 50,000 shares of common stock at $1.00 per share.

SHARES RETURNED

In December 2001, a significant shareholder returned 2,913,167 shares
of common stock to the Company for personal tax purposes.

SETTLEMENT OF PRIOR OFFERING COSTS

During the year ended December 31, 2000, the Company had accrued
approximately $630,000 of costs in connection with various stock
offerings. During 2000, disputes arose between the Company and the
investment banking firm over the meaning and the interpretation of the
respective parties' obligations.

F-18

NOTE 8 - EQUITY (Continued)

During the year ended December 31, 2001, the Company entered into a
settlement agreement with the investment banking firm whereby both
parties dismissed each other of any further obligations. As a result,
the Company adjusted additional paid-in-capital and the related
liability, to reverse previously recorded stock issuance costs.

NOTE 9 - STOCK OPTIONS

On November 6, 1992 and April 29, 1998, the Board of Directors adopted
the 1992 Stock Incentive Plan and 1998 Stock Inventive Plan,
respectively. Under the plans, the Board may grant options to officers,
key employees, directors and consultants. Incentive stock options may
be granted at not less than 100% of the fair market value of the stock
on the date the option is granted. The option price of stock not
intended to qualify as incentive stock options may not be less than 85%
of the fair market value on the date of grant. The maximum term of the
options cannot exceed ten years. A total of 3,500,000 and 4,000,000
shares have been reserved for issuance under the plans, respectively.
Certain options are still outstanding from prior to the 1992 and 1998
plans that carried similar terms.

On August 23, 1999, the Board of Directors adopted the 1999 Stock
Incentive Plan. Under the plan, the Board may grant options to
officers, key employees, directors and consultants. Incentive stock
options may be granted at not less than 100% of the fair market value
of the stock on the date the option is granted. The option price of
stock not intended to qualify as incentive stock options may not be
less than 85% of the fair market value on the date of grant. The
maximum term of the options cannot exceed ten years. A total of
3,000,000 shares have been reserved for issuance under the plan.

During 1999, the Company issued stock options in lieu of cash for
services performed, covering 120,621 shares of the Company's common
stock at exercise prices ranging from $2.19 to $9.72 per share,
expiring between February 2000 and December 2004. $105,805 was recorded
as a general and administrative expense, $160,588 was recorded as a
sales and marketing expense, and $2,082 was recorded as a research and
development expense based on the fair value of the stock options
issued.

During 2000, the Company repriced all options held by the 20 remaining
employees and Board members. The revised exercise price was $0.2812 per
share.

During 2000, the Company issued stock options in lieu of cash for
services performed, covering 8,621,242 shares of the Company's common
stock at exercise prices ranging from $.2812 to $4.50 per share,
expiring by December 2005. $332,563 was

recorded as a general and administrative expenses based on the fair
value of the stock options issued.

During 2001, the Company granted options to purchase 150,000 shares of
common stock exercisable at $0.2812 per share to an independent
contractor. In addition, during 2001, existing options granted to
employees under variable plan accounting and unvested options being
earned by contractors were revalued, resulting in a net reduction in
stock-based compensation of $280,400. Furthermore, as a result of
severance agreements with certain senior officials, the lives of their
options were extended to one year after termination or the full
contractual life instead of expiring within a shorter time. These
extensions resulted in a stock-based compensation charge of
approximately $127,947. These two adjustments resulted in a net
reduction in stock-based compensation of approximately $152,453.

F-19

NOTE 9 - STOCK OPTIONS (Continued)

During 2001, the Company granted options to purchase 250,000 shares of
common stock at an exercise price of $0.18 to Silicon Prairie Partners,
LP, an affiliate of John Micek III, a member of the Board of Directors.
The Company also granted options to purchase 100,000 options of common
stock to an employee at an exercise price of $0.1875 per share.

The Company also granted a former employee options to purchase 50,000
shares of common stock at an exercise price of $0.30 per share in
connection with a settlement agreement. See note 7.

The Company applies APB opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for options issued
to employees. Compensation cost for stock options is measured at the
intrinsic value, which is the excess of the market price of the
Company's common stock at the date of grant over the amount the
recipient must pay to acquire the common stock.

Statement of Financial Accounting Standards No. 123 (SFAS 123),
"Accounting for Stock-Based Compensation", requires the Company to
provide pro forma information regarding net income (loss) and earnings
(loss) per share as if compensation cost for employee stock options has
been determined in accordance with the fair value based method
prescribed by SFAS 123.

The per share weighted average fair value of stock options granted
during 2001, 2000 and 1999 was $0.21, $1.43, and $5.23, respectively,
on the date of grant using the Black-Scholes pricing model with the
following weighted average assumptions: volatility of 217%, 251%, and
117%, respectively; expected dividend yield of 0% for all years; risk
free interest rate of approximately 4%, 6%, and 6%, respectively; and
an expected life of 2.5 years for 2001, 2000 and 1999.

The option valuation model was developed for use in estimating the fair
value of traded options, which have no vesting restrictions and are
fully transferable. In addition, valuation models require input of
highly subjective assumptions, including the expected price volatility.
Since the Company's stock options have characteristics significantly
different from those of traded options, and since variations in the
subjective input assumptions can materially affect the fair value
estimate, the actual results can vary significantly from estimated
results.

Under the accounting provision of SFAS 123, the Company's net loss and
loss per share would have been increased to the pro forma amounts
indicated below:

2001 2000 1999
---- ---- ----

Net loss:
As reported $(3,577,322) $(19,609,984) $(12,977,729)
=========== ============ ============
Pro forma $(3,665,937) $(23,422,527) $(17,356,482)
=========== ============ ============

Net loss per share:
As reported $ (0.17) $ (0.98) $ (1.42)
======== ======= =======
Pro forma $ (0.17) $ (1.17) $ (1.90)
======== ======= =======

F-20

NOTE 9 - STOCK OPTIONS (Continued)

Stock options activity for 1999, 2000 and 2001 is as follows:

Number of Shares Weighted Average Exercise Price
---------------- -------------------------------

Balance on December 31, 1998 6,289,263 $ 2.52
---------- ------

Options granted 1,302,000 6.65
Options exercised (111,800) 1.01
Options expired (200,000) 1.00
Options forfeited (353,600) 2.78
---------- ------

Balance on December 31, 1999 6,925,863 3.36
---------- ------

Options granted 8,664,742 1.33
Options exercised (273,355) 1.91
Options expired (94,225) 1.86
Options forfeited (6,506,366) 4.09
---------- ------

Balance on December 31, 2000 8,716,659 1.04
---------- ------

Options granted 550,000 0.22
Options exercised 0 0
Options expired (30,500) 6.96
Options forfeited (1,538,279) 2.43
---------- ------

Balance on December 31, 2001 7,697,880 $ 0.84
========== ======

Stock options outstanding and exercisable at December 31, 2001 are as
follows:

Options Outstanding Options Exercisable
------------------- -------------------

Weighted Average Weighted Average Weighted Average
Shares Outstanding Exercise Price Remaining Life Shares Outstanding Exercise Price
------------------ -------------- -------------- ------------------ --------------

$0.18-$0.28 5,442,543 $0.28 2.25 5,351,837 $0.28
$0.50-$1.00 1,300,000 $0.98 3.43 1,290,000 $0.99
$1.37-$3.00 495,087 $2.00 2.93 495,087 $2.00
$3.13-$5.00 279,250 $3.95 3.89 276,125 $3.94
$5.75-$9.72 181,000 $8.69 3.10 156,000 $7.11
--------- ----- ---- --------- -----
7,697,880 $0.84 2.57 7,569,049 $0.79
========= ===== ==== ========= =====

F-21

NOTE 10 - LEASE COMMITMENTS

The Company leases its office space under a one year operating lease
which provides for one-year extensions. The lease was extended to April
30, 2003.

Rent expense for the years ended December 31, 2001, 2000 and 1999 was
$404,283, $299,077 and $104,969, respectively.

Future minimum lease payments at December 31, 2001 are as follows:

Year ended December 31,
2002 $ 11,340
2003 3,780
--------
Total $ 15,120
========

NOTE 11 - INCOME TAXES

At December 31, 2001, the Company had net operating loss carry-forwards
for federal income tax purposes of approximately $43,832, which are
subject to annual limitations, and are available to offset future
taxable income, if any, through 2021 and net operating loss
carry-forwards for state income tax purposes of approximately
$20,300,000, which are available to offset future state taxable income
through 2011.

The temporary differences that give rise to deferred tax assets and
liabilities at December 31, 2001 and 2000 are as follows:

2001 2000
---- ----

Deferred tax assets:
Net operating losses $ 16,656,000 $ 15,599,800
Depreciation, amortization and basis 0 107,400
differences
Compensation accruals 178,600 759,400
Research and experimentation credit 421,900 421,900
State income tax effect on federal (661,200) (647,500)
Other 0 61,100
------------ ------------

Total deferred tax assets 16,595,300 16,302,100

Less valuation allowance (16,595,300) (16,302,100)
------------ ------------

Net deferred tax assets $ -- $ --
============ ============

The net change in the valuation allowance for the years ended December
31, 2001 and 2000 was an increase of $293,200 and an increase of
$6,876,300, respectively. In assessing the amount of deferred tax assets
to be recognized, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized.
It is not possible at this time to determine that the deferred tax assets
are more likely to be realized than not. Accordingly, a full valuation
allowance has been established for all periods presented.

F-22

NOTE 11 -INCOME TAXES (Continued)

The Tax Reform Act of 1986 imposed substantial restrictions on the
utilization of net operating losses and tax credits in the event of an
"ownership change", as defined by the Internal Revenue Code. All federal
and state net operating loss carryforwards are subject to limitations as
a result of these restrictions. If there should be a subsequent ownership
change, as defined, the Company's ability to utilize its carryforwards
could be reduced.

NOTE 12 - BUSINESS RISKS AND SEGMENT DISCLOSURES

The Company's primary source of revenue is the licensing of Burst
technology, and its success is largely dependent on this product.
Changes in desirability of the product in the marketplace may
significantly affect the Company's future operating results.

The Company operates in one segment and accordingly has provided only
the required enterprise wide disclosure. The Company recognized no
foreign revenues in 2001, 2000, and 1999.

The Company currently has five customers who are acting as resellers
and use the Company's software in their business. Three customers
accounted for approximately 53%, 26% and 13%, respectively, of the
Company's total revenue in fiscal year 2001.

NOTE 13 -SETTLEMENTS AND EXTRAORDINARY GAINS

During the year 2001, the Company entered and executed various
settlements with employees and its landlord. Accordingly, rent and
salaries previously recognized during the year as a result of prior
oral agreements and estimates were offset against the related expenses
of rent and salaries for approximately $1,116,000.

During the year ended December 31, 2000, the Company had accrued
approximately $629,000 of costs in connection with various stock
offerings. During 2000, disputes arose between the Company and the
investment banking firm over the meaning and the interpretation of the
respective parties' obligations. During the year ended December 31,
2001, the Company entered into a settlement agreement with the
investment banking firm whereby both parties dismissed each other of
any further obligations. As a result, the Company adjusted additional
paid-in-capital and the related liability.

During the year 2001, the Company entered and executed various
settlements with some vendors and creditors. As a result of these
settlements, the Company recognized approximately $643,000 of
extraordinary gain.

F-23

NOTE 14 - QUARTERLY INFORMATION (UNAUDITED)

The summarized quarterly financial data presented below reflect all
adjustments which, in the opinion of management, are of a normal and
recurring nature necessary to present fairly the results of operations
for the periods presented.

Year Ended December 31, 2001
----------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter Total
------------- -------------- ------------- -------------- --------------

Net Revenue $ 31,323 $ 26,437 $ 23,076 $ 57,183 $ 138,019

Gross Profit 31,323 26,437 23,076 57,183 138,019

Operating Income/(Loss) (3,854,208) (1,239,824) 743,618 643,775 (3,706,639)

Basic and diluted
Income/loss per common share $ (0.21) $ (0.06) $ 0.03 $ 0.07 $ (0.17)

Year Ended December 31, 2000
----------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter Total
------------- -------------- ------------- -------------- --------------

Net Revenue $ 75,012 $ 311,136 $ 94,377 $ 18,851 $ 499,375

Gross Profit
44,741 311,136 93,891 18,844 468,612

Operating Loss (3,768,166) (6,166,446) (4,613,669) (5,008,419) (19,556,700)

Net Loss (3,799,140) (6,260,264) (4,680,188) (4,870,392) (19,609,984)

Basic and diluted $ (0.24) $ (0.33) $ (0.24) $ (0.17) $ (0.98)
loss per common share

F-24

2001 FOURTH QUARTER ADJUSTMENTS

During the fourth quarter of 2001, the Company recorded certain
adjustments that are considered material to the Company's financial
position and operating results for the fourth quarter of 2001. The
following is an analysis of these adjustments:

Increase (Decrease)
-----------------------------------------------------
(Increase)
Assets Liabilities Stockholders' Equity Decrease Net Loss
----------- ----------- ----------- -----------

Vendors settlements $ (84,615 $ (733,273) $ 4,660 $ 643,998

Employees settlements -- (867,863) 19,796 848,067

Pre-offering Costs
settlement -- (629,000) 629,000 --

Lease settlement -- (279,726) 12,000 267,726

Revaluation of Options -- -- (488,053) 488,053
----------- ----------- ----------- -----------
$ (84,615) $(2,509,862) $ 177,403 $ 2,247,844
=========== =========== =========== ===========

Significant 2000 fourth quarter adjustments included losses and
write-downs of fixed assets. See Note 4.

NOTE 15 - SUBSEQUENT EVENTS

Subsequent to year-end, the Company issued three promissory notes to
investors in the aggregate principal amount of $130,000. The notes bear
interest at prime plus 2% and are due in 2005. In connection with these
notes, the Company issued warrants to purchase 433,333 shares of its
common stock at $0.30 per share.

F-25